Here are the investing strategies that we will go over in this section:
Dollar cost averaging
Balanced portfolio
Unbalanced portfolio
Profit reinvesting
Dollar Cost Averaging
Some people on the interwebs promote this type of strategy heavily.
…and it’s not the worst idea that we have ever seen.
But I personally think that it’s an incredibly lazy approach and even a small amount of additional work can greatly increase your returns.
Dollar cost averaging is when you buy a fixed amount of cryptocurrency at regular intervals. You don’t even look at the price, you just buy to accumulate it for investment purposes.
For example, let’s say that you like the long-term prospects of Litecoin. On Coinbase, it’s easy to setup a schedule to buy a certain amount of Litecoin every month.
You could setup a schedule where you purchase $50 of Litecoin on the first day of every month. Here’s what it would look like.
Who this Strategy is For
If you are extremely busy and want to participate in cryptocurrencies passively, then this could be the strategy for you. You may forget to check the charts and want it all automated.
But quite frankly, that’s just being lazy.
Yes, dollar cost averaging would have worked very well over the past year. But that is only because we saw a historical jump in prices, across almost all cryptocurrencies.
As currencies become more actively traded, dollar cost averaging becomes much more risky.
Here’s why…
Downsides to this Strategy
For the small amount of time that Litecoin has been actively traded, we have seen huge percentage drops in price. One example is the drop marked here with the arrow.
It went from $38.95 to $19.36, a drop of about 50%!
If you had bought $500 worth of Litecoin and saw it drop to $250 in a matter of a few weeks, would you still stay in?
Maybe.
But most people I know would freak out, and rightfully so. That’s not good risk management.
It’s a much better investment to try to get in near $19.36 because that minimizes your downside. Could it drop more?
Of course.
However, you just eliminated about $20 of downside, simply by waiting for a better place to get in.
Balanced Portfolio
In this strategy, you would purchase the same dollar amount of each currency that you are investing in.
So if you are investing in:
Bitcoin
Monero
XRP (Ripple)
Dash
…and you have $1,000 to invest, you would allocate $250 to each currency. Any subsequent investment would be divided equally between the four currencies.
You would wait for the price to form a Baseball Cap (as described above), before you buy each one.
Who this Strategy is For
If you want to build a diversified portfolio of coins, but you aren’t sure which ones will do well, then this is the strategy is for you. It gives you exposure to a few currencies that have the best chance of succeeding…at a good price.
Downsides to this Strategy
With this buying strategy, you would fail to maximize your investment in the currencies that will outperform the rest. But since you can’t be absolutely sure of which ones will be successful, this strategy gives you good diversification.
Unbalanced Portfolio
To take advantage of the currencies that you think will do the best, you could use the Unbalanced Portfolio Strategy. In this strategy, you would allocate every investment by how well you think each currency will perform.
For example, if we use the same portfolio as above, you might have the following allocations:
Bitcoin (60%)
Monero (25%)
XRP (10%)
Dash (5%)
If you think that Bitcoin will perform the best over time, then it would make sense to invest a majority of your money in it.
Each subsequent investment would be distributed according to these predetermined percentages.
…and of course, you would not buy each currency until you see a Baseball Cap.
Who this Strategy is For
This is for investors who have done extensive research into currencies and have a very good idea of which ones will perform well. The preset percentage allocation to each currency can change over time, but be sure that you have a very good reason to make the change.
Downsides to this Strategy
The only downside is that you could get the allocation wrong and invest too little in the best performing currency. So only use this strategy if you are reasonably sure of your predictions.
If not, then the Balanced Portfolio Strategy would be best.
Profit Reinvesting
Once you have a solid portfolio of currencies and you are in profit, you can start to branch out to other currencies that have good potential.
For example, let’s say that you bought 3 Ether coins for $52 each. As I write this, Ether is at $368.
So your total profit is:
3 x $52 = $156
3 x $386 = $1,158
$1,158 – $156 = $1,002
Now, let’s say that you really like the potential of the Ripple Network. You could take half of that $1,002 profit and invest it in XRP.
By using this strategy, you can leverage your gains to make higher returns and diversify your portfolio.
In order to get the most out of your current profits, you should look for times when price goes parabolic. This type of price action is unsustainable, so it’s best to cash out some of these gains, before price drops again.
Remember to lock in your profits, so you can keep your money readily available to take the next trade.
…and look for the Baseball Cap.
Who this Strategy is For
Reinvesting your profits is a great strategy for investors who only want to make a very limited investment in cryptocurrencies. If you are skeptical that cryptocurrencies will actually survive, then only expanding your portfolio when you see results, is a great way to grow your initial investment.
Downsides to this Strategy
You might miss out on great investments if you have to wait for your current portfolio to show you a profit. In addition, you are taking money away from currencies that are actually showing a profit.
The next investment may not be as good, so don’t spread yourself too thin!