14 min read

Investing in and trading cryptocurrencies offers two different ways to profit from financial market movements. Both methods have the same target result, but the approaches to achieving it are different.

The main differences between crypto investment and crypto trading

  • Long-term investing

Investing in cryptos is a long-term process, rather than a simple way to make a quick buck. In some cases, investors will keep their assets for years or potentially decades.Trading, though, takes place across more compressed periods — daily, monthly, or quarterly. Traders typically exploit fast price fluctuations that go ignored by investors.

  • Transactional regularity

Following on from the point above, traders tend to place far more orders than investors. This is because short-term changes are unable to generate substantial profits independently, and traders need to make up for this through greater trading volumes.Crypto investors, though, usually engage in a lower number of trades.

  • Research and skill

Investing in cryptocurrencies successfully tends to demand an in-depth grasp of the market and its movements. Trading them, though, hinges on technical skills more than expert knowledge.Investors often focus on the psychology of the cryptocurrency market, while traders are likely to focus on charts and numbers instead.

  • Potential for risks

One of the most important factors to consider when researching how to invest in cryptocurrency is that risk is inherent to the market. Still, trading is viewed as a high-risk/high-return method — they usually expose themselves to risks on a daily basis because they complete more transactions than investors.Investing in cryptocurrency brings more gradual profits, and while risks still exist, they’re less prevalent.


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What is Fundamental Analysis and Technical Analysis?

There are two foundations of cryptocurrency investment strategies to consider: fundamental analysis and technical analysis.

Fundamental analysis focuses on the way in which an asset’s price is affected by market movements and news (e.g. profit margins, political events, natural disasters, financial statements from managerial leaders). Analysts are able to assess whether a specific asset is over- or underpriced.

Technical analysis, though, is more focused on historical data — indicators, price charts, trends, and other key information that enables analysts to predict price movements that may occur in the future. It provides market participants with a wide-ranging overview of statistics related to past performance.

Also, technical analysis involves researching demand and supply forces, which can have an impact on prices.

Here are some simple differences between fundamental and technical analysis:

  • Extended periods of an asset’s history are usually considered with fundamental analysis, which means it’s more likely to be utilized in long-term trading. Technical analysis is better for swing and short-term traders instead.
  • Typically, cryptocurrency investors opt for fundamental analysis while traders go for technical analysis. Fundamental analysis tells investors whether to buy and hold an asset for a specific period. Technical analysis, though, offers traders advice to help them make fast profits.
  • In fundamental analysis, it’s recognized that an asset isn’t just affected by the past, while technical analysis tends to ignore current events and focuses on historical data instead.
  • Technical analysis is a better option for identifying the most appropriate times for market entry and exit. Fundamental analysis, though, is related to the currency’s intrinsic value.

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How to Invest in Cryptocurrency - 9 Best Strategies

Let's consider the most popular cryptocurrency investing strategies, noting their positive and negative sides. This information will give you more information about potential problems, help you make smarter decisions and achieve better results.

#1. HODL

HODL is a strategy focusing on holding cryptocurrency for a long span of time without succumbing to the temptation to cash out. HODL is an intentional misspelling of “hold”, for obvious reasons.

This strategy is often preferred by new investors, as it’s fairly straightforward and can be executed easily. Ultimately, HODL is built on an optimistic view of the crypto market.

Honestly, there’s no single answer to whether investors are better off making long-term investments. HODL can bring investors profits when the market is going up: you’ll be able to earn money just by keeping hold of your asset while its value increases.

Some consider the long-term investment strategy to be unprofitable. Yes, it may bring success, but there’s no chance of achieving a profit if the trend becomes reversed. Following the HODL method may cause you to miss out on other opportunities that could emerge through more complex strategies.

Advantages

  • A simple strategy
  • Effective throughout uptrends

Disadvantages

  • Lack of nuance
  • Can be terrible during downtrends
  • Real potential for losses

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#2: Averaging

This strategy involves creating average positions by buying a cryptocurrency’s average price over a period of time. Due to the market’s high volatility, purchasing the asset in modest installments is a terrific way to build long positions. Ultimately, investors are cautious and face low risks, though there are fewer possible gains too.

You can choose the schedule for purchasing the asset, whether you would prefer to buy every week, every two weeks, every month, etc. Two of the most popular averaging strategies are dollar-cost averaging and value cost averaging.

The first is based on investing equal dollar amounts of a cryptocurrency at regular intervals. The second sees investors add to their portfolio based on the percentage gain or loss they made prior.

This offers investors the freedom to determine whether they would prefer to skip one particular week, month, etc., aim to only buy during the dips, and more.

Advantages

  • It’s affordable for most
  • Fewer issues related to bad timing
  • Investors can avoid impulsive decisions

Disadvantages

  • More fees to pay
  • Could lead to smaller returns
  • No regard to variable environment


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#3: Buy Low, Sell high

It’s pretty self-explanatory: you purchase an asset when you feel it’s price has dipped low enough and sell it once the value increases.

You would decide what cryptocurrency to purchase based on past values and the present market conditions. This can be a difficult strategy to utilize on a consistent basis, though it has still become popular.Investors using this strategy usually set stop-losses, or go further by applying technical analysis to buy or sell according to moving averages, support levels, etc. Investors can benefit from portfolio erosion and transaction fees.

Still, it can be difficult for investors to recognize when a price rises too high or dips too low. A lot of investors need to find a comfortable balance between wanting to hold out for longer in the hope of boosting their profits and feeling satisfied with the current price.

It’s recommended that this strategy be supplemented with various tools, including moving averages.

Advantages

  • Helpful for newcomers and experienced investors alike
  • Effective for various markets (including sideways)
  • Capitalizes on others’ panic-selling choices

Disadvantages

  • Demands intensive research
  • Most assets can be unpredictable
  • Psychological barriers can make it hard to know when to buy and sell

#4. Day Trading with a Bot

Automated trading software is a common option for many traders: it does most things that a human can do, but with obvious parameters. Most traders tend to choose pre-made trading bots, while others build their own. This can be challenging (to say the least!) without programming skills, though it offers greater control over strategies.

When trading strategies are integrated into bots, they’re usually straightforward and structured well. As they need to be broken down into a number of actions, they can’t be too complex — if they are, the bot will be hard to set up and could make trading mistakes.

Traders who buy pre-made strategies via trading platforms should be aware of the risks, though. Yes, you can achieve healthy profits thanks to the bot’s quick reactions to market changes and ability to trade 24 hours a day without emotions. But faulty strategies can lead to a number of losses.

Advantages

  • Not much maintenance required
  • Reduced psychological pressure
  • Plenty of markets and assets to watch

Disadvantages

  • Danger of automating consistent losses
  • Demands some experience and knowledge of programming
  • No way to verify bot creators
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#5: Investing with a Trading Bot

It’s less common for investors to automate their cryptocurrency investing process than it is for traders to automate theirs. Why? Because trading bots are designed to analyze markets and execute orders quickly.

That’s not the primary goal with investing. But enabling a bot to manage your own portfolio with stop-losses and choose low-risk strategies can generate profits.

Bots have different features, and investors pick them based on how well they align with their preferred strategy. Keep in mind, though, that a lot of features won’t apply if you’re planning to long-term HODL your assets (for example).

Automated investing offers numerous benefits, but it’s not always the right option for every investor. Those investing on a casual basis aren’t the target user base for bots, and so may work better without them. However, if you’re looking to invest consistently and aiming to maximize your risk-adjusted returns, you could generate profits with automated platforms.

Advantages

  • Helps investors to stay disciplined
  • Can be used across several accounts
  • Removes emotions from the process

Disadvantages

  • Potential danger of scammers
  • Not the perfect option for people making long-term investments
  • Not completely hands-off

#6. Cryptocurrency Arbitrage

Crypto exchanges have varying trading volumes, liquidity, and prices for specific assets. Big and small currencies will be affected by market changes in different ways. The larger exchanges tend to have lower rates, too.

In this arbitrage strategy, cryptocurrency investors buy assets on these bigger exchanges before selling them on smaller ones. A period of time will usually pass between a price changing at large exchanges and smaller exchanges. Investors can take advantage of this gap and, potentially, make a profit.

Crypto arbitrage is a fairly simple strategy, though you do need to invest time into it and commit to the process to see results.

You’ll have to boost your trading volume to maximize this strategy’s profit opportunities. Price changes may not be significant on every occasion, so you’ll want to make up for this by investing substantial amounts of cryptocurrency when opportunities arise.

Investors need to look out for fees on transactions, deposits, and withdrawals, as these can eat into your profits significantly.

Advantages

  • Profits can be instant
  • There are plenty of exchanges and cryptocurrencies available
  • Allows investors to take advantage of the market’s volatility

Disadvantages

  • Capital requirements to consider
  • Exchange fees can be an issue
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#7: Initial Coin Offerings

Initial Coin Offerings (ICOs) are a form of crowdfunding, in which tech creators sell tokens that will be replaced with altcoins once the company has been set up. The advantage of this is that tokens may be traded on crypto exchanges, and their values could rise as time passes.

Two main ICO strategies are available to investors. One is known as flipping, and involves buying tokens and trading them right away — you could make a profit if there’s hype surrounding the company and the token is in high demand. But if your initial investment is on the small side, you’re unlikely to see massive gains.

The second type of ICO investment strategy is holding. Investors choose companies and their tech based on their potential for success in the future, rather than chasing immediate gains.

This requires a lot of research: you’ll need to understand the business model, total supply, inflation, and other key elements of a company’s set-up.

Initial Coin Offering (ICO) is an innovative approach for raising funds through the use of digital currencies (cryptocurrencies). Such a strategy is more prevalent in cryptocurrency projects that are yet to fully developed their blockchain-based product, service, or platform. The funds collected on ICO events are normally received as Bitcoin (BTC) or Ether (ETH), but in some cases, fiat currency may also be taken as payment.

Usually, investors engage in Initial Coin Offerings with the hope and expectation that the digital token (or coin) and its corresponding company will be successful - possibly resulting in a good return on investment (ROI) for those that are regarded as early supporters.

Despite being often compared to IPOs (Initial Public Offering), ICOs are quite different in the sense that investors are not buying any kind of ownership of shared in a company. Initial Coin Offering events are mainly performed as a fundraising strategy for startups that are in very early stages of development and need funds to push the project forward.

Unfortunately, however, many ICOs are performed by non-reputable entities that raise large amounts of money and disappear, with no follow up on development. For this reason, it is extremely important that investors do their due diligence (also known as DYOR) before investing in cryptocurrency companies.

There are many different ways of issuing a cryptocurrency token or coin before offering them on ICO crowd sales. While some companies prefer to build their blockchain from scratch, issuing their own native coin, the majority of ICO events that were held so far took place on the Ethereum network, following the so-called ERC-20 token standard.

For instance, a startup may deploy smart contracts on the Ethereum network to create its own cryptocurrency as an ERC-20 token. In such a scenario, the ERC-20 protocol outlines what are the rules to be followed when issuing a digital token on the Ethereum platform, and the smart contracts ensure that these rules are followed in a reliable and autonomous way.

Although Ethereum is the most popular choice, there are some other blockchain platforms that support the creation and issuance of digital tokens, which are then offered through ICOs. A few examples of these platforms include Stellar, NEM, NEO, Komodo, and Waves.

Initial Coin Offering crowd sales are, certainly, one effective method of raising venture capital and project funding, making it possible for businesses and projects to get financial support during their early stages.

Advantages

  • Major potential for returns on initial investments
  • Everyone can take advantage of these strategies
  • Liquidity is high

Disadvantages

  • Lack of ownership
  • Danger of scams and Ponzi schemes
  • Price fluctuations can be extreme
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#8: Investor Fund Management

Investment portfolio management is based on the organization and maintenance of investments with an aim to reach certain goals. Depending on what these objectives are, an investor may pick different strategies, risk-management approaches, etc.

One approach is known as passive management: investors typically have a fixed asset allocation and won’t attempt to outperform the cryptocurrency market conditions. As there’s no active trading, related fees tend to be fairly low.

But with active management, investors pick their investments to outperform a market benchmark. This involves higher fees and some believe there isn’t as much profit up for grabs as the strategy’s advocates claim.

Advantages

  • Facilitates a regular income stream
  • Not particularly complicated for newcomers
  • Diversification of investments

Disadvantages

  • Tax inefficiencies must be considered
  • Fees for entry and exit
  • Control of asset choices is somewhat limited

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#9: Cryptocurrency Mining

Crypto investors argue over which investment strategy is best again and again. But when all is said and done, portfolio managers and analysts would all agree that there are different valid ways to reach investment goals — not everyone has to follow the same path. There’s no right or wrong answer here.

With this in mind, you still need to be adaptive. That means you should feel free to mix some of the strategies covered above if you think they will achieve better results when combined.

All of the strategies we’ve explored above have their own distinctive features, and crypto investors can exploit strengths and weaknesses to their personal benefit. For example, you might choose to combine passive and active strategies: the former will probably generate more consistent results while the latter would likely be higher-yielding.

But remember: just as there is no perfect strategy, there’s no correct way to combine multiple cryptocurrency investing strategies. If you believe you have adequate resources and knowledge, you can try your hand at mining or another cryptocurrency-related activity that suits you.

Advantages

  • Risk management is usually better
  • Fund expenses are lower
  • Combines the best of both worlds

Disadvantages

  • Demands more knowledge of the market
  • Potential to create poor combinations

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Factors to Think About Before Building a Cryptocurrency Investment Strategy

Each successful, profitable investment has a measurable strategy that can be reproduced in the future. But issues arise when crypto investors switch from pre-made strategies to making their own without giving it much consideration.

Think about these key points when trying to create the right strategy for you:

  • The state of your finances

A careful financial plan is essential, as there is no guarantee that any investment will lead to big profits. Consider your post-tax income — how much can you afford to spend on investments comfortably?

  • Desirable return and risk tolerance

Try to understand certain asset types’ inherent risks when making a risk-management plan and future strategy. Ask yourself how much you’re willing to risk in the hope of achieving a higher return on your investment?

  • Your cryptocurrency investing timeline and goals

Long-term strategies lasting for decades are significantly different to those running for just a few years. Decide whether you want to generate profits you can spend soon or you’d prefer to save for your eventual retirement.

  • Strategy performance in varying markets

The crypto market won’t always be as it is today, for better or worse, and it won’t be on your side every time. Ask yourself how the strategy you’re creating is likely to perform in different market conditions, and try to identify its strengths and weaknesses.

  • Measurability and determining effectiveness

You will need to revise and tweak your strategy at one time or another. Think about how you would assess whether your strategy aligns with your investment objectives.


Frequently Asked Questions

You’re sure to have questions about cryptocurrency investing strategies and the overall crypto market. We’ll answer the most common for you below:

  • What should I have before I start making crypto investments?

You should take advantage of crypto trading platforms, as they offer a wealth of assistance to newcomers. These services are designed to aid portfolio management, strategy choices, and picking financial instruments. They also connect you to cryptocurrency exchanges easily.

  • How can I pick the right cryptocurrency to start investing in?

You should analyze asset classes on the market based on the development team’s capabilities/reputation, the market value, and the goal driving the project. When you spend enough time researching cryptocurrencies, you might find picking the right one for you is easier than you expect.

  • Do you have to pay tax on profits from investing in cryptocurrencies?

Yes: any gains you receive from investing in cryptocurrency are considered part of your income, and will be taxed. Keep a secure, clear record of your profits and losses, as they’re required for tax reports.

  • Are virtual wallets necessary?

Virtual wallets are essential for sending, receiving, and storing cryptocurrencies — as cryptos are digital only, there is no physical way to store them. The best virtual wallets enable you to transfer funds to another online wallet securely.

  • How can I stay safe against hackers?

Follow these steps to protect your funds online:

  • Monitor your transaction history
  • Spread your profits across several wallets
  • Take advantage of two-factor authentication when available
  • Utilize password generators to ensure randomness
  • Reduce your online vulnerability overall
  • Is it worth investing in cryptocurrency?

The crypto market is likely to keep operating for a long time, and it’s gained impressive momentum in the past few years. New assets are always available to invest in, too, as the number of altcoins available continues to grow. 


Conclusion

Choosing a strategy for your cryptocurrency investing and picking specific instruments can be difficult. Ultimately, it’s about trial and error: when you start using the market, you’ll find that you gradually recognize the best and worst techniques.

First, though, you need to determine your personal risk tolerance, your personal investment goals, your funds, and other key preferences. You’ll find it easy to understand which strategy suits you best — it could be one covered in this list or one you find elsewhere.

Just do your research, be smart, and be willing to switch strategies when one stops working as well as it should. 


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