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Strategies for investing in cryptocurrency.

Cryptocurrencies — Bitcoin and alternative coins — were among the best performing asset classes in 2021 as more investors jumped into the crypto market trying to capture growth from digital investments that have the potential to increase in value in the long run. But cryptocurrencies are inherently risk assets that are prone to wild price swings. This is one among many risk factors that crypto investors must consider if they want to be profitable investing in this emerging asset class that now has a total market value of more than $2 trillion. Investing in digital assets is not all that that different than investing in traditional assets like stocks and bonds. Here are fundamental investing strategies to keep in mind while managing your crypto investments.

Choose the right mix of storage.

When it comes to keeping your cryptocurrency safe, there are a few ways to store it. Digital assets are held in either hot or cold storage. Hot storage refers to an online digital wallet, and cold is an offline wallet, typically stored on a hard drive. Experts say it is best to store the majority of your cryptocurrency in a cold wallet to prevent hackers from gaining access. It’s convenient to have some crypto in a hot wallet online so crypto traders can move in and out of positions quickly. A helpful crypto storage strategy is to hold roughly 80% of long-term funds inside a cold wallet, says Yubo Ruan, CEO and founder of Parallel Finance, a new decentralized lending and staking protocol on Polkadot. The hot wallet can then be used for short-term movements.

Prioritize liquidity.

Liquidity is an important metric when deciding how to invest in the crypto market. The market moves fast, so crypto traders need to move in and out of positions quickly. This means there has to be demand for cryptocurrency so market participants can buy at the best price and so that when they decide to sell some of their holdings, they can secure a profit. “You don’t want to buy an asset that maybe has great potential, but it’s not being traded and it’s just stagnating, so you’re sitting on it and you’re at the mercy of the market,” says Tally Greenberg, head of business development at Allnodes, a crypto hosting provider. When measuring liquidity, it can be helpful to look at recent trading volume of a crypto asset. Trading volume indicates how much cryptocurrency has been bought and sold, indicating the overall interest in the asset.

Harness volatility.

Since cryptocurrency is an emerging asset, there is still speculation and hype surrounding the asset class, which can often lead to heightened volatility. While large price movements are typically seen as a risk, daily volatility is normal and healthy for the crypto market and is actually an opportunity to make profits. Greenberg explains that volatility is, in fact, good for smart traders. But to manage your volatility risk effectively, it’s best to understand what type of trader you are so you can manage the market’s price swings. She explains that it would be best to pay close attention to what is happening in the market and with the traded asset itself. This means following the news and all related blockchain updates as well as historical charts so that you can identify emerging patterns.

Invest what you can afford.

Cryptocurrencies are speculative assets that could entail a high degree of loss. Just like with traditional investing, invest in the crypto market only what you can afford to lose. If you are not able to withstand the potential full loss of your crypto investment, that means you cannot afford the risk of investing the amount you are considering. Determining risk tolerance in the crypto market comes down to how much you earn and your level of expertise, Ruan says. Someone new to crypto should allocate less of their investable income to the asset class than a committed crypto enthusiast or a decentralized finance, or DeFi, expert.

Take your gains often.

Experts say crypto market participants should take gains frequently. A best practice is to store gains in your hardware wallet. When it’s time to take profits, crypto investors are often faced with the challenge that a cryptocurrency’s price could sink or soar. Regular profit-taking smooths out this risk over time. “A lot of people just buy and hold for an indefinite amount of time, and they’re at the mercy of news, memes, celebrity tweets,” Greenberg adds. To better define your crypto trading strategy of profit-taking, it can be helpful to understand why you are entering a crypto trade, just like with any investment. This way you can define your entry and exit points.

Diversify.

Putting all your eggs in one basket is not a sound strategy in the world of crypto. A better strategy to minimize risk in crypto investing is to have your crypto portfolio invested in a variety of coins and crypto projects. There are many investments available on the market associated with cryptocurrency and blockchain, including the “internet of things,” nonfungible tokens, DeFi projects and the wide variety of coin types. You can even diversify by cryptocurrency exchanges, Greenberg says, because some exchanges don’t have the same assets. By spreading your investments across different digital assets, crypto investors can reduce their overall risk profile.

Dollar cost average.

Dollar cost averaging, or DCA, is an investing strategy that involves investing a certain amount of money on a consistent basis rather than piling in all at once. This way investors can weather market swings, in much the same way that regularly taking gains smooths out pricing risk. By taking a DCA approach, you’re investing a set amount during bull and bear markets. Buying when the crypto market is down allows investors to buy assets cheaply to sell them for a profit in the long run. Cryptocurrency is a new asset class that brings a lot of excitement. But using DCA can keep the hype in check. “DCA also removes emotion from your new positions in the market and helps to ignore the short term for longer positions by purchasing your crypto over a period of time,” Ruan says.

7 best cryptocurrency investment strategies:

— Choose the right mix of storage.

— Prioritize liquidity.

— Volatility is a good thing.

— Invest what you can afford.

— Take your gains often.

— Diversify.

— Dollar cost average.