An easy way to better manage your crypto investments?
When it comes to reading the market it’s easy to comment post factum. But what if we could do something very simple to manage our investments better and as a result improve your portfolio performance?
The crypto-market dropped more than 70% since its highest point in January. I would be careful to trust anyone who claims to know all the reasons behind, it is most likely a combination of factors, some of which may be unknown to the general public.
One of the more obvious factors was the hype surrounding the blockchain space, which led to the subsequent entry of many non-professional investors who were just there for quick profits. A large portion of them did not understand what blockchain is and why it is valuable. Often, such investors have weak hands and are quick to sell when the market goes in the wrong direction, without thinking about fundamentals and long term potential. Another aspect to consider is that the crypto market has a history of extreme volatility and wild swings, and until it is much larger and more mature, this volatility unfortunately is here to stay.
When trying to read the market, I would often look for hints in research done on behavioural finance for non-professional investors, but that’s just me. The bottom line is that it was difficult for the normal crypto-investor to predict when the crypto market would drop and by how much.
A very simple, but useful practice which can save you money when managing your investments it’s the so-called Cash-Reserve strategy.
The strategy is simple — you just need to put some money aside when the market is bullish, for when the market is in a downward trend you have some smoney left to re-invest. Very simple, but effective.
Let’s assume you decide to invest $100 in ETH on 13th of December.
You have the choice between two strategies
1. Hold Strategy
You hold and 3 months later on 13th of March your investment will be $98.3
2. Cash Reserve Strategy
While the market is in an upward trend you decide to put aside every week (20.12, 27.12, 3.1, 10.1) In the example we tested with various percentage of 1%, 3%, 5% or 10% from the net asset value of your crypto investment.
1st DIP: When the market first dipped in January, you panicked and thought the market hit bottom. A couple of days later, and after some sideways movement of the market, you decide to buy crypto on 19.01 with some of the money you saved from before.
2nd DIP: Unfortunately, the market continues to drop and you decide to invest the rest of the saved amount of money after the next big drop on the 7.02.
We test combinations between re-investing 10/90, 30/70, 50/50, 70/30 and 90/10 of the saved amount between the first & second dip respectively.
For example, let’s choose to put aside 5% of our net asset value aside each week and after the first dip we re-invest 10% ($2.47) of the saved dollar amount and then 90%($22.3) after the second dip. The result at the end is $102.12 which is $3.82 more than in the Strategy 1.
Results
In most cases, you end up with higher results following the Cash-reserve strategy. On average, if we assume all scenarios are equally possible, your portfolio value will be higher $1.19 higher using Cash Reserve strategy than with Hold strategy.
The purpose of this small example is just to illustrate a useful and tested asset management practice in the crypto market and nothing more. I realise that many details in this example can be challenged, such as the re-investment timing selection or the transaction fees, but the overall idea is to demonstrate how sometimes with little effort, we can achieve better results while considering learning more about good asset management practices.
Originally published at belayerinvestments.com.
