The Best Crypto Investment Strategy
…or how to not get a heart attack on the way to the moon
Having been in the crypto space for some time I get asked frequently what the best investment strategy in crypto is. While there are many different strategies to apply as with every investment there is a specific one that I can recommend to everybody especially if you are not a professional investor. The main benefit of this strategy is that it takes away your stress level and keeps your focus on other things while you can still participate in the upside of the blockchain revolution.
Especially for newbies to crypto who have joined in the recent bull market and have witnessed the crash in May this strategy is highly recommended. If you are one of them the probability is very high that you panicked from the fast declining prices and sold your coins at a lower price than you purchased them. The probability is also very high that when prices will rise again you will start buying at a higher price than when you sold — Not the best way to make a good profit.
If you are one of these traders (most will not admit even though they are) you are a so called “weak hands” trader who lacks investment knowledge and/or conviction about cryptos future. Ideally one should sell when prices are rising and buy when they are falling most people do it the other way around. To be fair it is also hard to read the market for professionals especially in volatile crypto.
What most new joiners are not used to is high volatility because they entered in a bull market with constantly increasing prices. But historically high levels of volatility have been normal in the crypto market due to hypes, weak hands, leveraged positions and market manipulations. For professional traders high volatility is a dream as they can play the market but for retail investors seeing their portfolio increase and decrease by +25% in days it is a roller coaster of emotions.
Luckily when applying the below mentioned strategy you become indifferent to volatility and I will stop calling you a weak hands traders as it requires some mental strength.
Before I start outlining the strategy lets first start with some assumptions you need to agree upon when you want to follow this strategy. Generally as investments involve forecasting the future it is important to have a thesis to base your investment on. Many investor just invest because they read the news about rising crypto prices or a friend told them about his great performance. Many have no plan on their investment such as when to cash out, they just watch their assets increasing in price and then decreasing again and then sell in panic. So lets not do it this way and follow an investment thesis:
This strategy is based on the following assumptions:
- Blockchain technology will be the next big horizontal innovation having a similar (or probably greater) impact on our lives than the internet had
- Crypto will attract the mass market in the next 2–5 years as more and more users, investors and developers will enter the space
- Crypto will establish itself as a new asset class that will be accepted and regulated by traditional financial institutions and governments
- The majority of financial institutions will have crypto in their standard offering for their retail and institutional clients base
- Cryptocurrencies will move from being mainly a speculative investment asset to a useable good in their respective ecosystems
- High levels of volatility will continue over the next years driven by hype, retail investors, leverage and market manipulations
If you agree with the above assumptions you can follow this 6 step strategy.
6 Step Strategy
- Open an account at a crypto exchange (such as Kraken, Binance, or Coinbase) and buy “blue-chip” cryptocurrencies such as Bitcoin, Ethereum, etc. (I would go for a selection of Top 15 coins)*
- Buy a hardware wallet(s)** such as from Ledger or Trezor and send the coins from the exchange to the wallet. Here is a great step by step guide from Ledger on how to do this: https://www.ledger.com/start
- Stake the coins that you can on the hardware wallet to generate a passive yield while holding them or (if you are less risk averse) stake them on an exchange
- Store the wallets in a safe place such as in a bank locker and make sure to keep the recovery phrase (to restore the access to the coins in case you would forget the password of the hardware wallet or the device gets damaged) in a separate save place
- Forget about it for the next 2–5 years (the hardest step)
- Send the coins to an exchange and cash out or start using the coins in their respective ecosystems as by then they will move from speculative asset to a useable good (already is to some extent but will be more in the future)
Yes, basically this strategy is hodling as we call it in the crypto world. If you expected a more sophisticated strategy I must disappoint you. History has proven that for the non-professional investor (also for most professional) the long-term holding strategy would have resulted in the best performance.
Imagine you would have purchased Bitcoin at the peak of the 2017/18 bull market for USD 20.000. If you would have hodled your coins (without losing access to them) you would have made more than 3x at the current peak in 2021. Most probably you would have sold them below price afterwards. Of course if you needed the money you must cash out but another important rule in crypto or investing in general is: Only invest what you don’t need for a living and can afford to lose.
This strategy is also not crypto-specific as multiple studies and research papers have proven that holding blue-chip investments long-term results in a better performance than constantly trading “riskier” investments (less transaction costs/taxes). That’s also a reason why most day traders are not profitable as it is very hard to read the market in the short term (especially in crypto with a constant inflow of positive and negative news).
What are the benefits of this strategy:
- Focus on other things. This may sound wired but everybody who is invested in crypto knows the phases when you are constantly checking prices either for motivational reasons when markets rise or in panic when markets decline again. With a 2–5 years horizon, you can completely forget about it and focus on other more important things in life.
- It forces you to invest only as much as you can afford to lose and do not need in the short time. Since you know the time horizon of 2–5 years you can (or should) not use money you need as it should be locked for the next years.
- Some cryptocurrencies offer attractive yield by staking of coins which is similar to a dividend. For most coins it ranges between 5–15% per year. Hardware wallets such as Ledger allow to stake some coins while having them in safe custody.
What are the disadvantages of it:
- Unable to play the market as crypto is very volatile it offers great opportunities to play the market, this of course for people who have experience in investing.
- Not all coins can be staked from a hardware wallet so you are potentially missing out on yield opportunities. On the other side, you reduce your counterparty risk when you are not staking with third-party providers besides the custodian hardware wallet
Dollar Cost Averaging: Instead of investing everything at the same time you can split the amount you plan to invest into parts and buy for example every beginning of the month for the same amount to get a better average price. But if you agree with my thesis points it does not make a big difference if you just buy everything at the same time and hodl it for the next years.
Staking: Stake the coins that you can on the hardware wallet or with an exchange. You can earn a yield while hodling certain coins such as ETH, DOT or ICP but there is also a (small) risk that the exchange can gets hacked but if you go for a big player like Coinbase or Kraken I believe the risk is relatively small. Also hardware providers such as Ledger enable staking of certain coins you have on the Ledger.
Lending: For coins such as BTC which can not be staked there is the option to lend out and earn a passive yield on them. I personally recommend BlockFi where you can earn 5.5% per year on your Bitcoin holdings paid out in Bitcoin or any other cryptocurrency they offer. Here again you have the third party risk. Alternatively you can only lend some part of your bitcoin and leave the rest on the hardware wallet.
I hope this article will be helpful for you. Even though I am aware that for some this investment strategy seems boring it is the safest way in my opinion to make a profit in the crypto space. While the short term cannot be predicted it is for me without question that the current prices for coins such as Ethereum will be considered very cheep in the near future.
*I would personally suggest the following portfolio (50% ETH, 20 % BTC, 20% DOT & 10% ICP)
**This strategy is intended for retail investors. If you are institutional or plan to invest larger volumes I recommend going to a professional custodian.
As with every investment only invest as much as you can afford to lose. Do your own research even if you agree with my thesis points.