by Jake Wengroff
Some people purchase cryptocurrency because of trust: They believe in the power of the asset to disrupt the financial system and fundamentally change the way that we pay for goods and services.
Others, however, purchase cryptocurrency for the potential to make money. Buy low, sell high: This basic investing mantra for any asset — stocks, bonds, real estate — can be transferred to bitcoin and other cryptocurrencies.
Yet simply buying when prices are considered low and selling when they rise is not as easy as it sounds. Financial markets are volatile, and those for cryptocurrencies are even more so. Investors need to follow one or more investment strategies, or sets of instructions designed to help make investment decisions, including what to invest in, when to invest, how much to buy, and of course, when to sell—and hopefully collect profit.
Below, we cover six basic crypto trading strategies. (This is for informational purposes only and should not be construed as investment advice. )
Dollar Cost Averaging (DCA)
Dollar cost averaging is a proven trading strategy for other assets, and can easily be applied to cryptocurrencies. The strategy is rather straightforward: Instead of investing all at once, you would invest in small amounts, but in a disciplined manner where you would buy at a particular time and day of the week and only buy at those times.
For instance, spending $10,000 to buy bitcoin all on one particular day might net the investor a particular amount of the currency. However, if that investor were instead to buy bitcoin once per week for 20 weeks in $500 intervals, they would usually end up with more. (Of course, a consistent rise over 20 weeks would bring the opposite result; DCA is not a good strategy if it is expected that the price of the asset will rise.)
DCA spreads the risk, and takes advantage of price swings over a longer period of time. Further, buying over a long period of time helps to reduce the impact of market volatility.
Moving Averages and Crossovers
Moving averages (MAs) are chart indicator lines that show the mean average price of an asset over a defined period of time.
For this strategy, you are looking for crossovers between the 50 MA (an average of the previous 50 days) and 200 MA (an average of the previous 200 days) over long chart time frames, such as the daily and weekly charts. Because it deals with observing price activity over wide time periods, this is another long-term trading strategy that works best over 18 months and onward.
There are two types of crossovers you are seeking:
- Convergence, or “Golden Cross”: When the 50 MA crosses above the 200 MA
- Divergence, or “Death Cross”: When the 50 MA crosses below the 200 MA
Convergence, or when the short-term 50 MA crosses above the long-term 200 MA, usually means that prices are rising because buyers are returning to the market; as such, it’s a good time to buy.
The opposite is also true. In divergence, short-term momentum, or the 50 MA, is falling compared to the long-term momentum, or 200 MA, and as such, it’s a signal to sell. According to CoinDesk, divergences arise when large numbers of traders decide to exit the market and sell their assets.
This can be a tricky strategy, as sometimes there are both buy and sell signals, indicating that there is a lot of uncertainty in the market. The “Golden Cross/Death Cross” moving averages strategy works best over the long term.
Relative Strength Index (RSI)
Relative strength index (RSI) is a chart indicator that measures momentum by calculating the average number of gains and losses over a 14-day period. The indicator line oscillates between 0 and 100 and can be used to highlight when an asset is “overbought” or “oversold.”
A channel between 30 and 70 is most commonly used to show this. When the indicator line is above 70, the asset is considered “overbought” and the price will likely come back down. On the other hand, when the asset goes below 30, the asset is considered “oversold,” which means the price will likely rise.
This strategy can give investors subtle clues as to price movements, enabling them to buy when the line is above 70, when the crypto asset is overbought, as prices will decline. The investor can then hold on to the asset and follow the charting indicators to sell when the indicator line is below 30, when prices will rise.
Can you short crypto? The short answer is yes — but not without substantial risks (despite its apparent popularity with subsets of the crypto crowd).
Shorting is a trading strategy that bets against a rise in the asset’s price. Using derivative instruments like futures and options, investors can short the price of Bitcoin, just as they would for another asset class, like stocks.
One way to short Bitcoin is through a cryptocurrency margin trading platform, offered by several cryptocurrency exchanges and even traditional brokerages. Margin trades allow investors to “borrow” money from a broker in order to make a trade. Another way to short Bitcoin is by shorting its futures and options.
Index investing works great for passive investors, as the assets selected and weighted in a portfolio mirror popular, time-tested, high-performing portfolios. For example, S&P 500 index funds simply track the market cap of the top-performing 500 companies, allocating a percentage of the portfolio value to each stock proportional to the market cap.
While there are index mutual funds and exchange-traded funds for stocks, there aren’t yet available index mutual funds tracking a portfolio of cryptocurrencies. However, investors seeking this type of strategy can consider using tools known as crypto portfolio management, that offer a dashboard-like view of holdings and even automated crypto asset selection in order to lower risk and increase returns.
Buy and Hold
As its name implies, this is perhaps the simplest, most straightforward way to invest in any asset class: buy it, and retain ownership of it over the long term. The risk to holding on to an asset for a period of several years is that value might not appreciate as quickly as if it were invested in other assets or asset classes. Additionally, investors would need to be able to withstand wild price swings, which is usually the case with cryptocurrencies, before they ultimately decide on their crypto exit strategy (selling off their holdings).
Stronger Peace of Mind as You Invest
These basic investing and trading strategies might not seem so basic if you’ve never invested before. Luckily, however, most cryptocurrency exchanges offer a suite of applications, tools, and services to help clients invest through automation. For example, an app can be programmed to buy or sell a fixed amount when a crypto asset price reaches a particular level.
Yet trading applications do not protect the investor against fraud, misuse or compromise. Once a cybercriminal obtains the currency’s private key, that criminal becomes the rightful owner.
The industry needs market-driven solutions that demonstrate proof of ownership of crypto assets. TransitNet is creating the industry’s first third-party title registry, to add a layer of protection for cryptocurrency assets by providing proof of ownership. With a title in place, investors can feel safer that additional security measures exist to protect them in the event of theft or compromise.
Join the forefront of the new crypto infrastructure.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce and the Internet of Things.
Shrimpy – Passive Crypto Investing Strategies
Investopedia – Seven Ways to Short Bitcoin
Benzinga – Best Crypto Portfolio Trackers