As a digital asset investor, devising an efficient strategy is difficult. Investing in digital assets is still a relatively new concept in many jurisdictions. Therefore that is not a lot of digital asset investment strategies that have been proven against the test of time.
You should first evaluate your risk, and investor profile, as well as your financial goals. Then, choose a digital asset investing strategy that best suits your needs.
Before You Start Investing
Set your financial goals with digital assets investing first. You should set clear financial objectives for your trading strategy.
A trading strategy will act as a financial plan for your trading activities to achieve your financial objectives.
In turn, your trading strategy will depend on different factors. A few of them are:
- Which digital asset do you want to invest in?
- Do you follow an active or passive investing strategy?
- What are your risk capacity and risk tolerance?
- Which platform will you use?
- How will you diversify and manage your portfolio?
Remember, these few points can only be used as a starting point.
Fundamental analysis is widely used in stocks. However, it can also be used when assessing the value of digital assets. Although the methods employed vary entirely, the same concept applies to both traditional assets and digital assets.
Fundamental analysis is looking at the broader picture when evaluating a digital asset. It is an approach to find the intrinsic value of a digital asset by analyzing major internal and external factors of an asset. Since these factors directly influence the price of a certain asset, understanding these factors and how they interact with each other is a crucial part of assessing the value of any digital asset.
Fundamental analysis will look at factors like economic conditions, geopolitical implications, market competition, company growth, profit, liquidity, and trading volume of a particular stock.
Although the same may not be directly applied to digital assets. A digital investor can use the same structure to try to determine the value of a certain digital asset.
Technical Analysis is the use of historic data and trading trends of a digital asset to predict future outcomes. It uses advanced technical indicators and tools to analyze the performance of a digital asset. This is one of the most used methods for digital investors to determine whether a digital asset is worth trading.
In short, technical analysis looks at historic price movements, trends, and trading volumes, and uses these factors to predict future market behavior.
Digital asset investor investing strategies
Once you have decided between active and passive investing styles, risk appetite, and other factors, you can choose an investment strategy that’s best suited to your interests.
Day trading is buying and selling an asset for a short time, for less than a day. Digital assets are available for online trading 24/7. Thus, the concept is similar to day trading of conventional assets with a few tweaks.
Day traders find market inefficiencies using technical analysis of digital assets. This strategy involves buying and selling a digital asset at favorable price movements within a day.
Digital assets like Bitcoin and other cryptos are highly volatile and risky. It means day trading for digital assets is highly risky and rewarding at the same time. This is one of the reasons it tends to be one of the most used strategies for digital asset investors. Using technical indicators to find favorable price movements require exceptional skills and trading experience though.
Scalping is an active trading strategy that involves buying and selling digital assets rapidly. It involves executing several trades within a few seconds.
Scalpers look for market inefficiencies and try to buy or sell digital assets at favorable prices. Scalping also involves technical analysis and uses advanced technical indicators to fetch profits.
Scalping involves trading digital assets with very small price movements, often several times within a trading day.
The aim is to maximize profits by adding small profit margins from several transactions, often a few hundred within a day. Scalping is a highly intensive and risky trading strategy. Thus, it is suitable for advanced and experienced traders.
Trend trading refers to taking advantage of price movements with an established direction, up or down. These established directional movements are called trends.
Trend trading involves both fundamental and technical analysis. However, it is buying and holding digital assets for a longer period than day trading. Usually, trend traders hold positions for a week or a month.
Trend trading may involve a long (for upwards price trends) or a short (for a downwards price trend) position.
Commonly used tools for trend trading include moving averages, trendlines, charts and pattern indicators, momentum indicators, and other technical indicators.
Buy and Hold: Long-Term Investing
Buy and hold as the name suggests is an investing strategy to buy a digital asset and hold it for a longer period. It is a passive income strategy that utilizes fundamental analysis.
The buy-and-hold strategy is suitable for traders that do not possess sharp active trading skills. A digital asset investor will try to take advantage of upwards price movements for a digital asset in the long term.
The passive investing style is less risky and offers relatively easier gains to passive investors. Historic price trends for digital assets also prove the point. For instance, Bitcoin traded at $9,500 in January 2020 and rose to the $34,000 mark in January 2021 before touching an all-time high of $60,000.
Passive investors can follow index investing for digital assets as well. For instance, they can follow crypto ETFs such as ARK Next generation, BITO.
A digital asset investor can follow digital asset indices as well, for instance, the newly launched S&P’s Bitcoin index SPBTC.
Digital asset investors can also create their own diversified indices by including different types of digital assets. For instance, including utility tokens, privacy tokens, NFTs, and crypto assets within a diversified digital assets portfolio.
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