While simply buying and holding one asset is the most popular activity among first-time crypto investors, there are other fairly simple steps you can take to get a lot more out of your investment. In some cases, you can even significantly increase your return.
Why is this important?
Investments in crypto have increased remarkably over the past five years. For example, 14 percent of Americans now have digital assets in their wallets, according to crypto news site CoinDesk. In 2016, that was barely 1 percent. Some business leaders predict that figure could double by the end of this year. And there are figures to back that prediction: 13 percent of participants in a recent survey by crypto exchange Gemini have expressed their intention to buy cryptocurrencies in the coming months.
For new investors in the crypto market, it is important to learn how to get the most out of your crypto assets; to limit risks and increase potential returns. Here are four helpful strategies curated by CoinDesk to get you started.
One of the easiest ways to reduce risk and, in some cases, increase returns is by investing in a range of different crypto assets. This is known in the trading world as diversification, or asset allocation. The idea behind this is to spread your investments in order to average out losses when the market falls.
An example. Mark and Jeanine both invest 1,000 euros in crypto coins. Mark decides to invest 100 euros in 10 different coins, while Jeanine decides to bet completely on one asset. Jeanine runs the risk that if the market goes red and the project she has invested in takes a heavy blow, she will suffer heavy losses. Mark, on the other hand, has spread his risk and has a better chance of losing less (depending on whether he invested wisely or not). This can also work when the market is rising.
A common strategy is to select different types of cryptocurrencies to ensure that you profit when one of the many sectors is booming. Conversely, it also spreads the risk in the event of a dip in one or more sectors.
Here are a few examples of the different types of cryptocurrencies:
Store of value: Bitcoin (BTC)
Smart contract technology: Ethereum (ETH)
DeFi (Decentralized Financial Services): Uniswap (UNI)
Payment Coins: Litecoin (LTC)
Privacy Coins: Monero (XMR)
Non-fungible Tokens, or NFTs: CryptoPunks
Return: While diversification aims to reduce risk or loss, it can also reduce your return on investment.
2. Copying Stocks
Copy trading, as the name suggests, is a form of investing where you automatically copy the trades of a professional investor. Platforms such as eToro, Coinmatics and 3Commas are all examples of platforms that allow you to do this.
The setup is simple:
Select a trader to follow based on factors such as past performance, number of followers, and overall risk score (how risky the invested assets are).
Link your bill to their movements.
When they choose to buy or sell a crypto asset, your portfolio automatically does the same.
This is the way to trade crypto coins without having to study and follow the market yourself.
Once you’ve chosen a trader (or multiple traders), you can decide how much of your portfolio should be allocated to each trader. This is usually in the form of a percentage of your balance.
So if you have a $1,000 balance to invest, you can allocate 10 percent of your portfolio to one trader and 10 percent to another. This is another example of diversification and helps to diversify your funds and build a balanced portfolio. https://renovato.io/ has enough information. After you have completed your investments, the trades will start automatically. Of course, you can always switch traders or add more funds if they get it right.
Loss Limit: Just because they are professional traders doesn’t mean every trade is a resounding win. You cannot predict a trader’s success or the future movements of crypto assets, so setting a loss limit is critical. This is an automatic order that automatically stops your copy trading if you lose a predetermined amount or the value of an asset drops.
3. Hedging of crypto trading
Hedging is an investment strategy aimed at reducing potential risks and losses during a period of unfavorable price movements.
It involves placing a primary trade in the direction you think the market will move and then placing a second trade in the opposite direction. The idea here is that if the market goes against you, the second backup trade you placed will be profitable, offsetting the losses from your first trade.
A popular way crypto investors hedge their trades is by going long or short in the futures market. In futures, two parties agree to trade a specific asset at a predetermined price and date. Going long: If you think the price of an asset will rise and you agree to buy it at today’s price at a predetermined time in the future. Go short: When you think the price of an asset will fall and you agree to sell it at today’s price at a predetermined time in the future.
Risky: Trading futures is very risky and should not be attempted by inexperienced traders. While it has unlimited upside potential (meaning there is no limit on how much you can earn), it also has unlimited downside potential. This means that in some cases you may owe a scholarship more than you initially invested. Stop-loss orders are advised to reduce risk when trading assets. These orders ensure that you automatically exit a trade when the market price reaches a predetermined level.
Why should you hedge your crypto investments?
The crypto market is known for being highly volatile. This unpredictability makes it incredibly difficult to know which way the market will go at any given moment, meaning there’s a good chance the crypto assets you invest in won’t always go the way you want. Hedging provides reassurance that whichever way the markets go, any losses won’t be as severe.
4. DeFi Strike
DeFi staking is a way to lock up your crypto assets in dedicated, autonomous platforms to receive annual interest. These platforms are known as “decentralized apps” (dapps). We have already explained this concept several times on this site, but we would like to do it again.
DeFi – or decentralized financial services – is a sector of the crypto industry that makes traditional financial services, such as loans and insurance, available on a public (and decentralized) blockchain network, according to Investopedia.
This ensures that everyone can use them, without having to work with intermediaries, such as bankers or brokers. So, the main difference from traditional financial services is that the decentralized financial apps are not controlled or maintained by a single company.
Instead, they are run entirely by proprietary communities of users and by the automatic execution of computer programs known as “smart contracts”. Moveco.io has enough information. DeFi Staking is the perfect way to generate an annual return on your deposited assets if you only intend to buy and hold cryptocurrencies.
The process is similar to depositing money into a savings account, except instead of earning less than 1 percent interest, you can usually earn anywhere from 5 to 25 percent and in some cases even higher. Attention: DeFi platforms are not regulated. This means that there is no consumer protection in case you lose your capital due to theft or fraud. So far, $361 million has been stolen from DeFi applications in 2021. Not all cryptocurrencies can be discontinued, however. This is the list of coins for which it is possible. Cardano is the largest.
In conclusion: It is important to remember the golden rule of investing: if you are concerned about the risk of your position, closing or reducing it is a safer option. And remember: always invest and trade in an amount you can afford to lose.