The new Bitcoin ETFs are making it easier and safer than ever for average American investors to add cryptocurrency to their portfolios. Cryptocurrency is a controversial asset class, however, and its history of extreme volatility and regulatory scrutiny may make some curious investors leery of dipping their toes into crypto. Here are seven basic cryptocurrency investment strategies that can help you get into the crypto game while minimizing your investment risk:
An investment’s liquidity refers to how easy or difficult it is to convert the asset into cash. As a rule of thumb, the more popular a cryptocurrency is, the more liquidity it has. The largest cryptos like Bitcoin and Ethereum (ETH) generally have far more liquidity than smaller altcoins, but the cryptocurrency market’s extreme volatility suggests it is still less liquid than other asset classes.
Nigel Green, CEO and founder of deVere Group, says the launch of the new spot Bitcoin ETFs could significantly improve Bitcoin’s liquidity.
“Increased accessibility is likely to contribute to higher liquidity in the Bitcoin market, reducing price volatility and enhancing the overall stability of the cryptocurrency,” Green says.
It can be extremely difficult to make rational, responsible decisions when you are highly emotional. Investors who are panicked and fearful tend to sell investments near the bottom of a market correction, and investors who are excited and greedy tend to over-invest near the top of a market bubble.
Given the history of booms and busts in the crypto market, an emotional investor likely won’t last long if they are making decisions based on feelings rather than sound strategy. One way to help keep emotions under control is to try to avoid making real-time decisions and instead think over any buys or sells for a little while before pulling the trigger.
The number of long-term cryptocurrency bulls is seemingly growing by the day, but there are still plenty of skeptics out there who believe Bitcoin and other cryptocurrencies are inherently worthless. There is also a long history of failed private currencies, so there’s no guarantee the current generation of digital currencies will endure in the long term. Therefore, investors should only put as much money into cryptocurrencies as they are willing to lose in a worst-case scenario.
If you know you can survive the worst possible outcome, you know you will be able to handle any other outcome as well.
Diversification is a powerful tool for reducing risk in a portfolio. In addition to buying cryptos and crypto ETFs, consider buying crypto mining stocks and stocks of companies developing blockchain technology.
To most effectively diversify your portfolio, buy and hold a wide range of different assets, including stocks, bonds and real estate. Most experts recommend no more than 5% of your portfolio should be in crypto.
Green says crypto’s unique attributes make it an attractive diversification tool.
“We predict that crypto will play an increasingly important role in diversifying investment portfolios and facilitating cross-border transactions, thereby reshaping the global financial landscape,” he says.
Dollar-cost averaging can be an effective way to avoid trying to time the notoriously volatile and unpredictable crypto market. Dollar-cost averaging involves establishing a large position slowly over time by buying a fixed amount of crypto on a regular basis rather than buying your entire position all at once. By doing so, the cost basis of your crypto investment will be the average price you paid over an extended period rather than whatever the market price was on any given day during that time frame.
Josef Tetek, Bitcoin analyst at Trezor, says a dollar-cost averaging strategy makes market ups and downs a win-win situation for investors.
“During a bull market, an individual’s net worth increases, while during a bear market we have a chance to get more Bitcoins for our dollars,” Tetek says. “Many Bitcoiners have found over the years that building long-term Bitcoin savings through DCA (dollar cost averaging) works best for them.”
The crypto market has regularly experienced “crypto winters,” extended periods in which crypto prices drop dramatically. One of the silver linings to a year of heavy crypto losses is the opportunity to take advantage of tax-loss harvesting. Selling a crypto asset at a loss triggers a taxable event and locks in capital losses that can be used to offset capital gains and reduce your overall tax burden.
“This strategy can help investors reduce their total tax burden by booking a loss that they can use that year or carry forward, or alternatively, they can elect to use the loss to offset up to $3,000 in ordinary taxable income,” says Gargi Chaudhuri, head of iShares Investment Strategy Americas. “To maintain your portfolio exposure, consider reinvesting the sale proceeds into a similar ETF to keep your asset allocation on track while remaining tax efficient.”
You should use caution to avoid breaking the IRS wash-sale rule. For now, crypto itself isn’t subject to the rule, as regulators consider it a commodity rather than a security. Though a bit of a regulatory gray area, you should be able to lock in capital losses in a down year by selling the Grayscale Bitcoin Trust ETF (ticker: GBTC) and buying ProShares Bitcoin Strategy ETF (BITO), since the latter ETF invests in futures and not BTC itself.
Any financial advisor will tell you there’s no perfect way to invest your money, and there are plenty of different strategies that work well depending on each investor’s personal goals, risk tolerance and investing time horizon. Investors may stress over picking the perfect crypto strategy and allocation, but one factor that is likely even more important is to stay disciplined with whatever strategy you choose.
The second you start deviating from your strategy, you risk undermining your original investment goals. If you’re uncertain about how to choose the best crypto investing strategy, consider talking to a financial advisor or other financial professional.
