A Beginner's Guide to Cryptocurrency Investments

Exploring three types of cryptocurrency investments - Long-term investments, Hodling, and Trading.

Cryptocurrencies are gaining prominence all across the globe. From Tesla to banks like JPMorgan Chase, institutions are engaging with digital assets in one way or the other. Moreover, retail activity in cryptocurrencies is gradually increasing. A recent report indicates that retail activity started to accumulate larger portions of BTC in Q1 2021. Beginners are now finding new ways to engage with cryptocurrencies.

In this article, we have complied three popular ways of investing in cryptocurrencies. We have outlined the pros and cons of each method. These methods include long-term investment, buy and hodling, and cryptocurrency trading.


Long-term Cryptocurrency Investment

Long-term cryptocurrency investment is one of the most favorable methods of engaging in digital assets. Cryptocurrency markets are highly volatile. In other words, short-term fluctuations are a very common phenomenon in this industry. However, the prospect of investing long-term ensures that you do not get affected by short-term fluctuations in the market.


While the price of one Bitcoin ranges close to $40,000 (at the time of writing), one can always invest in small amounts. Another prospect is that one can consider diversifying their cryptocurrency portfolio encompassing several coins. Diversifying your cryptocurrency portfolio will help minimize losses and increase the potential for profits.


While investing for long term in digital assets, it is advisable to study the fundamentals of the coins. This includes studying the project, its team, roadmap, tokenomics, and overall use-case.


Pros

  • Profitable - There is enormous potential to profit when you invest in a cryptocurrency in the long term. For instance, Bitcoin gained more than 300% gains in 2020 alone. Cryptocurrency investments over a longer time period offer a huge potential for high profits. Long-term investment could be anywhere between 3- 10 years.

  • Clear market direction - With long-term investments, an investor needs to perform fundamental analysis of the blockchain projects. Moreover, it gives a clear direction for the the near-future of the crypto asset.

  • Growing industry - The cryptocurrency industry is growing at a fast pace. There are several opportunities that can yield massive returns to an investor in comparison to other traditional financial markets.


Cons

  • Network lag - The price of cryptocurrencies is highly dependant on the number of users. If the users are not growing, the price will not rise. This means a network lag might result in the declining price of a coin, hence liquidating your investment.


Buying and Hodling

Hodling is the simplest cryptocurrency investment strategies. The term was first introduced on the Bitcoin talk forum back in 2013 as a misspelling of the word 'HOLD’. HODL is an approach where investors decide not to sell their crypto coins even with a spree of the crypto market.


Seasoned traders might advise you that hodling strategy may not be the most profitable compared to other techniques. However, the truth is that any strategy, if not executed properly, might turn out even worse.


Pros

  • Simplicity - It is the most hands-off crypto trading strategy in the market. The only ability you have to nurture is patience and having the emotional robustness not to panic sell.

  • Less time-consuming - Hodling is much easier to learn and does not demand a lot of commitment than day trading, which is time-consuming and involves many technicalities.

  • Chances of profit - Crypto markets have periods of bullish and bearish movements. If hodling strategy is executed correctly, the chances of profitability are huge.


Cons

  • Grabbing opportunity - Unlike day traders, hodlers do not fully capitalize on the massive volatility of cryptocurrencies like bitcoin. If executed perfectly, other strategies like day trading can generate much more earnings because they don't depend on the appreciation of the coin in future.


Cryptocurrency Trading

Crypto trading is the buying and selling of cryptocurrencies to profit by taking advantage of price fluctuations. However, it is advisable for beginners to not jump into cryptocurrency trading directly. It is necessary to understand market fluctuations, perform technical analysis, and research fundamentals of digital assets before starting to trade. Trading is rewarding but demands high-risk tolerance. The following are different types of trading strategies for crypto:


  • Swing trading - Swing traders buy a cryptocurrency when its price is low, then wait for the price to rise to sell with profit. However, the wait duration is not as long as with Hodling and could be a day or two.

  • Day trading - Day traders open short, quick positions by taking advantage of brief price fluctuations to reap quick profits. However, a day trader does not carry any positions to the next day. The interest here is based on cumulative gains throughout the entire day.

Pros

  • Opportunities - Crypto trading provides the opportunity for a trader to take a long or short position and profit even when prices are falling.

  • Profitable - With the right strategy and targets, cryptocurrency trading can be highly profitable.

  • Flexible - Cryptocurrency markets operate 24/7. Compared to other financial markets, trading in digital assets is flexible and convenient.


Cons

  • Steep learning - Trading in crypto is not only a risky affair but it takes considerable time and efforts to understand the fundamentals before starting to make a profit.

  • Highly risky - Crypto markets are highly volatile. A trader can incur huge losses if not exercised appropriately.


Bottomline

Cryptocurrencies can turn investors into overnight millionaires or even liquidate them at the same time. The technology is evolving, and it’s essential to learn as much information as you can to take full advantage of digital currencies. There are more ways to make money through cryptocurrencies, please refer to this post here.