What are cryptocurrencies- a myth, a magic bullet that can turn around your investment plans or a dark pit full of promises that do not deliver? Cryptocurrencies are neither a magic wand that can instantly change your financial progress nor are they scams that will ruin your finances. They are digitized money that operates on a blockchain network that assures security and non-mutability to each transaction of the network. Once you have read all about cryptocurrencies in my previous blog, you must read this one to learn a thing or two about the smart crypto investment strategy.

Why Crypto?

There are several investment options: real estate, shares of blue-chip companies, gold, and many more, so then why cryptos? The answer is pretty straightforward: cryptos have the potential to offer high returns, and they are innovative as the technology behind them has multiple applications that are being discovered each new day.

Purpose of the Smart Crypto Investment Strategy

Cryptocurrencies are a promising investment but they are volatile by nature. Moreover, scams that fool gullible new users are also prevalent. So here is a crypto investment strategy that will work well for those who have never ever dealt with cryptocurrencies. Dive in for actionable insights that will help you build a sustainable crypto portfolio.

Understanding the Crypto Landscape 

Source: Unsplash

Understanding the crypto landscape is essential for optimizing crypto investment returns. Here is what you need to know

• Key Features of Crypto Assets

The primary feature of crypto assets is that control over these assets is under a peer-regulated consensus-driven mechanism and not any centralized authority like a federal bank. In fact, there is a branch of study called tokenomics that deals with the study of cryptos or blockchain technology-based projects, including the project design and the distribution of the native tokens. While the script that runs Bitcoins is fairly simple, hence it is largely restricted as a store of value, whereas Ethereum has a more complex script that allows the execution of complex functions via smart contract. 

• Volatility and Risk Factors

Cryptos are inherently volatile, so price fluctuations are expected. Moreover, the diversity of regulatory norms that surround them increases the complications further. In El Salvador, they are recognized as legal tender, whereas in China and Saudi Arabia, they are completely banned. Hence, devising a perfect crypto investment strategy is tough given their volatility, novelty and, hence, the ambiguity of the legal landscape that surrounds them. 

Types of Cryptocurrencies

• Large-cap: These are BTc and ETH, as their market cap is beyond $10 Billion. 
• Mid-cap: Cryptocurrencies like ADA and SOL fall in this category as their market cap is between $1 to $10 Billion.
• Small-cap: These are emerging tokens with potential but higher risk.

Crypto education is a prerequisite for creating a solid crypto investment strategy. Education and experience help analyze crypto price rallies, read and analyze white papers, cross-check team’s credentials and check the community engagement patterns. 

Core Investment Principles 

1. Define Investment Goals Smart Crypto Investment

You have two principal choices, ie, whether you want gains in the short or long term. For short-term gains, it is advisable to go for more liquid and volatile cryptocurrencies. So ETH, BTC, BNB, SOL and XRP are the best cryptocurrencies for short-term gains. However, at the same time, BTC and ETH may be a long-term investment option for some in case they use them as a store of value or see their potential future applications in fields like NFTs. 

Moreover, you have to pick between the type of earning you want, i.e., whether you want to stake your cryptocurrencies and earn returns much like the interest you earn on your capital or you want to consider yield farming, where you invest your crypto asset in digital protocols where you earn more crypto asset as rewards.

2. Risk Tolerance Assessment

Once you have defined your investment goals, your next goal is yourrisk management. Your risk tolerance in the crypto market is a factor of your age (younger people usually have higher risk tolerance), financial stability (usually higher your financial stability, the more your ability to take risks), and then there is experienced the more experienced a trader, the larger his ability to turn around a loss to a gain and hence the reliance of many beginners on copy trading the practices of experts.

3. Portfolio Diversification Smart Crypto Investment

Even the investors with the highest levels of risk tolerance need portfolio diversification, as cryptocurrency investingis highly risky. So, diversification in cryptohelps, and here is how to diversify your crypto portfolio

• Balancing large-cap, mid-cap, and small-cap coins.
• Allocating 50% to BTC/ETH for stability, 30% to mid-caps, and 20% to high-risk small-caps.

4. Dollar-Cost Averaging (DCA)

New investors should try out Dollar-cost averaging or DCA which involves investing a fixed amount at definite intervals irrespective of the market ups and downs. 

5. Avoid Emotional Decisions

Taking rational decisions and avoiding an emotional stance when investing in any asset is critical for investors.

Researching and Selecting Cryptocurrencies for Smart Crypto Investment

Before going into tips for successful crypto trading, you must select the cryptos you want to trade with

1. Fundamental Analysis (FA)

At this stage, conduct market analysis for crypto investments and make smart use of the background of project developers, the roadmap and the vision that they have for a particular asset etc. Also, check out the market potential of an asset. If need be ape the moves of whales or trade advisors to make prudent decisions.

2. Technical Analysis (TA)

Knowledge of basic candlestick charts and trade terminology is a primary requisite for making an informed decision (making timely entries and exits) in the crypto market.

3. On-Chain Metrics

For any blockchain-based assets, the health of the chain can be determined by metrics such as the transaction volume; the network health parameters, like the number of blocks generated in a given time and the consistency of block generation, are critical for investors’ decisions.

4. Community and Adoption

A good project will have an active and ever-growing community. So, tracking community sentiments via community engagement on social media platforms is a simple way to judge the potential of a project.

5. Risk Assessment for Each Asset

For any crypto, several risk factors persist. So it is essential that the market risk, regulatory risk, volatility risk, exchange risk etc, are factored in before investing in any asset. Based on the risk, cryptos can be classified as low, medium and high risk, as stated here

• Low-risk: BTC, ETH.
• Medium-risk: ADA, DOT.
• High-risk: New projects, meme coins.

Building & Managing Your Portfolio 

Once you have done your research and analyzed the risks, it is time for building and managing your portfolio. So here is how to go about crypto portfolio management.

1. Initial Allocation For A Smart Crypto Investment

Start with a balanced approach. Example:

• 50% in BTC and ETH.
• 30% in established mid-caps like SOL and BNB.
• 20% in high-growth potential small-caps.

2. Regular Portfolio Review

• Adjust based on market conditions and asset performance.
• Example: Reallocate profits from high-performing assets to underperformers or stablecoins.

3. Use of Stablecoins

• Hedge against volatility and maintain liquidity.

4. Tools You Need For Smart Crypto Investment

• Make use of Crypto wallets, portfolio trackers, and tax tools.

5. Risk Mitigation Techniques

• Stop-loss orders, staggered investments, and hedging with stablecoins.

Final Words

Cryptocurrencies are a solid investment with immense growth potential. However, the regulation of cryptocurrencies remains ambiguous. Moreover, the prevalent volatility in the market and the existence of multiple cryptocurrencies make it difficult for new players to venture into the crypto market. So, it is critical to understand how cryptocurrencies work and know about the indicators of a healthy currency, including on-chain metrics. Further, it is critical to have a set investment goal based on one’s risk appetite and diversify or have stop-loss mechanisms accordingly for a smart crypto investment. Finally, it is a must to build and manage your portfolio in a way that lets your investments multiply and curtains your losses.