Those who are new to the cryptocurrency market often want to know what is the best way to invest in cryptocurrency. Investing in Bitcoin or other crypto assets doesn’t have to be as simple as buying and holding tokens. Investors in today’s market have a few different choices. All of them have their advantages and disadvantages. Let’s take a look at some of the popular ways to invest in crypto.
Buying and Holding Cryptocurrency
In cryptocurrency investing there is a acronym that is very popular: HODL. It stands for Hold On for Dear Life. This term is used to describe the buy and hold approach to investing in Bitcoin and other tokens. Those who embrace the buy and hold way of investing are generally patient souls who are looking to the future.
Many people will say that buying and holding cryptocurrency is not speculation but wise investing. In truth HODL is also a speculation. Those who hold their tokens are speculating that the token will rise in value over the long haul. Some of them have a specific time period in mind. Others are just staying in until they think a ceiling has been reached. Either way, there is speculation involved.
The person who is credited with creating the HODL phrase is known for saying being a bad trader is what compelled them to buy and hold. We wouldn’t say that all who buy and hold Bitcoin are bad traders, but they may have less interest in active trading than others. They may not want to be strictly tied down to an observation of the market.
Is a buy and hold strategy the best way to invest in cryptocurrency? That depends on the preference of the investor. What we will say is that to HODL can be profitable. In January of 2013 Bitcoin was valued at less than $15. In August of 2019 it is hovering around the $10,000 mark. Could you live with that kind of return on your investment when all you were required to do was be patient?
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There are some downsides to this approach. Some believe the days of massive crypto gains are over. It could take years for Bitcoin to once again reach $18,000 or it could happen six months from now. No one knows for certain. Another issue is that the value of the buy and hold approach can go down the longer one waits to invest in a cryptocurrency. If you had bought those Bitcoins in 2013 and still have them you’re probably a rich person right now. If you buy today and hold there is the chance that Bitcoin has peaked and won’t rise much more. Getting in early is always best.
Buy and Hold Pros:
- Does not require advanced trading ability
- Less labor intensive
- When buying in early has the potential for explosive growth
Buy and Hold Cons:
- Can take years to achieve large returns
- Subject to long-term market moves which tend to become the trend
Actively Trading Cryptocurrency
The next way that people choose to invest in cryptocurrency is active trading. These people are constantly watching the crypto market and looking for short-term trends and swings. They buy the dip and sell the rip. None of them stay in a trade for very long periods of time, and some even open and close market positions within one day.
Some of these traders are also trading on margin, which means that they can leverage more units of a cryptocurrency by getting a loan from the crypto exchange. Trading on margin can be filled with risk and should not be attempted by those with little trading experience.
On the subject of risk, active trading is not for the weak of heart. Those who do it must be able to rein in their emotions and stick with proven strategies. Those who are risk averse will not want to adopt this as the best way to invest in cryptocurrency.
Active trading has the potential to produce large returns very quickly. Investors can also lose vast sums of money in a short period of time. It may be necessary for the active trader to have more capital to work with in order to maximize gains. Of course, this means the risk is going up. This type of investing in crypto also requires diligence and paying attention to market conditions on the regular.
Active Trading Pros:
- Potential for large short-term gains
- Can access leveraged trading on some exchanges
- Possible to make money in both bull and bear markets
Active Trading Cons:
- High levels of risk
- Requires near constant market attention and awareness
Cryptocurrency Mutual Funds, Options, and Other Investment Vehicles
Bitcoin and other cryptocurrencies have become an asset class just like stocks in many ways. They can be traded on exchanges, and there are also opportunities that one commonly finds in the stock market. For those with deep pockets the best way to invest in cryptocurrency could be to invest in mutual funds or options.
These are advanced investment vehicles that are not suited for the cryptocurrency trader with limited experience. Some of them can carry more risk than others. Some also require large amounts of money to get started trading.
A mutual fund is one where many investors pool their capital to buy cryptocurrency. The fund is directed by a fund manager who makes investment decisions after consulting with board members and other fund executives. Most mutual funds are designed to produce long-term gains. They are not designed to produce short-term profits, although this can happen if the fund chooses to sell a digital currency when its value goes up.
Options trading is perhaps the most risky of all cryptocurrency investments. The options trader is making a short-term speculation on whether the value of a token will rise or fall. They can go short or long on their options, so it is possible to make money when the value of a token goes down when trading options. This type of trading can be very volatile and is usually only suited for those with the most investing experience.
Mutual Funds and Options Pros:
- Good profit potential
- Suited to both long-term and short-term investment goals
Mutual Funds and Options Cons:
- Only for experienced investors
- Require more capital
- Can be very risky
In determining what is the best way to invest in cryptocurrency you should consider your own investment goals and objectives. No strategy is going to work for each investor. All of us have different amounts of capital, different aversions to risk, and different levels of knowledge. Research and choose which strategy is best for you before you invest.