Only 16% of Americans have yet to invest in cryptocurrency. How to Build Crypto Investing Strategies: As a new asset class, people are still on the fence about it.
They think it’s a fad, or that it might not be around forever. But considering that it’s become a $3 trillion global industry in just a matter of years means that it’s probably around to stay.
And it has yielded some of the highest returns ever, in a relatively short amount of time. You don’t necessarily need to go all-in on crypto, but you need to build crypto investing strategies that at least give you exposure to the growth potential that crypto offers.
But how does one start investing in cryptocurrencies without knowing anything about the industry? Read on below to learn how to develop simple strategies to balance your crypto investment risks and rewards now.
First, Understand Crypto
Warren Buffet is the most successful investor of all time. And while he might be completely underexposed to cryptocurrency, he has developed his own investing strategies that have made him one of the richest people in the world.
The cornerstone of that strategy? Only invest in what you understand. He doesn’t invest in companies or assets that he can’t quite wrap his mind around.
You should focus on education and research before putting your hard-earned money into any type of investment. Only you can be confident about the asset you are betting on.
Crypto is a new asset class, and very volatile. In order to not panic sell, you need to understand the nature of the market and be prepared for the swings, and gains, that come along with that.
What Is Cryptocurrency?
Cryptocurrency is a virtual, internet-native currency. It’s much more efficient in the digital age than fiat currency, which was developed many decades prior to the advent of the internet.
It lives on the blockchain, which is an open, distributed ledger that documents all transactions. This creates a trustless system, where you don’t need to rely on a central authority like a bank to verify and authorize transactions.
Cryptocurrency is a decentralized financial ecosystem. Since the ledger is maintained by the community, there is no authority in charge of the currency. That means no one can control it, manipulate it, devalue it, or make it go away.
Cryptocurrency exists without the help of banks or governments, creating the first peer-to-peer, digital cash system that is changing, and will radically change how finances work in the future.
How to Buy Crypto
Once you have a good idea of what crypto is, and which cryptocurrencies you’d like to invest in first, you need to learn how to purchase it. There are a few options for cryptocurrencies and ways to purchase them.
Most people will use an online crypto exchange. These are similar to a stock exchange, where the system matches your buy orders with other people’s sell orders, and vice versa.
Exchanges like Coinbase, Binance, Gemini, Kraken, and a few others are popular in the US. They allow you to purchase dozens of different cryptocurrencies, and each platform adds new ones all the time.
To create an account, you’ll first need to verify your identity. The process is known as KYC (Know Your Customer). It helps to reduce the prevalence of money crimes such as laundering and fraud.
Once verified, you’ll fund your crypto exchange account. You can do this by linking your bank account or using a debit card.
Choose how much you’d like to invest, add it to your account, and place some buy order to acquire your chosen cryptocurrency.
If you receive cash on a regular basis, you can convert that into crypto very easily using a Byte Federal crypto ATM. They’re available across the country and allow you to deposit cash and purchase cryptocurrencies like bitcoin and Ethereum.
Keep Your Crypto Safe
One of the benefits of investing in cryptocurrency is that you are in complete control of your assets. While newbie investors will hold their crypto on the exchange they purchase from, serious investors will transfer it to their own personal wallets.
When you keep your crypto on an exchange, they are the ones who hold the private keys to your crypto. They custody it for you.
One of the core components of crypto is that it’s a self-custodial currency, not relying on financial institutions to hold it on your behalf.
You can download a software wallet to hold your crypto on your phone or computer. Or you can purchase a hardware wallet, which looks like a small thumb drive.
You can store your crypto on this wallet for maximum security. No one will be able to remove your crypto from the wallet unless they have the physical device with them, as it requires confirmation on the device itself to send funds away.
How to Build Crypto Investing Strategies
As you start to direct more and more funds to crypto investments, it’s important that you have a plan. There’s a lot of money to be made if you are intentional about how you invest. Here are some of the key strategies to utilize.
Buy and Hold
The basic strategy for crypto is the same strategy you would use for investing in stocks or real estate. You buy an asset, and you hold it as long as possible.
Assuming you’ve chosen the right crypto investments, they should appreciate in value over the course of months and years. If you buy the right assets, you can experience a high return on investment in short periods of time.
For example, if you bought Solana in January 2021, and held onto it until January 2022, you would’ve gone from $3 per coin to $150 per coin.
If you bought bitcoin or Ethereum a few years ago and held onto it today, you would also have some serious crypto investment profits. The key is knowing which assets have a bright future ahead of them.
Stake Your Crypto
Holding crypto is a passive strategy. But it’s a low-yield passive strategy that might be costing you in opportunity cost. There are many ways that your crypto investments can actually earn an additional yield rather than sitting idle.
Staking your crypto is similar to earning dividends with stocks, but more lucrative. Staking is the process of participating in network security.
Cryptocurrencies that use the proof of stake (POS) consensus mechanism require validator nodes to have a certain amount of crypto under their control. When they do, they get to run the blockchain software, verifying transactions and confirming them with other nodes.
When you stake your crypto, you are locking your funds up with these validator nodes. And as the network incurs transaction fees, these are distributed among all of the people who are staking their coins.
Most of the time, you can remove your funds from the staking pool at any time.
Staking rewards vary, depending on the platform you are using and the cryptocurrency you are holding. Low-yield staking pools can provide 4% to 5% APY. But it’s common to see staking pools with more than 10% APY.
This is the better passive crypto investing strategy, as you earn yield while allowing the price to appreciate.
Lend Your Crypto
Looking to earn some higher yields on your crypto investments? Rather than staking them, you can lend them to other users. But you can do so in a risk-free manner.
With crypto lending, you supply your crypto assets to a lending pool. When you do, you earn a yield and can withdraw your assets at any time. You aren’t making direct loans to a specific borrower. Borrowers instead borrow from the pool.
Lending rates can be similar to staking rates, but you can find rates above 20%.
Most borrowing platforms require borrowers to put up collateral in order to borrow. So if they default on their loan, their collateral pays back the lenders, making this a no-risk strategy.
Supply and Borrow
For a more advanced crypto investing strategy, you can borrow crypto against your current assets. For example, you can put up $5,000 worth of Ethereum to a borrowing platform.
Then, you’ll be able to borrow against, usually with a loan-to-value (LTV) rate of 30% to 80%. Many borrowers will borrow 50% of the collateral provided.
So you can borrow up to $2,500 against your collateral. You can then use those funds to invest in another crypto asset.
So not only are you holding onto your original $5,000 in Ethereum, ready to capture the price appreciation. But you are also putting those funds to work by creating another $2,500 with which you can use to earn yield elsewhere.
To make this strategy work, it’s best to collateralize more stable assets that are unlikely to lose more than 50% of their value. And never over-borrow. an LTV of 50% or less is best.
Another way to earn money while holding onto crypto long-term is by providing liquidity on decentralized crypto exchanges.
Centralized exchanges, like Coinbase, act as an intermediary, matching buyers and sellers together. But decentralized exchanges, like UniSwap or TraderJoe, are different.
Rather than matching orders together, the platform creates pools of trading pairs. Each pool needs to have a certain amount of funds inside it, as liquidity.
You can supply funds, in the form of a trading pair, to earn a percentage of transaction fees from the pool. For example, you can supply liquidity to a USDC/ETH pool. To do so, you’ll need to provide equal amounts of USDC and ETH.
Another way to earn potentially lucrative yields in the crypto world is with NFTs. The NFT industry exploded in 2021 and is likely going to continue its upward trajectory in 2022 and beyond.
Non-fungible tokens are unique digital assets that live on the blockchain. Unlike cryptocurrencies like bitcoin or Ethereum, which are interchangeable, NFTs are not interchangeable.
For example, one bitcoin is the same as one bitcoin. They are fungible, interchangeable. Just like dollar bills, they are all the same.
NFTs are more like trading cards. Each one is unique, making some more valuable, and some less valuable.
Consider the popular NFT collection Bored Ape Yacht Club (BAYC). This collection of 10,000 unique images of cartoon apes was originally sold for about $300 apiece in April 2021. In January 2022, the lowest you can purchase one on the secondary market was about $250,000.
Some of the more rare apes have sold for over $1 million.
There are many other NFT collections that have seen impressive gains as well, such as Doodles and Cool Cats. And new collections are launched every month that have insane growth potential thanks to a passionate community that supports the project.
Buying individual NFTs can be a great addition to your portfolio. But if you want to lower risk, you can buy into NFT funds, which buy various NFTs and give you exposure to many different collections, similar to a mutual fund.
Putting It All Together
There are thousands of different cryptocurrencies available. And there are many different investing strategies you can implement right now.
Where do you start?
First, choose a few core cryptocurrencies that you believe will be in demand for a long time. Many people are insanely bullish on Ethereum because it is becoming the foundational piece of many other cryptocurrencies and Defi applications.
It’s also the backbone of the NFT industry. As Ethereum scales, new solutions will be built on top of it. And all of that will be powered by the Ethereum blockchain and its corresponding cryptocurrency, ether (ETH).
And while bitcoin (BTC) doesn’t offer near as much utility as ETH, it is the original cryptocurrency and will continue to hold its value long into the future.
Other cryptocurrencies like Polygon, Polkadot, Solana, Avalanche, and a handful of others show signs of immense promise, as they seek to build out ecosystems of their own.
Once you’ve chosen core assets to hold long-term, consider the yield-bearing strategies available for those coins. You don’t have to earn a yield on all of your crypto holdings but should strive to earn a yield of 25% to 50% of it to build wealth faster.
Then, you can either let those yields compound over time or diversify them into riskier investing strategies. After all, you’re playing with house money at that point, with everything to gain and nothing to lose.
Now that you have an idea of how to build crypto investing strategies, it’s time to get started. Your first step is creating an account on a crypto exchange of your choosing. Fund your account and make your first purchase.
Then, take your time to explore the different opportunities available to earn yield. Don’t rush, and don’t be reckless. If an opportunity sounds too good to be true, it probably is. It’s up to you to protect your investments and prevent loss to hackers.
With cryptocurrency, there is no one to restore lost funds, as it’s a decentralized, self-custodial system.
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