There’s more than one way to invest in cryptocurrencies, but only long-term investing can spare you the day-to-day anxiety that comes with short-term events and price trends. We review four ways that twitches in the cryptocurrency market can cause investors grief and how long-term investing strategies avoid these pains.
As of today, there are more than 1,600 cryptocurrencies and several ways to invest in them:
- Day trading. This strategy involves holding cryptocurrency assets briefly. The goal: Use the buy-low-sell-high methodology to make a small, but quick profits by buying and selling at opportune moments. Few day traders (only 2 percent) do it well enough to make a consistent profit. Given the wild swings of the cryptocurrency market, the chance for new investors to be successful fades rapidly.
- Swing trading. Swing traders try to catch big swings in the market. Sometimes these traders hold onto their coins for months before they can exit and make a profit. But as any active stock trader will tell you, success in timing the market is elusive. As a result, few swing traders are consistently successful, either.
- Long-term investing. Long-term cryptocurrency investors aren’t traders at all. They belong to the buy-and-hold school of thought. These investors choose their coins carefully and are more likely to invest in one or more blue-chip coins, like Bitcoin, Ethereum or Ripple. These coins have a large chunk of the total crypto market, a dedicated following and provide a useful, real-life service such as a payment system/currency/privacy assurance.
Each trading method has its own level of risk, reward, and stress. Those who would like to limit the stress involved should consider long-term trading. Investors who choose their currencies carefully and keep their cool can ride with any ups or downs — and are less likely to make beginner mistakes.
Remember Why You Invested in Cryptocurrencies
Are wild swings in the cryptocurrency markets making you nervous? If so, it might help to remember why you invested in cryptocurrencies (or are considering doing so) in the first place:
- Growth potential. Yes, this is the big reason that most folks invest in cryptocurrencies. And yes, the nerve-wracking swings in value earlier this year reduced some of the huge price increase of 2017. But, when the dust settled, as of May 2018, year-to-year BTC values increased three-fold.
- Anonymity. Many investors value the privacy of cryptocurrency transactions and therefore buy specific coins such as Monero, which are known for their privacy-promoting technology.
- Freedom from third-party control. Cryptocurrency investors also like transactions free of third parties or centralized control. As time passes, more and more uses are being developed for these capabilities. And as uses grow, so should adoption rates.
- Flexible investment options. One of the best ways to reap the long-term benefits of digital currencies is to hold them inside a Digital Currency IRA (also known as a Bitcoin IRA). This unique, Self-Directed IRA enables you to use your retirement funds to purchase cryptocurrencies on a tax-deferred basis and mix them with conventional retirement assets.
In addition to these general benefits, choosing a long-term investment approach often keeps your trading fees low and reduces the risk of missing profitable swings in the market.
Don’t Let Current Events Give You the Jitters
Cryptocurrency investors have a variety of strategies to choose from. However, one thing is clear: Investors who have confidence in the long-term potential of cryptocurrency and stay the course with their investments do not need to subject themselves to the stress, risks, and mistakes that come with cryptocurrency technologies and markets.
Here are four things that should never keep long-term cryptocurrency investors up at night:
1. Price Fluctuations
You’ve probably heard about Bitcoin’s value soaring roughly twenty-fold during 2017 — and then dropping by 65 percent in early 2018. Since then, prices have fluctuated, with values climbing and falling in four or five-week cycles.
In spite of the shock, the market hasn’t given up on BTC. In fact, a BTC futures market has launched. And since the end of May 2018, analysts have engaged in an argument as to whether BTC values have bottomed out.
The long-term view: How much you have benefitted from cryptocurrency price fluctuations depends on the coin you chose and when you entered the market. For example, if you bought one Bitcoin in May 2017, you paid about $2,517. One year later, the price was $7,460 – a three-fold increase! Or go even further back in time. If you had the foresight to purchase Bitcoin at the start of 2015 at $313 and held it all the way to today, you would have an astronomical increase of more than twenty times.
Simply put, for the long-term investor who has faith in cryptocurrency as the future of finance, they should not be concerned with any short-term price fluctuation.
2. Additional Regulation
The value of cryptocurrencies remain heavily tied to speculation and optimism in mostly unregulated markets. Early adopters have grown used to making profits without interference from third parties like the government. This creates a highly sensitive environment, in which policy changes can have severe effects on short-term prices.
News or mere speculation of upcoming regulation leads to wild swings in value, as investors rush to sell off or purchase coins. Bitcoin, for example, lost nearly half of its value as the Coinbase exchange launched an internal investigation into insider trading on their platform.
Blockchain technology and specific cryptocurrencies are designed to span national borders. The G20 recognized this reality in a 2018 report about ICO and cryptocurrency regulation. Unlike an earlier G20 response of wait and see, the international group now looks at specific problems and solutions.
The long-term view: Identifying cryptocurrency problems and regulatory solutions will take time. But, while cryptocurrency prices may dip and rise as these details are ironed out, long-term investors need not worry. In fact, some may actually embrace increased levels of regulation. Those individuals believe that the long-term effects of more government oversight – in the form of a more safe, secure and stable market – will produce even stronger returns in the long-term.
3. Hacks into Exchanges and Wallets
As cryptocurrency prices and adoption rates have risen, so has related cybercrime. Hackers are smart, sophisticated and determined — and now, they are focusing on mainstream crypto investors.
A very recent example of a cryptocurrency hack is the entry into Japanese cryptocurrency exchange, Coincheck, in January 2018. That’s when 500 million units of NEM (worth $524 million) were stolen from customers’ wallets.
The long-term view: To be the victim of a hack on an exchange, your cryptocurrency must be stored on that exchange. Fortunately, for just about any long-term investor, this will almost certainly not be the case. That’s because most of these investors place their cryptocurrencies into cold storage, and therefore out of the prying hands of any would-be hackers. From this position, they can sleep easy, knowing that their currencies are impervious to this threat.
4. The Spread of Fear, Uncertainty, and Doubt (FUD)
There seems to be no end to the events that influence cryptocurrency values. In March 2018, the BTC market lost 13 percent of its value in just one week.
The cause? Google joined Facebook in banning all crypto-related advertisements on their platforms. The companies claimed a concern for consumer protection against ICO fraud and other crypto crime. Some investors freaked out. But, long-term BTC values continued their recent cycles of ups and downs.
FUD is an important concept to understand because social and mass media are everywhere, and it can have a greater effect on prices than the truth. FUD comes in two flavors:
- False information meant for online distribution. These are the rumors, falsehoods, and lies that trolls deliberately create or redistribute online. Their goal: Change investor perceptions and cause panic, with the goal of influencing prices for their own gain.
- Negative or false information sent through mainstream channels. Business experts or financial professionals often report misinformation or give negative opinions about investing in coins. They might lack knowledge about cryptocurrencies or have an interest in keeping the financial landscape as it is.
In either case, the spread of such info is oftentimes enough to give a short-term jolt to cryptocurrency markets.
The long-term view: Simply put, FUD should be a non-factor for the long-term investor. Whatever short-term damage is created by FUD is usually reversed. Whether that reversal takes days, weeks or months to occur, the long-term investor has the benefit of time and the confidence that the virtues of their coins can overcome temporary price changes and retain long-term value.
Confidence is the Key
There are many ways to invest in cryptocurrencies. But only “HODL” shields you from the day-to-day, white-knuckle experience of investing in digital assets. Knowing that even drastic swings in prices are part of the drill — you’re dealing with new technologies and markets, remember — should give you the long-term confidence you need to survive the bumps along the way.
The key is to have confidence in the long-term value of cryptocurrencies as potent technologies and financial assets. You can sleep well as an investor, but you must do your homework and keep a wary eye on long-term trends to keep that confidence strong.
Featured Image via BigStock.