For most of crypto's existence, high volatility and short-term trading strategies seeking to profit from sudden momentum shifts have defined the cryptocurrency market, but the recent arrival of institutional investors and a new mindset that cryptocurrencies could become an entirely new asset class seems to be changing that.
This is good news for retail investors around the world as more thought is being given to how cryptocurrencies can be part of a long-term, well-diversified portfolio. If you're considering investing in cryptocurrencies for the long term, here's a closer look at three popular investment strategies.
1. Buy and hold
The most straightforward approach to investing in cryptocurrencies is a simple buy and hold strategy. This is exactly what it sounds like: find one or more cryptocurrencies that you like and hold them forever. The idea here is that many of the major cryptocurrencies will rise significantly in value over the long term, even if they are prone to large short-term fluctuations.
Of course, the cryptocurrency that stands out here is Bitcoin (Cryptocurrency: BTC)Bitcoin is the world's largest cryptocurrency with a market capitalization of $1.3 trillion. It is often the first cryptocurrency that both retail and institutional investors buy, and for good reason: Over the past decade, Bitcoin has been one of the best-performing assets in the world.
But the key here is to stick with the long term: ARK Invest's Cathie Wood recently crunched the numbers and determined that as long as you're willing to hold Bitcoin for at least five years, you're likely to make some pretty substantial gains.
Wood now predicts that Bitcoin's price could soar to $1 million by 2030, making this five-year holding period especially important for anyone looking to become a crypto millionaire one day.
2. Dollar-cost averaging
A related cryptocurrency strategy is known as dollar-cost averaging. While “buy and hold” typically means making one large purchase, a dollar-cost averaging strategy means making a series of smaller, regular purchases.
The key idea here is that you commit to buying a set amount of a particular cryptocurrency on a regular basis, regardless of market conditions. For example, you might decide to buy $100 worth of Bitcoin every month.
This strategy is especially effective if you want to take the emotion out of your investing. Instead of checking your portfolio every few days, you might check it only once a month. This means you can block out market volatility and avoid being overly influenced by fluctuating cryptocurrency prices.
This is more important for crypto investors than stock investors because the cryptocurrency market is much more volatile: seeing your Bitcoin position fluctuate by 10% or more in the space of 24 hours can be unsettling.
3. ETFs for diversification
Finally, exchange-traded funds (ETFs) can be an effective way to diversify your long-term cryptocurrency portfolio. ETFs are especially popular with investors who don't want to invest directly in the cryptocurrency market.
For example, the new spot Bitcoin ETFs are a way to invest in the digital currency in the same way that you invest in tech stocks. Two of the most popular spot Bitcoin ETFs right now are: iShares Bitcoin Trust (Nasdaq: IBIT) And that FidelityWise Origin Bitcoin Fund (NYSE: MKT: FBTC).
Based on the early success of the Spot Bitcoin ETF, it is expected that other cryptocurrencies will soon get their own spot ETFs. For example, the same Wall Street investment firm that brought a Spot Bitcoin ETF to market is looking to bring a new spot ETF to market. Ethereum (Cryptocurrency: ETH) Launching ETFs into the market.
Also, don't forget about the possibility of using more traditional ETFs to diversify the cryptocurrency market. For example, Valkyrie Bitcoin Miners ETF (Nasdaq:WGMI) If you are looking for broad exposure to the crypto mining sector, you can also invest in ETFs such as: Amplify Transformational Data Sharing ETF (NYSE: MKT: BLOK) If you are looking for broader exposure to blockchain technology companies.
The key idea here is diversification. It's much easier to diversify your portfolio with a single ETF than by buying several different stocks. Simply put, you can buy one bitcoin mining stock or the top 20 bitcoin mining stocks together. So if you're confident in the long-term potential of the industry, but less confident about who the big winners will be, ETFs can be very helpful.
Maintain a long-term perspective
Remember, it's important to maintain a long-term perspective when investing in cryptocurrencies. It's easy to get distracted by the latest meme coin or short-term momentum trades. By following one of the strategies above, you can avoid this. Instead, you can focus on creating a long-term, well-diversified portfolio that will build you real wealth.
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Dominic Basulto has invested in Bitcoin and Ethereum. The Motley Fool has invested in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
3 Long-Term Cryptocurrency Investing Strategies was originally published by The Motley Fool.
