Okay, you’ve decided to take the big plunge and invest (or speculate) in the wild world of cryptocurrencies. The potential rewards are overwhelming but so are the choices. In this article, I’ll be covering the major strategies (as I see them) and what is involved. In part 2, I’ll be going over some specifics of how to implement some of the strategies below. Note: Mining is not included in this article as I touched on it in my Beginner’s Guide to Cryptocurrency.
Motivation and Goals
The first question to answer is what is your motivation and what are your goals? Are you just looking to earn a little extra or are you trying to save up to put your kids through school? Your individual situation will influence which strategy might be best to take.
The FOMO is real
In case you’re not up on your internet lingo, FOMO stands for Fear of Missing Out. Although FOMO might have its place (for example motivating you to learn about this stuff in the first place), if you make your investment and speculations based on FOMO, then you’re going to sell low and buy high and lose your shirt. Sometimes it’s better to just hold and wait for another opportunity.
Satoshis or Dollars or Something else?
Is your goal to accumulate satoshis (1 millionth of a bitcoin) or dollars. Trying to do both at the same time may lead to compromises that result in neither. Satoshi gatherers usually have a longer term view thinking that eventually cryptocurrencies will become a viable (if not dominant) way of buying goods and services. Dollar accumulators want the value of their investment to be worth more dollars even if it costs them satoshi value in the short term. Decide on a goal up front.
Strategy 1: The HODL
This comes from a famous misspelled forum post from back in 2013 that reads in part, “I AM HODLING. I type d that tyitle twice because I knew it was wrong the first time. Still wrong. w/e. BTC crashing WHY AM I HOLDING? I’LL TELL YOU WHY. It’s because I’m a bad trader and I KNOW I’M A BAD TRADER.”
The strategy is pretty simple. It’s basically Jeremy Siegel Stocks for the Long Run applied to cryptocurrencies. Choose a selection of crytpocurrencies that you think may have a future, and HODL them for all you’re worth through thick and thin. You probably want to hold some mainstream (Bitcoin, Litecoin, Dash, etc.) as well as some newer, cheaper, up-and-coming alt-coins.
This strategy probably the best one for people with limited time and tolerance for anxiety. Once you buy, don’t look at the price on a weekly, daily, hourly basis. Just check once a year. This strategy is also best for a longer time horizon.
Strategy 2: Sleep at night speculation
This is similar to the HODL strategy except that whenever a coin doubles whatever you put into it, you withdraw half and put it into another potential up and coming alt-coin. As an example, let’s say you buy 100,000 PurplePill coin for the equivalent of $0.001 (total of $100). The price of PurplePill goes to $0.002, now your PurplePill is worth $200. Sell $100 of it and use it to buy another new alt-coin.
If the PurplePill becomes worthless, you still have $100 in the new alt-coin. If the price of PurplePill goes up to $0.1, then your initial $100 is now worth $5000.
But if you hadn’t sold, then it would be worth $10,000!!! This strategy sucks!!!
The FOMO is real. Yes, you halved your potential profit, but you also preserved your original capital, and own a new alt-coin that might do just as well.
This has a couple of benefits over the HODL.
- Over time your portfolio will become highly diversified.
- This will limit your potential for catastrophic loss
- AND put you in a position where you own lots of alt-coins which may one day breakout and make you “instantly” rich after you held them for however many years.
Strategy 3: Day trading
Just like it sounds, this involves frequent trading in and out of various alt-coins. People who do this are usually skilled in the dark art of Technical Analysis. It doesn’t take a huge effort to learn how, but boy can you lose your shirt fast if you don’t know what you’re doing. You can combine this with Strategy 2 to provide a short term and long term combined strategy.
Strategy 4: Masternode investing/speculating
Dash was the first coin to implement masternodes. These are computers that hold a large number of coin (1000 in Dash’s case) and are used to verify and speed transactions. In return, masternodes receive “interest” in the form of new coins. As of this writing, a Dash masternode receives about 200 new Dash each year, representing a 20% annual return on the initial investment.
Sounds like an awesome deal right? Plus if the price of Dash rises, the value of both your masternode and its interest rises. Unfortunately, at the current price of Dash, a masternode will set you back a cool million dollars. If you had bought your masternode just 12 months earlier, it would only have cost you $12,000.
This is the closest to true value investing (IMO) because you get an income as well as a speculative assest (even if you’re being paid in said speculative asset).
So the key is to look for solid up and coming coins that have the potential to go up in value. Good luck.
As a more speculative play, you can look for brand new coins that often pay out more than a 1000% interest. These will pay back the original cost of the coins within 15-40 days. So if the price can hold out for one month, you’ll have your initial investment back plus a masternode in that coin. Keep it or cash out and repeat.
Do this strategy over and over with various new coins. After 1 year of this, you’ll have 6-10 masternodes providing an interest return in that many new coins. Now if just one of them doubles or quintuples in value…. well, you get the idea.
Personally this is my favorite strategy. It does take a little server administration know how to set up a masternode, but you can learn it or outsource it fairly easily.
Warning!! Danger Will Robinson!!!
NEVER NEVER NEVER put your coin in a wallet on the masternode. Never give anyone the private keys to your wallet. Your wallet should reside on your own computer, and the masternode just references the wallet. People have been scammed out of their coin by people they hired to set up their masternode. Don’t fall prey to it.
Bonus: How to evaluate a cryptocurrency
No matter which strategy you adopt, you need to be able to analyze a potential alt-coin investment. Here is a handy checklist that you can use to evaluate the worthiness of a potential investment/speculation.
What are the coins fundamentals?
- What problem is coin or project trying to solve? How is their approach different?
- Does the project have a compelling story?
- Who is on the team? A 30 person team with experience is more credible than a project of 2 people with no experience.
- Who is the leader of the team.
- What partnerships does the project have in place? It’s one thing to claim a future benefit to…someone. It’s another thing to have a client signed up in advance.
- What is the community response to the project?
- How much capital is backing the project? Technology is wonderful but without capital to back it up, there’s no there there.
- Are there any anticipated events (such as the CEO being featured on a cable news show)?
- What exchanges is the coin listed on? This can dramatically affect the ability of the someone to acquire the coin.
- What is the volume of trading? Be very very wary of purchasing coins with low volume. You might not be able to sell it at any price.
- What is the price history
- If you do technical analysis, feel free to do so.
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