Cryptocurrency Investment Strategies

As cryptocurrencies gain ground and earn widespread social acceptance, investors of all ages are looking for the best ways to get in on the action.

Investing in cryptocurrencies can feel novel and risky to new investors, but the reality is that digital currencies are just that, currencies in digital form. In almost all ways, they can be invested and managed in portfolios very close in form and function to how investors to grow their assets in any other currency. Which methods and strategies will be most attractive to a given investor will depend almost entirely on his or her individual digital coin holdings and personal level of risk-aversion. Still not sure where to begin? Start with a tried-and-true method of stockpiling or angel investing.

Stockpiling Digital Coins

Since early 2014, the official position of the IRS has been that cryptocurrencies are a form of property rather than a type of money. This is becoming increasingly less true every day as new apps allow investors to set up digital debit cards linked to their cryptocurrency wallets and ever more retailers are accepting Bitcoin (and altcoins of all kinds) as payment for goods and services. However, it does offer investors a solid starting point for their investment strategies.

Like gold, silver and other assets that walk the line between normal, highly spendable currency and property-like assets, cryptocurrencies can easily be stockpiled. One of the easiest and most direct ways for individuals to begin investing with cryptocurrency is to collect and hold various currencies using the traditional “buy low, sell high” approach. Under this investment ideology, investors bank on the promise of demand for cryptocurrencies rising as more people recognize their value and seek to buy their way into the digital currency market.

Right now, the digital currency market still finding its footing and demand is relatively light. This creates a prime opportunity for investors to search out low-cost coins or tokens and buy them in large quantities. By holding onto those coins as the market expands, investors set themselves up for success in two ways.

As demand increases, the value of those coins will rise relative to both other forms of currency and to purchasable goods and services. Investors will, down the line, be able to either “sell high” or “spend high.” Selling high is exactly what it sounds like. For example, investors can sell coins they bought for $3 (fiat currency) each for $10 or more apiece. This “cashing out” provides investors with a hefty return on investment in some other form of currency. Alternatively, investors may wait until their cryptocurrency tokens have increased in value and then spend them directly on goods and services. Again, for example, an investor might spend $200 of fiat currency buying cryptocurrency right now. Once the value of the purchased currency has matured, the coins or tokens originally purchased for $200 might be worth $800 in the original fiat currency, giving the investor $800 worth of purchasing power for no additional investment or cost.

Angel Investing or Crowd-Sourcing Investments

Investors with a little more tolerance for risk, or who desire to build financial portfolios that also invest in social change, can choose to put their cryptocurrency holdings to work through digital Angel Investing or crowd-sourcing scenarios. Both of these investing formats work in almost the same ways as their traditional, fiat-currency counterparts.

  • Amass some money. To get started, investors should identify how much money they want to put into this form of investing. Then, they determine which specific cryptocurrency (or currencies) best meet(s) their personal needs and are also appropriate for the type of investing they want to do. Privacy, liquidity and stability are all important factors to consider when making that decision.
  • Find a good cause or promising endeavor. Investors eager to participate in social change might select a startup along the lines of AudioCoin, which is attempting to revolutionize the music industry. Investors prioritizing fiscal return on investment might select a business-oriented project deploying blockchain technology in ways that aim to improve efficiencies or disrupt standard business practices in profitable ways.
  • Lend money to the project. Generally, this takes one of two forms. If a project is launching its own coin to procure funding (crowdfunding), then investors can buy tokens in the Initial Coin Offering (ICO) and hold the coins. Otherwise, investors can formally lend cryptocurrency in the desired amount to a project on set terms, as in any common Angel Investing arrangement.
  • Receive fiscal returns aligned with the project’s success. Depending on the format and terms of the Angel Investing or crowd-funding investment, investors may see a return on investment in different ways. In some cases, it will come when the value of the coins an investor purchased increases as a result of project success. In others, the projects an individual invested in will repay the initial loan with interest as per the terms of the original agreement.

Balancing Risk and Reward

As with any investment opportunity, it is essential that investors carefully review the cryptocurrency landscape before jumping into a particular opportunity. Standard investment rules apply. In fact, basic investment guidelines may become doubly important when investing in cryptocurrencies due to the notorious volatility of the market and the comparative lack of regulation.

  • Never invest what you cannot afford to lose. The cryptocurrency market is hot right now and stories of investors making it big in cryptocurrency deals seem to be everywhere. But the immense growth and movement in the industry is not a guarantee of success. Investors should never put money into an investment that they cannot afford to lose if the market experiences a downturn. How much exactly that works out to be will be different for each investor, and expert suggestions vary widely. Investors need to keep the possibility of loss in mind from the beginning to ensure they make wise choices.
  • Research, research, research! Investors need to decide what is important to them, such as a financial return on investment or supporting social change, and then do their due diligence on any potential investments they are considering. Is the strategy sound? What is the larger state of the market? What competition does the start-up have? Knowing the strengths and weaknesses of a project or start-up can help an investor make smart investments.
  • Balance risk with the opportunity for returns. Different investors have different financial goals and varying tolerances for risk. Typically, risk operates on a sliding scale. The higher the risk, the higher the potential payout. Investors can decide for themselves whether they are willing to take high risks in hopes of making a large return or if they are more comfortable making safer bets that promise lower returns.
  • Patience is a virtue. (Usually.) The cryptocurrency market is still evolving. With the exception of specific, short-term investment options, many investors will find the best return by slowly but steadily building a solid and strongly diversified digital currency portfolio over time. Taking this into account when making investments and buying currency can set new investors up for healthy long-term success.

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