Crypto Investing Strategies: The Complete Guide

December 27, 2021
financial literacy

You don’t have to be a professional investor to know that cryptocurrencies are hot right now. 

Over the course of the last decade, thousands of digital currencies have gone live onto the market — with several cryptos like Bitcoin and Ethereum rapidly rising to become household names.

But the truth is that not all cryptos are created equal. The prices on some crypto assets have turned out to be pretty volatile, and so it’s important that you understand both the risks as well as the opportunities associated with investing in crypto.

More importantly, you should understand the basic crypto investing strategies so that you can invest in crypto in a way that suits your risk tolerance.

This guide explains what crypto is, how to invest in crypto, and some different crypto investing strategies.

So, what is Crypto?

Before we delve into crypto investing strategies, let’s take a couple of steps back and talk about what exactly crypto is and how it works.

Crypto (or “cryptocurrency”) is a digital currency that’s based on a computer network distributed across the globe.

Unlike traditional currencies, cryptocurrencies aren’t issued or regulated by any government’s central bank. This enables cryptos to operate as an asset class outside of the control of central authorities or individual governments.

As you might have guessed, cryptocurrency gets its name from the encryption techniques that are used to secure the individual networks of each digital currency.

Generally speaking, the vast majority of cryptos use cryptography in order to keep their network and investors secure. Most cryptos don’t have physical coins or paper notes that you can trade. Instead, “crypto coin” balances are kept on a publicly available ledger that everyone in the world can access.

Although each transaction record on the public ledger (or “blockchain”) is accessible to everybody, individual records are encrypted to protect the privacy of all parties involved in a transaction. New crypto transactions are processed using a computer process known as “mining.”

Although investing in crypto might sound a bit complicated at first glance, it’s actually pretty straightforward once you get the hang of it — and the crypto market has expanded by leaps and bounds in recent years.

The global market capitalization of the cryptocurrency sector is now valued at $2.13 trillion, and that market is populated by a huge number of cryptos.

You’ve probably heard of the most popular cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). But, as of December 2021, there are actually more than 8,300 cryptocurrencies in existence.

Because cryptos are a fairly new asset class, not all of the digital currencies are created equal. Some are more sustainable and robust in the long-term, while others launch and then disappear after a number of months or years. 

That being said, market leaders like Bitcoin, Ethereum, Binance Coin (BNB), and Tether (USDT) have proven to be sustainable (and fairly lucrative) over the past decade or so.

Table showing most valuable cryptos
(Image Source)

When you purchase a crypto coin, you store that coin in a “digital wallet.” A digital wallet is a secure account that you can set up through a crypto exchange or payment services provider (PSP) in order to hold your encrypted digital currency. 

You can then use that wallet to purchase and hold additional cryptos, pay for purchases directly using the contents of your digital wallet, or sell your crypto coins and convert them back into a traditional currency like US dollars (USD).

How Do You Invest in Crypto?

Now that we’ve covered what crypto is and how it works, let’s dig a bit deeper and take a look at how you can invest in cryptocurrencies.

There are four popular options that you can go for as a crypto investor. You can either:

  • Purchase a single crypto coin
  • Invest in a crypto mutual fund
  • Invest in a crypto exchange-traded fund (ETF)
  • Invest in a crypto index fund

Crypto mutual funds offer you exposure to cryptocurrency markets through futures contracts. 

When you invest in a crypto mutual fund, you place traditional currency like USD into a managed fund. That money will then be invested in front-month futures contracts. 

Futures contracts basically say that your fund manager is going to buy an asset (in this case cryptocurrency) at a predetermined price on a future date. Then, when that date comes around, the asset is usually worth more than the predetermined price and can be sold at a profit.

With cryptocurrency, fund managers usually sell the contract before they expire, so you never actually own any crypto coins.

The money made on each expiring contract is then used to invest in new contracts the following month — slowly increasing the value of the fund.

Cryptocurrency exchange-traded funds (ETFs) can track either a single crypto coin or a basket of different crypto coins or digital currencies.

Another emerging crypto investment solution is the crypto index fund. A crypto index fund sees investors place traditional currencies into a fund that tracks one of several crypto indexes. Funds are then weighted by market capitalization.

Something to keep in mind, however, is that these three ways of investing in crypto are all still developing.

The final investment option (and perhaps the most simple) is to purchase an individual crypto coin (or “crypto token”).

How to buy crypto

The process of buying crypto is fairly straightforward. The first step is choosing a crypto broker or crypto exchange.

While you can choose either of these options to buy coins, there are a few key differences between the two that you should keep in mind.

Illustration of woman sitting next to baby under giant shield

First, let’s talk about exchanges. 

A cryptocurrency exchange like Gemini is a platform where buyers and sellers meet to trade cryptocurrencies. The key benefit of using an exchange is that they normally have pretty low fees.

By contrast, cryptocurrency brokers enable you to buy crypto with an easy-to-use app. The broker interacts with the exchange for you, which takes a lot of hassle out of the purchasing process. 

But the removal of that hassle comes at a cost — crypto brokers are known to charge high fees that you could have otherwise avoided.

After choosing an exchange or broker, you can deposit the cash you’d like to invest. You can often place cash directly into a digital wallet or crypto account as part of a one-off authorized transaction. It’s also possible to link your bank account directly to a crypto account.

Depending on the funding method you choose for your crypto account, you may need to wait for a couple of days until you’re able to use the traditional currency you’ve deposited to buy your crypto. 

You should also note that a lot of credit card companies tend to process crypto purchases as cash advances. That means your card company will charge you a higher interest rate than you’d get on a normal purchase, and you might run into some extra fees.

Once you’ve deposited traditional currency like US dollars into your crypto account, you’re able to place your initial crypto order. There are literally thousands of coins to choose from, and so it’s important to do your homework here.

Read up on each coin, take a look at its market performance in the short-term, medium-term, and long-term, and make sure you’re choosing crypto that matches your investment style. From there, all you have to do with most brokerages and exchanges is enter the ticker symbol of the crypto you’d like to buy and the quantity.

A lot of crypto exchanges will let you buy a fractional share of a cryptocurrency — which is important for a lot of investors because of how much leading cryptos like Bitcoin cost (the cost of Bitcoin is currently more than $40,000).

It’s really as simple as that. From there, you can store your crypto in a digital wallet. There are two main types of digital wallets to choose from: “hot wallets” and “cold wallets.”

Hot wallets are digital wallets that are based online. Meanwhile, cold crypto wallets aren’t connected to the internet. They usually take the form of an external USB drive or a hard drive.

What are Different Crypto Investing Strategies?

It’s one thing to simply buy a bunch of crypto coins. But utilizing a strategy as you invest is a whole different ball game.

In its most basic form, an investment strategy is just a set of instructions that can help an investor make choices like what asset classes to buy, when to invest, and how much money to invest. 

Crypto investment and crypto trading strategies vary pretty dramatically. 

For example, you could choose to go for a conservative strategy that focuses on low-risk portfolios and assets. This strategy would focus on the objective of protecting wealth. But on the other end of the spectrum, you might go for an aggressive strategy with high-risk, high-reward investments. The goal here would be capital appreciation (making money faster).

Screenshot of EarlyBird app showing portfolio selection process

Every strategy has both risks and benefits. But to help you get a rough idea of how you can invest in digital currencies, let’s explore a few of the most common crypto investing strategies.

Buy and hold strategy

The top crypto investing strategy is called a “buy and hold strategy.” A lot of crypto investors refer to this strategy as “HODL.”

Interesting fact: most people think this is a typo that’s gained traction over the years. But others maintain that HODL is an abbreviation for “hold on for dear life.”

HODLing is when you buy a digital asset and then hold onto it in your digital wallet for a relatively long period of time. When you choose the buy and hold strategy, you’re not really going to be doing much cryptocurrency trading. You simply buy coins and file them away.

If you don’t plan on selling any of your assets for years and years, then the HODL strategy is probably going to be a good choice for you — particularly if you’re trying to build a nest egg for the kids in your life.

When it comes to purchasing crypto to hold for a child’s future, the best solution is to set up a UGMA custodial account through an account provider like EarlyBird.

Here at EarlyBird, we recently partnered with the top crypto exchange Gemini so that you can easily invest in crypto for a child. It works like this: 

UGMA custodians can use a crypto wallet through Gemini to buy crypto like Bitcoin or Ethereum. 

You can then add that investment to existing UGMA portfolios by linking the digital wallet to your UGMA account. The child beneficiary of that account can then benefit from the cryptocurrency investment when they reach the “age of majority” in their state.

Illustration of man with child on shoulders walking alongside table

But that’s not your only option. You can also pick from a pre-tailored EarlyBird portfolio that includes cryptocurrencies as a small part of your overall asset mix.

Earning a yield

Another common crypto investing strategy is “earning a yield.” Using this strategy, you buy crypto and then hold onto it to generate a financial return over given time frames.

The difference between earning a yield and HODLing is that when earning a yield, you’re only holding onto your crypto for a certain amount of time. The goal is to buy your coins at one price and then sell them at a higher price.

A benefit of this investing strategy is that you can often earn passive income while you hold assets — sort of like how a savings account pays out interest on your existing balance.

Dollar-cost averaging

Dollar-cost averaging is a crypto investing strategy that focuses on investing fixed amounts of your money into cryptocurrencies at regular intervals.

This strategy operates on the basis that the crypto market often shows volatility, which means that timing is difficult. By investing relatively smaller amounts of money on a regular basis, you should theoretically be able to minimize your risk while maximizing your market exposures.

Essentially, dollar cost averaging spreads your investments over time to insulate you from rapid price movements. That means the cost of your investment will get averaged out over time.

Value investing

Value investing is a crypto investing strategy that assumes most assets are undervalued — which means their actual worth is higher than the assets are trading for.

If you’ve ever heard of investor Warren Buffet, he’s the one responsible for making value investing a pretty common investment strategy.

Value investing is all about finding an asset you think is trading for less than it’s worth. You’d then purchase that asset under the assumption that its market price will go up over time.

The primary challenge here is figuring out which assets are genuinely undervalued. This strategy takes a lot of time, research, and practice if you want to generate a profit.

Conclusion

At the end of the day, one thing is for certain: crypto isn’t going anywhere. There are now over 8,000 cryptocurrencies to choose from, and a lot of those cryptos have been increasing in value.

You just need to carefully consider which crypto investing strategy is right for you and your investment style.

If you’re trying to save for a child’s financial future, your best bet is probably to invest in crypto using a UGMA custodial account — but don’t just take our word for it.

Download the EarlyBird app now and find out how simple it is to invest in crypto for your loved ones.