Cryptocurrency investing and trading is still in its infancy. This is good news, since opportunities for profits are likely to increase once more and more investors enter the cryptocurrency market (e.g., bitcoin, litecoin…). Trading on cryptocurrency exchanges is a new way of doing foreign exchange trading (forex). This article is an attempt to give some advice on trading in this new space.
First, before you buy your first bitcoin, have a time frame in mind. Are you planning to hold this coin for the long term, medium term or short term? If you are planning to hold for the long term, then you have a “buy and hold” strategy.
A “buy and hold” strategy works best when you use the Warren Buffet approach. Warren Buffet buys when there is extreme pessimism in the market place. For example, after the Mt. Gox debacle, bitcoin plunged in value, and in April of 2014, a bitcoin was selling for $400. If Buffet invested in Bitcoin, he would have bought at that time. Historically, one-third of gains in a bull market are usually made in the first few months when a stock begins to recover after a period of extreme pessimism. If an investor waits until the pessimism turns to optimism, he/she is missing out on a lot of the potential profits.
One major problem with a “buy and hold” strategy is that most investors tend to get frustrated during times of extreme pessimism and sell out of frustration. In other words, investors feel frustrated when they see big losses in their investments, and many will sell at the wrong time. When using a “buy and hold” strategy, one has to have to discipline to weather the storms. And, disciplined investors will buy during these market slumps, rather than sell.
Even “buy and hold” investors need an exit strategy, and one sell strategy for long-term investors that works well is a “sell your winners, buy your losers” strategy. In this strategy, an investor decides what percentage of a certain currency (e.g., bitcoin or litecoin) that they will hold. Allow me to illustrate this strategy with a concrete example. Let’s imagine that I have 80 percent of my investments in index funds, stock and bonds and 20 percent in cryptocurrencies. Of that 20 percent investment in cryptocurrencies, let’s imagine that I hold 60 percent bitcoin, 20 percent litecoin and 20 percent dogecoin. If the value of bitcoin, litecoin and dogecoin increases relative to my other investments, I will sell some of my cryptocurrency portfolio and buy more stocks and bonds. Likewise, if cryptocurrencies are not doing well relative to my other investments, I will sell some stocks and bonds, and buy more cryptocurrencies. Since this is a long-term, “buy and hold” strategy, I will set a frequency for re-balancing my portfolio at every three months or every six month or even longer.
This re-balancing strategy that I describe above also holds true for the percentages of cryptocurrencies that I have in my cryptocurrency portfolio. At periodic intervals (e.g., weekly, monthly or at some time interval), I will sell some of my winners and buy some of my losers. So, continuing with my example above, if bitcoin were to increase in value by 20 percent, while litecoin and dogecoin remain unchanged, I would sell some of my bitcoin and invest my bitcoin earnings in litecoin and dogecoin. In this way, I would maintain my percentages of 60 percent bitcoin, 20 percent litecoin and 20 percent dogecoin.
“Buy and hold” is a strategy is an appropriate strategy for less active investors. In future articles, I will address medium-term and short-term strategies.