Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, DeFi, Blockchain News

Crypto Trading Strategies to Enhance Your Portfolio

Whether you are a crypto only investor or if you have an investment portfolio that only comprises of some cryptocurrency, learning strategies for trading this asset can improve portfolio performance.

With over 300,000 Bitcoin transactions, alone, occurring daily, learning how to break into the crypto market can yield strong results if successful.

What is Cryptocurrency?

Learning trading strategies for cryptocurrency starts with actually understanding what this digital currency is. You’d be forgiven for not being able to quote the definition of crypto off the top of your head. The literal definition of cryptocurrency is a digital currency that is secured by cryptography and based on a network, distributable across a large number of computers.

However, that definition in and of itself is more confusing than helpful.

To help clarify, it’s best to compare cryptocurrency to a physical currency such as the dollar. The dollar is a physical bill which has three driving forces determining the value: exchange rates, treasury notes, and foreign exchange reserves. A strong economy can result in a stronger dollar. Other currencies values are partially tied to our own dollar.

On the other hand, cryptocurrency is completely digital and is not issued by a central authority such as a government. They are created, distributed, and overseen by a complete peer-to-peer network.
Cryptography is a mathematical technique that is used to secure a specific cryptocurrency in a way that ensures it cannot be forged or copied. The value of crypto coins is most often influenced by consumer sentiment and media hype. Most cryptocurrencies unofficially mirror the movements of Bitcoin.

How Does Cryptocurrency Work?

As mentioned, cryptocurrency is secured in a way that allows transactions between parties to occur 24/7 instantly. There is no bank or payment processor needed. The blockchain records the transaction into its general ledger, stored on all computers within the blockchain. There are over 10,000 coins which can be traded for one another, each with their own value and network model.

In most cases, it is not possible to trade cryptocurrency on a traditional exchange. Those wishing to trade cryptocurrency will need to use a crypto exchange for their transactions.

Types of Cryptocurrency Exchanges

As you being to look into trading cryptocurrency, you will soon find that there are three types of exchanges you can consider using:

- Centralized Exchange: A centralized exchange works exactly the same as a traditional exchange, with an intermediary facilitating the crypto transaction between the two parties. A traditional currency can be used to execute a trade, or a person can use their cryptocurrency for the trade as well.

- Decentralized Exchange: Unlike a centralized exchange, a decentralized exchange allows investors to trade directly with one another. This typically results in faster transaction speeds and a lower total cost due to there being no intermediary.

- Hybrid Exchange: Finally, a hybrid exchange is the least common of the three, combining the aspects of both centralized and decentralized exchanges. It provides security and anonymity, yet also provides ample liquidity.

5 Tips for Trading Digital Currency

As you start to dive into the world of cryptocurrency trading, there are five strategies that you can use to maximize the potential gains you could see:

1. Consider ETFs for diversification
To start understanding the benefits of crypto ETFs, it’s important to look at what an ETF actually is. An exchange traded fund (ETF) is a type of pooled investment where someone can purchase a single asset but have exposure to a wide number of assets. Most stock market ETFs aim to track a certain index, but crypto ETFs are most often a grouping of common cryptocurrencies.

Ideally, an ETF will hold assets that aren’t directly correlated, so that drops in one asset class do not impact another, thus keeping your total investment balanced.

2. Dollar cost average into your crypto portfolio
By using a dollar cost average investment strategy, an investor can limit their exposure to volatility risk. This strategy involves investing equal amounts of money on a consistent basis, regardless of the price of an asset. Over time, this helps a person buy more shares of that asset when the price is lower, as opposed to buying more shares when the price is high.

3. Don’t buy just because you see a low price
One of the biggest mistakes in cryptocurrency is buying a coin immediately when you see the low-price tag for a single coin. An investor should always ask themselves why the price is where it’s at and how that price is likely to move in the future. For example, one cryptocurrency may have exploded in value because of a Twitter thread, before promptly falling back down to its natural value. It’s not likely to skyrocket again, meaning that investing large sums of money may be a waste.

4. Understand that you may lose your entire principal
Cryptocurrency is incredibly volatile and unpredictable. This means you need to be prepared to lose the entire value of your portfolio in a worst-case situation. Don’t just only invest what you’re comfortable losing, only invest what you are able to lose.

5. Understand the cryptocurrency you’re investing in
While cryptocurrency is digital, investors can take steps to research the actual network that the cryptocurrency represents. In some cases, a cryptocurrency may represent a physical product or idea that can be vetted. These have the potential to be stronger investments as they are based on less speculation.

Build a successful crypto portfolio

Adding cryptocurrency into your portfolio can be an excellent strategy if you are looking for a more diverse asset class. Keep in mind, however, that cryptocurrency is extremely volatile. Being influenced by factors such as media attention and the general public hype, it’s impossible to predict how the price of a certain coin will move.

When adding crypto to your investments, research every coin thoroughly and only invest what you are able to comfortably lose. By doing so, you can add a unique asset to your portfolio to further diversify your overall investments.


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Mercredi 15 Février 2023