Cryptocurrency & Blockchain Business

Investment Strategy: Long-term (HODL) vs Short-term (Trading)

From my observations on Reddit, lots of people seem to have undefined or a vague investment strategy when it comes to their cryptocurrency investments. I’ve put together this post to help you devise reasoned and well-thought-out goals so that you can improve your financial decision-making. I’ll cover the characteristics of the long-term (i.e., the hodl) and short-term (i.e., trading) investment strategies, then outline what I personally do.

LONG-TERM STRATEGY

WHAT DOES THIS INVOLVE?

This is often referred to as ‘hodling’ (for origins, see here and here). This is where you:

  • Invest in one-off or regular sums of bitcoin (and other favoured cryptocurrencies).
  • Secure and ‘hodl’ the investment for a long-term period (e.g., 1+ year), or until another condition is met.

This is the lowest effort and easiest strategy to adopt and is based on the assumption that the price of bitcoin (or your other favoured cryptocurrency) will see a rise in real-value over long-term time periods. This is despite all the volatility which plagues the marketplace in the short-term. Once you’ve set yourself up, this is a passive investment strategy.

SIMPLE, BUT NOT STUPID.

Despite its simplicity, this shouldn’t be goal-less.

Consider:

  • What cryptocurrencies are long-term winners?
    • Amongst these winners, how do you want to allocate your investment(s)?
  • How are you going to invest?
    • Will it be at specific times? Or when the value of target currencies hits certain boundaries?
  • What are your conditions for pulling gains out?
    • Is it time-based, or value-based?
    • What percentage, or what fiat value, would you draw out?
  • Are you prepared to lose all of your investment?
    • If not, what conditions would you force yourself to sell-out (some, or all, of your position)?

Once you answer these questions, you have some semblance of a plan. Great!

WHY MIGHT YOU ‘HODL’?

  • Just want to invest in cryptocurrencies easily.
  • Don’t have the time or motivation to invest actively.
  • Aren’t confident in your technical analysis ability (or don’t have any).
  • Have confidence that your investment choices are long-term winners.

SHORT-TERM STRATEGY

WHAT DOES THIS INVOLVE?

  • Invest sums in bitcoin, or other cryptocurrencies.
  • Hold the investment for short to medium-term periods (e.g., anything between minutes, hours, or months).

This is a high effort approach which embraces the volatility of the marketplace, as it offers the opportunity to profit from drastic changes in prices over short to medium time periods. This is the opposite of the long-term strategy I defined above, which looks to evade the short-term volatility.

WHAT ARE THE PROS AND CONS?

  • It can require a significant time investment.
  • It can be stressful if price movements go against your expectations/plans.
  • Requires some level of technical analysis ability.
  • Offers an opportunity for high percentage gains quickly.

The primary advantage is the potential for high percentage gains on your investments over short-term periods due to price movements. But, this is at the cost of a higher time investment and higher blood pressure.

GOALS!

If you’re taking this approach, goals become even more important.

Consider:

  • What cryptocurrencies have short and medium-term potential?
    • Are there specific criteria which you’ll set for any investment you make (e.g., volume, market cap., coin purposes, etc.,)?
  • What are your conditions for pulling gains out?
    • What percentage of return do you desire when making your investments?
      • Is this realistic?
  • What are your conditions for accepting losses?
  • Do you have a daily, weekly, or monthly target for profits?
    • Is this worth your time compared to passive investment?

Defining these ahead of time gives you general guidelines, which you might break or bend under certain circumstances if you see an opportunity.

WHY MIGHT YOU TRADE?

  • You’re confident in your technical analysis ability.
  • You want to generate returns quickly.
  • Have spare time you’re willing to spend on this.
  • You’ve got a decent amount of capital which can be leveraged to generate sizable gains from percentage movements.

“SO WHAT SHOULD I DO?”

What is right depends on your circumstances, motivations, and goals. What’s right for one person is the exact opposite of what another should do.

“FINE. BUT WHAT’S YOUR APPROACH?”

  • I hold about 70% of all my investments passively in cryptoassets that I think have long-term potential and are ‘safe’ bets.
    • Whatever happens in the next year, I won’t touch this pot at all.
  • With the other 30%, I make short to medium-term bets on coins which are undervalued or volatile.
    • If I think the market is overvalued, I might take everything out and keep it liquid – so that I can take advantage if/when the market corrects.

MY INVESTMENT TENANTS

  • Don’t invest more than I’m willing to completely lose.
  • Write down my goals, plans, strategies, and targets. This helped me a lot.
  • Track everything.
    • Compare your active trading against the asset passive performance.
    • If I can’t beat the passive performance of that asset, then I should just go 100% passive instead.
  • Willing to adapt my strategy, but only after substantial thought and a mandatory cooling-off period.
  • Make fewer, but better, investments and trades.

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