By Edul Patel
Cryptocurrency is a new emerging market unlike others such as stocks and mutual-funds. And so, there would be considerable market volatility and capitalizing on it could be a challenging task. However, it is not impossible either. Investors and traders might consider these strategies and sail through it making good returns.
Buy and Hold
This strategy involves buying a cryptocurrency and holding it for a long time, ideally until the market reaches a peak. During a bull market, this strategy can be highly effective as prices tend to rise over time, and you can benefit from the long-term growth of the asset. This strategy can be useful during a bear market as well, as it presents an opportunity to accumulate more at lower prices, potentially increasing the long-term gains.
Short-selling is a strategy that can be effective during a bear market. It involves borrowing an asset, such as Bitcoin, from a broker and selling it immediately with the hope of buying it back at a lower price in the future to return it to the broker. Short-selling can be risky, as it can result in substantial losses if the market moves against you. However, if executed correctly, short-selling can generate significant profits in a falling market.
Margin trading is a strategy that involves borrowing funds from a broker to trade large positions than you could with your own funds. Margin trading can amplify profits during a bull market or a bear market, but it also amplifies the risk of losses. It is important to carefully manage your risk when using margin trading.
Dollar-cost averaging is an investment strategy that involves buying a fixed amount of a cryptocurrency on a regular schedule, regardless of the price. This strategy can be effective during periods of market volatility, as it allows you to buy more at lower prices and less at higher prices, effectively averaging out the cost of your investment. This approach can be less stressful than other strategies, as it avoids the pressure to make decisions based on short-term price movements.
Algorithmic trading involves using automated software to execute trades based on predefined criteria. This strategy can be useful in highly volatile markets, as it allows for rapid response to market conditions and can reduce emotional decision-making. However, it requires a solid understanding of trading algorithms and programming skills to be executed correctly.
It is always a good idea to spend time in the market rather than attempting to time it. Attempting to time the market can result in significant losses if the market doesn’t behave as expected. While experienced traders may be able to successfully time the market and generate profits from short-term trades, novice traders may not have the same level of skill or knowledge.
Therefore, it is generally considered a good idea for novice investors to focus on a long-term horizon. This can involve diversifying their portfolio across different asset classes, investing in low-cost index funds, and maintaining a disciplined approach to investing over time. By doing so, investors can benefit from the potential growth of their investments while minimizing the risks associated with trying to time the market.
The author is co-founder and CEO, Mudrex