For much of cryptocurrency's existence, short-term trading strategies that seek to profit from high volatility and sudden momentum shifts defined the cryptocurrency market. But with the recent arrival of institutional investors, as well as new ideas about how cryptocurrencies could represent an entirely new asset class, that appears to be changing.
There is more thought being given to how to make cryptocurrencies part of a well-diversified portfolio over the long term, and that is good news for individual investors around the world. So if you're thinking about investing in cryptocurrencies for the long term, here are three popular investment strategies.
1. Invest in buy and hold
The simplest approach to cryptocurrency investing is a simple buy and hold strategy. This is exactly what it sounds like: you find one or more cryptocurrencies you like and hold on to them forever. The idea here is that many major cryptocurrencies will appreciate greatly in the long term, even if they are prone to high volatility in the short term.
Of course, the crypto being highlighted here is bitcoin (CRYPT: BTC), which remains the world's largest cryptocurrency with a market capitalization of $1.3 trillion. It is often the first cryptocurrency that both individual and institutional investors buy, and with good reason. Over the past decade, it has been one of the best-performing assets in the world.
The key here, however, is to commit to a long holding period. Cathie Wood of ARK Invest He recently did the math and determined that as long as you're willing to hold on to your Bitcoin for at least five years, you're likely to make substantial profits.
Now that Wood predicts that Bitcoin could skyrocket to a price of $1 million by 2030, this five-year holding period has particular meaning for anyone thinking about becoming a crypto millionaire one day.
2. Dollar Cost Averaging
A related crypto strategy is known as dollar cost averaging. While "buy and hold" typically involves a single large purchase, a dollar-cost averaging strategy involves a series of smaller, recurring purchases.
The key idea here is that you commit to purchasing a set dollar amount of a particular cryptocurrency on a regular basis, regardless of market conditions. For example, you could decide to buy $100 worth of Bitcoin each month.
Dollar-cost averaging can be like frequently putting money into a piggy bank. Image source: Getty Images.
This strategy can be particularly effective if you are looking to take the emotion out of investing. Instead of reviewing your portfolio every few days, you might review it only once a month. This means you can block market volatility and avoid being unduly influenced by changing cryptocurrency prices.
This is more important for cryptocurrency investors than for stock investors, simply due to the much greater volatility in the cryptocurrency market. It can sometimes be stressful to see your Bitcoin position swing 10% or more during a single 24-hour period.
3. ETFs for diversification
Finally, Exchange-traded funds (ETFs) could be an effective way to diversify a cryptocurrency portfolio over the long term.. They are particularly popular among investors who would prefer not to invest directly in the cryptocurrency market.
The new detect Bitcoin ETF, for example, are a way to invest in digital currency in the same way you would invest in technology stocks. Two of the most popular spot Bitcoin ETFs right now are the iShares Bitcoin Trust (NASDAQ:IBIT) and the Fidelity Wise Origin Bitcoin Fund (NYSEMKT: FBTC).
Based on the initial success of Bitcoin spot ETFs, the expectation is that other cryptocurrencies will soon get their own spot ETFs. For example, the same Wall Street investment firms that brought Bitcoin spot ETFs to market are trying to launch new spot ETFs. Ethereum (CRYPT: ETH) ETF to the market.
And don't forget about the possibility of using more traditional ETFs for crypto market diversification. For example, you could invest in the Valkyrie Bitcoin Miners ETF (NASDAQ: WGMI) if you are looking for broad exposure to the crypto mining sector. Or you could invest in an ETF like the Amplify Transformative Data Sharing ETF (NYSEMKT: BLOCK) if you are looking for broad exposure to blockchain technology companies.
The key idea here is diversification. It's much easier to diversify your portfolio with a single ETF than it is to buy a handful of different stocks. Simply put, you can buy a single Bitcoin mining stock or you can buy a basket of the top 20 Bitcoin mining stocks. Therefore, ETFs can be very useful if you are confident in the long-term potential of an industry, but less confident in which the big winners will be.
Maintain a long-term focus
Just remember that it is important to maintain a long-term approach when investing in cryptocurrencies. It's easy to get distracted by the latest meme coins or short-term momentum plays. If you follow one of the strategies described above, you can avoid this. Instead, you can focus on building a long-term, well-diversified portfolio that builds real wealth.
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Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool holds and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
