Choosing an investment strategy
You have three main strategies to consider for getting in on crypto: buy and hold, trading, and mining. Here are the main characteristics and trade-offs:
|Buy and hold||Trading||Mining|
|Description||Invest in currencies you think will gain over the next three to five years. Buy, then hold.||Try to buy on dips and sell on peaks over the short term.||Use computing power to generate new coins.|
|Pros||Requires less time than day trading and mining. Lower tax rate on gains.||Potential to make quick gains.||Being part of the cryptocurrency ecosystem.|
|Cons||Must hold onto your crypto through day-to-day volatility.||Potential to lose a lot quickly. Higher tax rate on gains.||High energy bills.|
|May be right if||You think the future of cryptocurrency is bright and you want to make a long-term bet.||You already have experience trading in volatile markets.||You are highly tech savvy.|
When to buy and sell
In addition to choosing your overall investing philosophy, there are strategies you can consider to help you decide when to hit the “trade” button:
1. Recoup your initial investment
If your crypto gains, consider cashing out the amount of your original investment so that you’re protected against losses.
- You invest $1,000 in Ethereum.
- The price spikes, and your investment goes to $8,000.
- Consider selling $1,000 to recoup your initial investment (or slightly more, since you’ll owe taxes on your realized gains).
2. Use dollar-cost averaging
The mantra “buy low, sell high” is great, but it can be paralyzing. With dollar-cost averaging, you don’t need to guess what the market is going to do tomorrow. Instead, you invest an even amount at regular intervals.
- You want to buy $1,000 of Litecoin this month.
- Instead of waiting for a day when you think the price is good and then investing the full $1,000, invest $250 each week over four weeks.
3. Use buy and sell orders
Instead of hanging out on your exchange’s website waiting for the price to drop before you buy (or rise before you sell), you can use automation to put your strategy into place.
- Suppose Bitcoin is trading around $7,000 and Litecoin is trading around $65.
- Suppose you want to sell some Bitcoin and buy some Litecoin.
- You can set up a sell order to automatically sell a certain number of Bitcoin if, say, the price rises to $8,000 (or whatever price you set) within a certain period of time.
- You can set up a buy order to automatically buy a certain number of Litecoin if, say, the price falls to $50 (or whatever price you choose).
- If the coins reach those prices within the time period you’ve set, your order or orders will go through.
- If not, no transaction will occur.
A word on taxes
For all strategies, be prepared for tax season. Keep records on each investment, including the day you bought it, the purchase price, and the quantity. Spreadsheets and apps can help you track your holdings. An accountant who specializes in cryptocurrency taxes may be able to help.