Why Long-Term Crypto Investment Makes Sense
When you’re thinking that of investing in cryptocurrencies, you may immediately picture quick profits—or steep losses—given the volatile nature of this asset class. However, seasoned investors know that the actual strategy lies in playing the long game. Instead of placing hasty bets, they deal with regularly constructing a diversified portfolio. In this text, we’ll guide you on the best way to apply this mindset to crypto, particularly through crypto Exchange Traded Products (ETPs).
Five Compelling Reasons to Consider Long-Term Crypto Investment
Looking beyond the immediate future is a clever approach for anyone venturing into cryptocurrency. While it is easy to get caught up in sensational headlines, the reality is that crypto investment is a lot better suited as a long-term strategy.
The Cyclical Nature of Cryptocurrency
Ever heard of the terms bull and bear markets? These are two opposite phases the market undergoes. During a bull market, prices surge and the market is booming. Conversely, a bear market sees prices declining because the market shrinks.
Crypto has had its fair proportion of those cycles. For instance, Bitcoin’s value skyrocketed from $4,000 to $20,000 in a matter of three months in 2017, only to plummet below $3,000 shortly after. Another bull run occurred between 2020 and 2021, with Bitcoin reaching $60,000 before dropping below $20,000.
So, what is the takeaway here? While some crypto assets have shown resilience and may bounce back after downturns, timing these cycles is difficult. Investing smaller amounts often over time may help navigate these ups and downs.
Cryptocurrencies Are Gaining Ground
Though still relatively young—Bitcoin was introduced in 2009 and Ethereum in 2015—cryptos have gained immense traction. Take a have a look at the variety of unique addresses: over 170 million for Ethereum and greater than a billion for Bitcoin as of May 2023 (source: Glassnode).
Constant Technological Advancements
Crypto is constantly evolving. Innovations are frequent, enabling faster and more efficient transactions. A recent example is Ethereum’s September 2022 “Merge” upgrade, which cut energy consumption for transactions by 99%.
Low Barrier to Entry
You don’t need a fortune to start out investing in crypto. You can begin with just a couple of dollars every month and potentially profit from substantial increases in value over time.
Embrace Diversification Without Going All-In
Given its volatility and accessibility, crypto is a robust candidate for diversifying your portfolio. We delve deeper into this in our article on diversification with crypto.
Mastering the Art of Crypto Investment: Timing Is Everything
The dream of each investor is to purchase low and sell high. But pinpointing the proper moment is difficult and requires thorough market evaluation. Fortunately, there are tools to assist.
Research, Research, Research
Before investing, immerse yourself in learning concerning the crypto you’re considering. Check its historical performance, the technology behind it, and who’s on the helm. All this info is obtainable online, although gathering it may well be time-consuming. Our Knowledge section is loaded with insights on major cryptos and current trends.
Understanding the MVRV Score
The Market Value to Realized Value Ratio helps gauge whether an asset is undervalued or overvalued. Typically, a high MVRV rating suggests Bitcoin is likely to be overvalued, while a low rating indicates potential undervaluation.
Stick to Your Goals: Dollar-Cost Averaging and Savings Plan
Dollar-cost averaging (DCA) is a classic investment strategy where you invest a set amount often, say $100 in Bitcoin every week, no matter price changes. This approach, also often known as a “savings plan,” goals to average out investment costs over time and minimize the impact of volatility.
Think Globally
Whether you’re using DCA or other techniques, crypto investment ought to be a part of a broader, diversified strategy tailored to your financial goals and risk tolerance.
Unpacking the Benefits of Diversifying with Bitcoin
Let’s explore three portfolios lively from October 2015 to November 2022, rebalanced quarterly:
- A typical portfolio with 60% stocks and 40% bonds.
- An identical portfolio with 4% gold added.
- A portfolio with 57% stocks, 39% bonds, and 4% Bitcoin as a substitute of gold.
Top Performer: Portfolio 3 with 4% Bitcoin
- Performance: The inclusion of 4% Bitcoin boosted annualized returns from 6.9% to 14.4% in comparison with the usual portfolio.
- Risk: Despite Bitcoin’s volatility, the general portfolio didn’t turn into significantly more volatile (10.4% vs 9.3%). However, the gold portfolio experienced lower volatility and drawdown.
- Decorrelation: Adding just 4% Bitcoin reduced correlation with the usual portfolio by nearly 8%, indicating Bitcoin’s potential for diversification.
Over eight years, a crypto-diversified portfolio outperformed traditional strategies.
Crypto ETPs: Your Allies for Long-Term Investment
If long-term investment appeals to you, how must you start with crypto? Exchange Traded Products (ETPs) may very well be your answer. These securities, traded on regulated exchanges, offer exposure to digital assets and are available with several perks for long-term investors.
Ease of Use
ETPs will be purchased through your bank or broker and traded like every other security, eliminating the necessity to navigate unregulated exchanges.
Seamless Portfolio Integration
ETPs fit naturally into your asset portfolio, simplifying management, especially should you’re using the DCA method. In some regions, they could even qualify for tax advantages.
Transparency
CoinShare’s Physical ETPs are backed by digital assets secured with advanced technology, ensuring they reflect the true value of the underlying assets. CoinShares’ XBT Provider ETPs within the Nordics are hedged by digital currency held by the guarantor, ensuring transparency and security for investors.
Investing for the Future
Every investment carries opportunities and risks, and crypto is not any exception. Adopting a long-term perspective can mitigate some risks, provided you do your homework and remain calm when making decisions.
If you like a passive approach, often investing in your chosen crypto ETP may very well be rewarding. CoinShares offers a variety of Physical ETPs. Check out our Crypto ETP catalogue for more on performance, rewards, and costs. If you are within the Nordics, explore XBT Provider by CoinShares for Bitcoin and Ether ETPs in EUR and SEK.
Remember, XBT Provider’s ETPs include risks, including counterparty and volatility risks. They are complex products with a high risk of capital loss.
Image Credit: coinshares.com
