10 Best Crypto Trading Strategies
An emerging asset class with a total market capitalization of more than $1 trillion is sure to turn any investor’s head. Cryptocurrencies were one of the best asset classes in 2021.
An increasing number of investors, both individual and institutional, allocated part of their portfolio to digital assets, hoping to make money in the long term.
However, digital assets are subject to wild price swings, making them risky assets. Trading in this new space requires due diligence and a thorough assessment.
Let’s take a look at the top 10 crypto trading strategies in 2022.
- How Much Crypto Should You Own?
Many argue that the performance of the stock market is thriving and that there is no need to invest in a volatile emerging asset class such as crypto. There is some truth to that statement considering that the performance of stocks, bonds and bills averaged around 20% a year over the past three years.
A look at the performance of Bitcoin, whose price went from a few dollars in 2009 to $68,000 in November 2021, is all the incentives an investor needs. An opportunity like this should make you wonder “why not add crypto trading strategies to my portfolio and maximize my gains.”
A 2019 Yale study recommends allocating 4-6% of your portfolio in digital assets. Most financial advisors and money experts recommend that anywhere between 1% and 5% of a portfolio be invested in crypto.
On the other hand, crypto veterans and pundits may suggest that you allocate up to 20% of your portfolio in this industry.
- The right mix of storage
After allocating part of your portfolio to crypto, the next important decision in the list of crypto trading strategies is regarding the storage of purchased crypto assets.
You may be thinking how storage can be part of the strategy, but after reading further you will realize how properly storing cryptos can help you trade them more efficiently.
Crypto assets can be stored either in hot or cold storage. Hot storage refers to an online digital wallet, while cold storage refers to an offline wallet such as Trezor.
Experts usually suggest storing a majority of your crypto in cold storage to prevent it from being hacked and protect it from third-party liabilities.
Also read: Voyager’s Bankruptcy assumes losses for investors
Crypto traders can keep a small amount of crypto in their hot wallets to make it easy to move in and out of positions. It can also be used for short-term movements.
- Prioritize liquidity
An important measure of the crypto market is liquidity. There are hundreds of coins and tokens available for crypto trading. Prioritizing liquidity thus becomes an important part of crypto trading strategies.
Since crypto traders move in and out of positions quickly, they need to choose an asset with high demand so that it can be traded and make money.
An asset with great potential but less demand results in fewer trades. A trader’s money is then caught up in that trade, and is at the mercy of the market.
An important marker for measuring liquidity is the recent trading volume of a crypto-asset. The trading volume indicates how much cryptocurrency has been bought and sold, and indicates the overall interest in the asset.
- Harness volatility
The main difference between the traditional and crypto markets is the volatility factor. Since crypto is a new asset, hype and speculation surrounding the asset class can result in periods of increased volatility.
However, a certain range of daily volatility is considered healthy in the crypto market and is a great opportunity to make money. This can be considered as one of the most profitable crypto trading strategies.
However, in order to use this volatility to allocate and manage the risks associated with it, a trader must have sufficient experience and knowledge of the market to manage its price fluctuations.
Another way to profit from this volatility is to pay close attention to what is happening in the market and with the traded asset itself. This means following the news and all related blockchain updates as well as historical charts so you can identify new patterns.
- Invest what you can afford
To remember while dealing in the cryptocurrency market is to invest only what you can afford to lose. This is a very important rule to follow when venturing into crypto trading.
If you cannot withstand the potential complete loss of your crypto trade, it means that you cannot afford the risk of investing the amount you are considering.
Crypto beginners should take a cautious approach and allocate less of their investable income to the asset class. While experienced crypto traders and DeFi experts tend to have a higher risk tolerance, resulting in larger trades.
- Claim your winnings often
According to experts, crypto traders should book their profits often. Instead of speculating whether the price of crypto assets might go higher while exiting a position, a trader should regularly take profits to manage market volatility.
Having a predetermined target while deciding crypto trading strategies will further help the trader define entry and exit points.
Also read: Best Trading Techniques to Use During a Crypto Crash
- Diversify
One of the golden rules of trading in the crypto market is to diversify. By trading a variety of coins and investing in various crypto projects, an investor can significantly reduce their risk.
The crypto industry offers a huge bouquet of investments, including the “Internet of Things”, non-fungible tokens, DeFi projects and a wide variety of coin types.
For further diversification, investors can use different crypto exchanges, since different platforms offer different assets.
By spreading their investments across different digital assets and exchange platforms, crypto investors can reduce their overall risk profile.
Diversifying your portfolio is the best crypto strategy for beginners. Going all-in on one crypto asset can result in big losses.
- ETF
A notable trading option offered by the crypto market is ETFs (Exchange Traded Funds). A crypto ETF tracks the price of one or more digital tokens. Several Bitcoin ETFs and blockchain ETFs are available in the market.
ETFs provide exposure to crypto without the additional cost of ownership, and without any hidden costs, such as transaction and network fees.
Crypto ETFs also allow investors to diversify their portfolios without incurring the cost of each token.
- Dollar Cost Averaging (DCA)
The dollar cost averaging strategy involves investing a certain amount of money on a consistent basis. Investors make regular purchases and reduce the average cost.
This strategy makes it possible to invest money in both bear and bull markets. DCA also reduces the risk associated with the extreme volatility of the crypto market.
Using the DCA strategy helps remove sentiment from new positions in the market and also helps to ignore short-term for longer positions by buying crypto over a longer period of time.
Remember that DCA is a long-term crypto trading strategy and cannot be used to make quick profits.
- Trading Bot
Crypto trading bots are automated software that help you buy and sell cryptocurrencies. This software helps an investor to increase his income and reduce his losses.
Bots can take advantage of the fact that crypto markets trade 24/7. They also react much faster than investors.
The most popular type of bot is the arbitrage bot, which exploits the price difference across different crypto exchanges. Since the price of Bitcoin varies slightly from exchange to exchange, the robots that can move fast enough can beat exchanges that are late in updating their prices.
This is one of the more popular crypto trading strategies in 2022, especially in the midst of this crashed market.
CONCLUSION
While all these crypto trading strategies may seem simple on paper, navigating the volatile terrain of the crypto market is quite difficult.
Every investor should carefully research their investments and trading strategies before investing money.
A beginner crypto trader can join telegram groups or find mentors who have been in this business for a while to help them formulate their crypto trading strategy.
Every investor should carefully consider how much money they are ready to trade and lose while formulating their trading strategy.
