- Rash dive in during the 2017 bull run....and hasty retreat in the 2018 apocalypse - ✅
- Gentle dive in during the end of 2020 bull run....and still riding strong post the 50% pull back in the 2021 spring/summer - ✅
At this point the sea of red candles adorning every wallet or exchange i've parked my money into are as expected as the morning sun. They not only represent buying opportunities (for those who have any fiat left to contribute to the altar of crypto) but also reflect an evolution in the utility of said cryptocurrencies.
In the first market crash I mention (2017/18 and the plethora before that) there weren't many ways to spend our magic internet money apart from speculation. Fast forward to today and innovation in the space has given rise to applications such as decentralised finance (DeFi) and Non-Fungible Tokens (NFTs) amidst myriad use cases being brought to fruition.
So what approach maximises returns whilst simultaneously minimising all the costs of trading in crypto?!
HODL
The old school approach is to hold on for dear life (HODL) a favourite coin or token and never sell. Typically one of the blue chips like bitcoin or ethereum although a rising proportion of allocations are going towards altcoins with specific niche audiences and functionalities.
Perspective: long term
Fees: minimal transaction fees, minimal taxable events
Risks: ignores opportunities that present themselves as the market matures and new modes of interaction become possible
Verdict: History lies on the side of the HODL'ers for now given BTC performed ten times better than any other asset over the last decade
Dollar Cost Average
DCA assumes, whatever position you start from, that one will continually invest a specific amount on an ongoing basis so as to reduce the impact of market volatility and cater to ongoing income flows (e.g. salary).
Perspective: long term
Fees: ongoing transaction fees, minimal taxable events (as long as nothing is sold)
Risks: fails to take advantage of opportunities in the market that present themselves (e.g. market crash)
Verdict: a powerful mechanism which minimises emotional and/or attentional depletion as well as reducing the impact of market timing
Buy the Dip
By now I would be aghast if you hadn't heard the Warren Buffet line "buy when others are fearful, sell when others are greedy". This was previously coined more rapaciously by Baron Rothschild who in the 18th Century suggested "the time to buy is when there's blood in the streets". My interpretation would be to accumulate fiat and/or stablecoins until the price of an asset dips below its expected value, then invest wholeheartedly.
Perspective: medium term
Fees: less transaction fees than DCA, some taxable events (specially if selling at perceived market tops to accumulate for the next dip)
Risks: requires nuanced insight and higher level judgement with regards to what constitute's a "dip" vs. a crash or rugpull.
Verdict: highly behavioural, emotional and attentional with significant impact of market timing, requires regular market monitoring
Trading
The other classic old school approach is to trade the markets drawing on a variety of analytical techniques, skills, resources and capabilities to discern arbitrage opportunities and leverage the behavioural nature of a volatile, nascent market to capitalise on market trends and idiosyncrasies.
Perspective: short term
Fees: maximum transaction fees, maximum taxable events (every transaction), high time and attention costs
Risks: requires technical and/or fundamental analytical skill to competitively deliver risk adjusted alpha
Verdict: There are estimates that over 70 per cent of traders lose money, especially in the long run, for advanced (highly capitalised) users mostly
Staking
A new age branch of HODL is to stake! This means taking your liquidity and parking it on a platform (typically an exchange) such that you can earn interest for providing that liquidity to others and foregoing it yourself. Not only does your capital appreciate (or depreciate) as it would in your wallet based on the intrinsic value the market determines that coin is worth BUT you also earn passive income whilst contributing to the stability and growth of that coin. Moreover, it seems staking is environmentally friendlier than mining so there's that.
Perspective: medium term
Fees: more transaction fees, taxable events (every interest payment is taxable, so is un-staking!)
Risks: the platform you stake on could collapse, or the APY could change (common), and lock-up periods significantly curtail liquidity.
Verdict: on balance an effective model for earning rewards whilst HODLing, interactions with exchanges also sometimes yield airdrops!
Diversify
A Bloomberg article reflects on the fact that crypto is highly correlated with the stock market and draws the conclusion that it offers minimal hedging against money markets. Having a predetermined allocation of traditional assets, with have a much longer track record, is certainly no bad idea. There is also a new wave of riskier, less liquid, assets such as NFT's which embody a new frontier in the cross-section between culture and finance.
Perspective: long term
Fees: high transaction fees, some taxable events (when selling or rebalancing a portfolio)
Risks: protects against the downside but mitigates the upside, especially when one has conviction! Concentrated bets yield max profits (or losses).
Verdict: for investors early in their journey, those who are even moderately risk averse this is a no brainer. Makes sense for most everyone else too.
**
This is not an exhaustive list, with more complex manoeuvres like using options and derivatives on the table for more advanced investors than I. One of the key insights to be mindful of is that bear markets only represent paper losses - until you sell!
For instance long in the tooth BTC holders are now highly experienced with severe drops and rises in value. The majority held on to their BTC in March 2020, or added to their bags, during the pandemic related market crash down to below $4k before rising to $60k later in the year. There are a plethora of risks in the space as it matures so doing your own research (DYOR) is a maxim well worth repeating.
The ideal approach will likely vary on account of personal risk preference/tolerance, time horizon, as well as the specific goals (financial or otherwise) being targeted. However given that is a really weak conclusion i'll get off the proverbial fence and add that i'm going big on NFTs, diversifying across traditional assets and cryptocurrency assets, as well as staking as my big three.
Would love to hear yours!
- Tell me whats what in the comments.
- Give me a shout on twitter
- Check out my mum’s digital generative art.
- Check out my NFTs.
