Crypto investments are at an all-time high as more investors flood the market in the hope of getting more bang for their buck. While the most popular route for investors is to dip their toes in high-cap crypto waters, there are other ways that investors could use to maximise their investments.
For newer investors, it is vital that they learn the best techniques to get the most out of their digital assets in order to minimise their risk and maximise potential returns. While the crypto market is inherently volatile, the following techniques provide insight and guidance to help you on your crypto investment journey.
Seasoned crypto investors will tell you that one of the best ways to reduce your risk is to diversify your portfolio. Not only do you protect your investment by doing so, but you also give yourself a better opportunity to improve your returns. This technique is commonly known as diversification or asset allocation. The key concept is to spread your investments to average out losses if the market dives.
With diversification, crypto investors typically choose different types of cryptocurrencies across a multitude of categories so that they can benefit when one or more of these experiences a spike in value. Moreover, it spreads the risk of losses when one or more cryptocurrencies experiences a drop in value.
Common categories for diversification include:
· Store of value such as BTC;
· Non-fungible tokens (NFTs);
· Smart contract technology such as ETH;
· DeFi such as UniSwap;
· Payment coins such as LTC; and
· Private coins such as XMR.
Make sure to study the market before committing to your favoured combination. It must also be noted that while diversification may act as a safety net for your crypto investment, it may also reduce your returns — considering all your eggs are not in one basket.
Decentralised Finance (DeFi) staking is a technique that the more technically-minded crypto investors often use. With DeFi staking, investors lock up their crypto assets in autonomous platforms referred to as decentralised applications — DAPPS — where they gather interest annually.
DeFi is an element of the crypto industry that has taken traditional financial services — such as insurance and loans — and put them on the blockchain. The DAPPS that these services are run on are not controlled or regulated by any authority or intermediary but are rather managed entirely by their own communities of users. Additionally, these services are executed automatically through computer programs commonly referred to as smart contracts.
For investors who plan to buy cryptocurrencies with the intention of only holding onto them, DeFi staking is a fantastic option to generate annual returns on your crypto deposits. This is akin to depositing money into a bank savings account and accruing interest, except the interest levels with DeFi staking, are far superior to traditional financial institutions — making this an attractive option for many crypto investors.
However, you must note that DeFi platforms are not regulated, so there is no protection for investors in the event of fraud or theft. Another point to consider is that third-party auditors do not audit many DeFi platforms, so investors cannot be guaranteed that the DeFi platform is free of bugs or flaws that hackers could exploit. With that being said, you must perform your due diligence before committing to DeFi staking.
Hedge Crypto Trades
Hedging is an investment strategy that reduces risk and losses when markets are volatile. Investors typically make a primary trade in one direction and a secondary trade in the opposite direction. The key concept to this technique is that if the market swings heavily against you, your second investment will return tidy profits to offset the losses of your first investment.
For crypto investors, they would hedge crypto trades by either going long or short. For example, two parties would agree to trade a specific asset at a predetermined price and date. By going long, the investor predicts the price of a specific asset will rise, so then agrees to buy it at today’s price at a predetermined date in the future. By going short, the investor predicts the price of a specific asset will drop, so then agrees to sell it at today’s price at a predetermined date in the future.
When you consider this arrangement, it becomes clear that this technique should only be used by the most experienced investors — even more so in a highly volatile crypto market. There is always the chance that your prediction may not materialise, and that could prove to have devastating consequences for your investment. But, on the flip side, there is incredible potential to rake in some big profits if you get it right.
With the crypto sphere in a constant state of evolution, there will always be amazing opportunities to maximise your investments. We hope that the techniques described above help you to stretch your crypto investments and provide a foundation for great returns on your investments. As always with crypto investments, you must be willing to take some element of risk so always invest with funds that you can afford to lose — Good Luck!
While our team at Wisly is highly knowledgeable on cryptocurrencies, please note that we are not financial advisors and are not licensed to provide guidance and/or advice on crypto markets. The information that we provide is merely our opinion. Therefore, it is important for you to conduct your own research before committing to any cryptocurrency investment. You can, however, use established platforms like Wisly to track and analyse your crypto investments.