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Crypto Investment Strategy: Minimize Losses, Maximize Returns



24 Mar, 2021


Any experienced crypto trader would agree that you can get better returns, whether they’re long term or short term, by actively managing your portfolio. Now, by active, we don’t mean glued to your screen all the time and checking your investment apps on the phone throughout the day during conversations and meetings. This article explains some management strategies that can help you find a sweet balance to do it all and still maintain a life.

cutting Losses

“Loss Aversion” is what we call in behavioral finance when investors keep the losing assets in their portfolios while actively selling the “winners.” This tendency is why going against the crowd is one way to curtail your losses.

Measuring returns

Managing your cryptocurrency investments can be challenging because your assets may be scattered over different exchanges and cryptocurrency wallets. Additionally, you may have purchased some altcoins by using Bitcoin, some others by using the U.S. dollar (USD), and more by using cryptos such as Ethereum or Litecoin.

That’s why we recommend you keep a log of your investments and record any changes you make to your portfolio. Here are the three steps in determining your portfolio returns:

  • Measuring the amount you’ve invested
  • Measuring capital gains, which is the profit you make through buying and selling cryptos
  • Measuring income, which is the payment you get by holding some cryptos (if applicable)
  • To measure your capital gains and income, you can simply check your account information with your broker and exchange. With cryptocurrency exchanges, your capital gain information is normally under tabs labeled “Wallet” or “Funds.” Most exchanges provide the estimated value of your whole account either in Bitcoin or USD. If you have more than one account, you can add up these estimated numbers in your investment log and monitor them on a regular basis.

    Monitoring exchange fees

    To buy and sell cryptocurrencies, you need services like crypto exchanges and brokers. These companies mainly make money through transaction fees. Although it’s not recommended choosing an exchange based only on low fees, sometimes fees can become an important decision-making factor, especially for active traders.

    The fees can get even larger if you’re looking to convert a fiat currency to a cryptocurrency like Bitcoin and then send it to another exchange to buy another cryptocurrency by using Bitcoin, and so on. Fees can be the biggest downside to short-term trading strategies for cryptocurrencies.

    Here are some tips for keeping your exchange fees minimal while keeping your investment secure:

    • Buy your lump-sum major cryptos on more secure exchanges, which may have higher transaction fees.
    • For active trading, choose exchanges that offer lower rates for your specific cryptocurrency pair, but make sure to periodically store your profit on a hardware wallet
    • Consider active trading with the exchange’s native cryptocurrency. It may have a lower transaction fee than trading other cross-cryptos. For example, the Binance exchange offers cheaper trading options for its cryptocurrency, Binance Coin (BNB).
    • Always include the transaction fee when calculating your profit to be on top of your game. For example, if you buy 1 Ethereum coin for $200 but you pay $1.50 in transaction fees, you have spent $201.50 for your investment. While this amount doesn’t make a great impact for long-term investments, active traders can feel the accumulative fees over time.

    when to get out

    No matter how thoroughly you conduct your analysis, at times you may find that getting out of a bad investment is better than holding onto it. The following give a few of many general strategies when it comes to getting out of an investment.

    Don’t be greedy

    You may get a feeling that the market will continue going up after your profit target (PT) is triggered, and you may be tempted to readjust your PT prematurely. Sometimes the market will continue to rise. Sometimes it won’t. It’s better to be safe rather than sorry, so refrain from readjusting the PT orders way too often (unless you have a valid fundamental reason to do so besides just gut feeling).

    Let go of bad investments

    Every once in a while, you find yourself holding onto a coin that’s just not worth it. With worthy long-term investments, you tend to buy more coins as the price drops, but sometimes the cryptocurrency, its community, and its management simply don’t have a future. This point is when reexamining your fundamental analysis becomes important. When it becomes evident that this coin just isn’t going to bounce back, you may as well get out before your losses get bigger.

    Let the Profits Rise

    You have to deal with two emotions when the markets start to rise. One is regretting not buying more when the prices were down. The other is the temptation to sell and take profit before reaching your carefully analyzed profit target.

    What you need to keep reminding yourself is that emotions rarely lead to maximizing profit. At the end of the day, discipline is what really works. The following detail some tricks to avoid emotional investing.

    Buying low

    Being able to purchase at the lowest price every time you invest is highly unlikely. But studying the market psychology and historical price patterns can help you get close. You can use the Ichimoku-Fibonacci combination to gauge crowd psychology and identify key support and resistance levels. (Support is a price level where the market has difficulty breaking below; resistance is a price level where the market has difficulty breaking above.) For longer-term investing, prefer to use the daily chart for Ichimoku analysis.

    Since the cryptocurrency market doesn’t have enough historical data to rely on, sometimes the price continues to drop below the all-time-low levels, creating new lows. If you’re confident enough in the fundamentals of the cryptocurrency, the new lows can give you an opportunity to buy more at lower prices.

    You can use Fibonacci’s extended levels to identify new lows. To use these levels, you must first identify a trend where the price went either up or down for an extended period of time recently. Then drag the Fibonacci tool on your charting platform from the top to the bottom of the trend (if it’s a downtrend) and from bottom to the top (if it’s an uptrend). By doing so, the Fibonacci levels magically appear on your chart.

    patience is profitable

    Whenever you feel the adrenaline rushing through your head from looking at a chart or an opportunity, take a step back. Then change the time frame and look at the big picture. Do more fundamental research. Getting nervous is very easy when the markets take a dip and you’ve invested a bunch of money in an asset. Being patient can often be the ultimate path to making tangible returns.

    Identifying the peaks

    “Buy low and sell high” is the name of the game! But again, you’ve got to be really lucky to be able to take profit at the highest price every time you invest. But if you use historical data and technical chart patterns, you can stack the odds in your favor. For active trading and medium-term investing in the cryptocurrency market, you’ll find the Ichimoku-Fibonacci combo pretty useful. Other tools include technical chart patterns and key psychological resistance levels.

    For long-term investors, timing the profit taking can be a bit more challenging. The crypto market is an exciting new investment opportunity that a majority of people are just discovering. Just like with the dot-com bubble, the hype can lead to extreme volatility. You saw the results of the hype in 2017 when Bitcoin price surged over 1,000 percent and Ripple’s XRP gained a whopping 36,018 percent. We all know investors who sold right at the peak and became millionaires and others who bought at the peak and had to sit on their losses until the next surge. In this case, most investors who were able to sell at the peak are those who went against the hype and against the majority of the crowd.

    Technical chart patterns such as double bottoms, indicators such as Ichimoku, and going against the crowd don’t guarantee optimal results. These items are simply tools that increase the probability of identifying the best price to buy and sell. At the end of the day, you must conduct thorough risk management that applies to your personal financial goals and risk tolerance.

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