Crypto trading strategies are a tool for investors to better manage both short-term trades and long-term investments. Having a clear trading strategy that combines a variety of analytical tools can enable you to develop a well-informed and consistent approach to navigating the crypto market.
Building an investment strategy that combines insights from both technical and fundamental analysis can enable investors to monitor market conditions, understand trends and identify patterns to better predict future price movements.
There are many indicators used by crypto investors to inform their strategy, manage risk and identify opportunities for return.
Why is a crypto trading strategy important?
For crypto investors, having a clear trading strategy that combines a range of analytical tools can help to develop a well-informed and consistent approach to navigating the crypto market.
A considered strategy may include having a diversified portfolio, which allows investors to identify opportunities and trends while mitigating the risks of a volatile market.
Crypto fundamental and technical analysis
Most trading strategies rely on insights from both fundamental and technical analyses for the assessment of the market and to identify potential investment opportunities.
Fundamental analysis relies on the “real-world” information about cryptos, such as white papers, company reports, global news stories or market sentiment. These factors can be used to determine an asset’s value in comparison to the broader geopolitical context.
Tip: When planning a well-balanced crypto portfolio, investors should rely upon a combination of fundamental and technical indicators.
Technical analysis relies on data and patterns formed on crypto charts to make predictions about future price movements. Various charts and charting tools are used to achieve this, each with different indications regarding the performance of a crypto. Short-term crypto traders can use these indicators to time their entry and exit points.
Crypto trading strategies
Different strategies and indicators can be more or less useful in different trading scenarios and for different kinds of crypto traders. For short-term crypto trades, certain technical indicators are more popular because they offer niche insights to traders.
For investors considering long-term crypto investments, their strategy is more likely to include certain fundamental indicators that reflect market sentiment. That way, they can get insights into the broader crypto market.
Moving averages
Moving averages and trendlines are technical indicators that can help investors predict the direction of a cryptoasset’s price over time. This can allow them to establish long-term trends and potentially understand when it is best to open or close a position.
RSI
The relative strength index (RSI) is a momentum indicator designed to measure the relative strength of a crypto at a given time, against its price history. It is a technical analysis strategy that can be used to identify overbought and oversold market conditions and indicate potential market entry and exit points.
Event-driven
Event-driven fundamental analysis tools monitor market sentiment and offer insights into events that might influence sharp price movements in the short or long term. These events are usually more external or macroeconomic. The Crypto Fear and Greed Index can be used to analyze such and get a sense of the general feeling among investors.
Long-term crypto investment strategies
There are some popular strategies that investors may rely on for long-term investment in the crypto market. The most popular strategies used across the market include HODLing, DCA and staking.
HODLing
HODLing refers to buying and “holding” a cryptoasset for longer periods. For a “HODL” strategy to be successful, investors need the price of the crypto to rise over time so that they can profit from the difference.
Tip: Some people think that HODL originated as a typo, while others argue that it stands for “Hold on for dear life”.
DCA
Dollar-cost averaging (DCA) is when an investor incrementally buys into the market over time. Investors use DCA to average the price at which they buy into a cryptoasset, helping them to hedge against an unfavorable buy-in price at the height of a sharp price fluctuation.
Staking
Staking is a long-term strategy that investors can use to earn passive income from their crypto holdings by lending them to a Proof of Stake (PoS) blockchain network.
Staking is common, but not limited to decentralized exchanges. These exchanges have processes in place that enable investors to lock up certain cryptocurrencies fairly easily and earn passive income from their investments.
Popular crypto investment strategies
In addition to staking, there is a vast array of investment strategies that are unique to crypto investors, such as yield farming, investing in ICOs, or copy trading. Let’s explore these essential strategies below.
Yield farming
Yield farming is another strategy that crypto investors can leverage to create passive income from their assets. Crypto investors can lock (or “loan”) their crypto to a decentralized finance (DeFi) project or platform for a set period and earn interest-like rewards as a result of providing them with liquidity.
Investing in ICOs
Investing in Initial Coin Offerings (ICOs) provides investors with the opportunity to find and invest in crypto projects during their earliest days. This presents the chance to find undervalued assets with the potential to grow in size, market capitalization, utility, popularity and price.
Copy trading
Copy trading is a popular strategy among investors of all asset classes, but can be especially popular for those still finding their feet in the crypto market. It allows investors to utilize the knowledge of others by emulating the moves of pro traders in real time.
Exchanges such as eToro offer automated copy trading, which is considered more user-friendly than other options.
How to select a crypto investment strategy
For a crypto investor to determine the investment strategy that best suits their needs and goals, they should consider which type of investor they are and identify which indicators are most relevant to them.
- Value Investing: Using fundamental and technical analysis to find undervalued cryptoassets.
- Growth Investing: Selecting cryptoassets that are expected to grow at an above-market-average rate.
Alternatively, some investors will consider “momentum investing” in line with market sentiment, or “passive investing” using methods involving staking or yield farming.
Final thoughts
Investors should develop a trading strategy in line with their investment goals and risk tolerance, using a combination of technical and fundamental performance indicators for a well-rounded insight into the crypto market.
Typically, investors who are new to the crypto market should select an investment strategy that prioritizes portfolio diversification and risk management, while also offering the opportunity to leverage market conditions favorably.
Visit the eToro Academy and learn more about trading and investing.
FAQs
- How can I test a crypto strategy?
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Investors do not need to risk capital when testing out a crypto investing strategy. Using a demo account is a risk-free way of using virtual funds to simulate an open trade. When using a new strategy for real, it is always advisable to start small and increase the size of your position gradually.
- How can I determine my crypto risk tolerance?
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Crypto investors should look inward to determine their risk tolerance and also be certain of the type of investor they are (active or passive), as well as their investment goals (short or long term). Investors should never risk more than they can afford to lose. They should also consider their budgets and portfolios when making decisions.
- How often should I change my crypto strategy?
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There is no ideal frequency for changing a strategy. So long as it’s working, there’s hardly a need to change it. However, crypto investors should remain open to adjusting their approach based on market conditions or personal changes. While predicting the future of crypto is impossible, analytics can help investors to make informed decisions.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.