For much of cryptocurrencies existence, short-term trading strategies that seek to benefit from high volatility and sudden momentum shifts defined the cryptocurrency market. But with the recent arrival of institutional investors, as well as new thinking about how crypto could represent an entirely new asset class, that appears to be changing.
More thinking is going into how to make crypto part of a long-term, well-diversified portfolio, and that's good news for individual investors everywhere. So if you're thinking about investing in cryptocurrency for the long term, here's a closer look at three popular investment strategies.
1. Buy-and-hold investing
The most straightforward approach to crypto investing is a simple buy-and-hold strategy. This is exactly what it sounds like: You find one or more cryptos that you like, and you hold on to them forever. The thinking here is that many of the top cryptocurrencies will appreciate greatly over the long term, even if they are prone to high volatility over the short term.
Of course, the one crypto that stands out here is Bitcoin (BTC -0.44%), which remains the largest cryptocurrency in the world with a $1.3 trillion market cap. It is often the first crypto that both individual and institutional investors buy, and for good reason. Over the past decade, it has been one of the best-performing assets in the world.
The key here, though, is to commit to a long holding period. Cathie Wood of ARK Invest recently crunched the numbers and determined that, as long as you are willing to hold on to your Bitcoin for at least five years, you are likely to make substantial gains.
With Wood now predicting that Bitcoin could soar to a price of $1 million by 2030, this five-year holding period has particular significance for anyone thinking of becoming a crypto millionaire one day.
2. Dollar-cost averaging
A related crypto strategy is known as dollar-cost averaging. While "buy and hold" typically implies a single large purchase, a dollar-cost averaging strategy implies a series of smaller, recurring purchases.
The key idea here is that you commit to buying a set dollar amount of a particular cryptocurrency on a regular basis, regardless of market conditions. For example, you might decide to buy $100 worth of Bitcoin every month.
Dollar-cost averaging can be like putting away money frequently in a piggy bank. Image source: Getty Images.
This strategy can be particularly effective if you are looking to take the emotion out of investing. Instead of checking your portfolio every few days, you might be checking your portfolio only once a month. This means you can block out market volatility and avoid getting unduly influenced by gyrating crypto prices.
This is more important for cryptocurrency investors than equity investors, simply due to the much higher volatility in the crypto market. It can be nerve-racking at times to see your Bitcoin position oscillate by 10% or more during a single 24-hour period.
3. ETFs for diversification
Lastly, exchange-traded funds (ETFs) could be an effective way to diversify a long-term cryptocurrency portfolio. They are particularly popular with investors who would prefer not to invest directly in the crypto market.
The new spot Bitcoin ETFs, for example, are a way to invest in the digital currency the same way that you would invest in tech stocks. Two of the most popular spot Bitcoin ETFs right now are the iShares Bitcoin Trust (IBIT -1.58%) and the Fidelity Wise Origin Bitcoin Fund (FBTC -1.51%).
Based on the initial success of the spot Bitcoin ETFs, the expectation is that other cryptocurrencies will soon get their own spot ETFs. For example, the same Wall Street investment firms that brought the spot Bitcoin ETFs to market are trying to bring new spot Ethereum (ETH -0.49%) ETFs to market.
And don't forget about the ability to use more-traditional ETFs for crypto market diversification. For example, you could invest in the Valkyrie Bitcoin Miners ETF (WGMI -1.16%) if you are looking for broad exposure to the crypto mining sector. Or you could invest in an ETF such as the Amplify Transformational Data Sharing ETF (BLOK -0.58%) if you are looking for broad exposure to blockchain technology companies.
The key idea here is diversification. It's much easier to diversify your portfolio with a single ETF than it is to buy a handful of different stocks. Simply stated, you could buy a single Bitcoin mining stock, or you could buy a basket of the top 20 Bitcoin mining stocks. Thus, ETFs can be very useful if you are confident in the long-term potential of an industry, but less confident about what the big winners are going to be.
Keep a long-term focus
Just remember that it's important to keep a long-term focus when investing in crypto. It's easy to get distracted by the latest meme coins or short-term momentum plays. By following one of the strategies outlined above, you can avoid this. Instead, you can focus on creating a long-term, well-diversified portfolio that builds real wealth.
