With Bitcoin racing through the charts, many people are wondering if and how to get in on the action. In 2017, we heard stories of people selling their houses and going all in on Bitcoin, and losing everything in the end.
Now, again, when you scour the web, you’ll come across lots of videos and testimonials of people going all in on Bitcoin. We’d like to warn against this.
Bitcoin has absolutely changed since 2017, as we’ve recently explained in detail in a research paper on Bitcoin, and while there is always a risk of a mass sell-off, there is now considerably more support for Bitcoin and we do expect any large price drop to be met with committed investors buying the dip.
However, irrespective of how the market develops over the short term, in this article we want to talk about how you can build a position in Bitcoin that should generate a good outcome in the long term – provided that Bitcoin will be successful in the long run, and assuming this belief is your basic premise as a long term investor.
When it comes to investing in Bitcoin, perhaps it’s better to think of it as a long term process, where buying into the coin is done over a longer period of time. It’s all about balancing your overall portfolio, deciding on the risk you’re willing to take, and the amount of capital at your disposal.
Bitcoin’s price moves a lot, not just because people are emotional about bitcoin, but more importantly because different participants apply different strategies – or in some cases no strategy at all.
We are often presented with a choice between HODLing, hedging, trend trading and breakout trading. But as with all investment strategies, diversification is key and that also applies to your methodology.
For example, if you have decided to put 25% of your overall holdings into investments, and say 5% in total is allocated to bitcoin, one way to build up compound is to faithfully deposit 5% of your disposable income into Bitcoin. An option could be to be relatively agnostic about the price and simply buy on a fixed day or you pick a good moment in, say, a three day window. This way, your entry price averages out over the year, giving you a solid basis for growth – assuming once again that Bitcoin has a successful future ahead.
The bitcoin you hold can be held in cold storage or you can place it in a savings product on AAX, where you can accrue an interest on your Bitcoin holdings every minute.
Hedging and Trend Trading with Futures
In addition to this, you could potentially allocate a percentage to futures trading.
When Bitcoin is in trouble, and on a downtrend, placing some bitcoin into a low leverage short position, might compensate for the downtrend, yielding more Bitcoin on the way down. Likewise, during an uptrend, a low leveraged long position might amplify profits.
Learn how to trade futures here.
This process becomes even more interesting once you start diversifying across cryptocurrencies. Correlation between Bitcoin and Ethereum is quite high, but could be a way to share risk across protocols, and in addition, allocating a small portion to less popular coins – like penny stocks – might add some extra power to your crypto portfolio.
The key to trading is not about making as much money as possible in the shortest amount of time. The first priority is capital preservation: how do you make sure that if one market crashes or one industry suffers, you don’t lose you house? And secondly, it’s about growing your capital steadily.
Bitcoin is becoming increasingly popular and we do believe it is worth considering as part of a way to hedge against inflation and turmoil, but now that the market is changing, institutions are getting involved and Bitcoin is coming to its proper place in global finance, it’s time to upgrade our trading habits and demonstrate true (and lasting) ownership.