In recent years, Bitcoin became one of the most attractive assets on the market. Compared to gold or any other stocks, the top digital currencies by market capitalization significantly overrun the return on investments, or ROI. Long-term cryptocurrency investment can be a very advantageous strategy which is often recommended by Warren Buffet and a number of other influential Wall Street investors and millionaires. This article will guide you through the most important details that are worth taking into account if you are interested in designing a profitable long-term portfolio.
Bitcoin has been traded since the first crypto exchanges were introduced almost a decade ago. At the same time, it became well-known and influential only a few years ago when the cryptocurrency and ICO rush has begun all around the world. In early January 2017, Bitcoin has entered the cryptocurrency market at about $1000 price level and rapidly grew to almost $19 800 by December, which is considered to be Bitcoin’s highest price of all times. 20x growth in less than 12 months has triggered fear of missing out among traders, investors, miners and anyone who had the slightest interest in virtual coins and wanted to strike it rich in a short period of time.
While Bitcoin’s popularity was boosted by enthusiasts and newbies who wanted to buy this promising cryptocurrency for the first time and enter the market, experienced investors were not planning on selling their Bitcoin capital. In other words, they followed a long-term investment tactics, also known as HODLing, which is undoubtedly the most widespread cryptocurrency investment approach. The concept was first introduced several years ago, when Bitcoin was in a bear stage and one of the investors wrongly spelled “hodling” instead of “holding” to express his unwillingness to exit the current position. HOLD became a full-fledged cryptocurrency tactics that is determined by sustaining a position and expecting that it would grow in price soon.
At first glance, long-term portfolio is quite an obvious strategy which suggests embracing a long-lasting approach to investments. In the stock market language, “long-term” normally means investments that last more than couple of years. At the same time, Bitcoin and other digital currencies are also infamous for their high volatility which signifies that this approach should be taken with caution by inexperienced or impatient investors. In the cryptocurrency world, long-lasting investments are those that last more than several months and up to one year. For this reason, it is also highly advisable to consider risk minimisation recommendations.
Advantages worth taking into account
XXth century history of modern economy has demonstrated that long-term tactics is profitable. According to statistical data provided by S&P 500, the annual return from 1927 to 2019 was around 12%. This proves that financial markets tend to grow in long-term perspective despite all possible downturns, black swan events and negative trends. Without a doubt, cryptocurrency market is very different from traditional financial markets. At the same time, HODL is still considered to be the most well-established strategy even in the young and volatile crypto world.
Low trading fees
Your trading fees depend, among other factors, on different trading strategies. The more active trading approach you will follow, the bigger transfer fees will be deducted from your potential profit on the market. Long-term investment tactics does not imply high (if any) trading fees as all you need to do is just to HODL. Only the primary transaction fees will be taken into account.
Active trading strategies require a lot of research and dedication. Trading regulations and restrictions, malware attacks and global macroeconomic events have a significant effect on Bitcoin’s rank on the market. That’s why it is essential to stay up-to-date with the most recent cryptocurrency news and updates in order to foresee bull runs, upward trends and profitable periods. For example, 26th of October 2019 was a major Bitcoin pump which brought around 40% ROI to all investors. Unlike active traders, long-term strategists do not have to stress over those events and possible risks. At the same time, there are a lot of methods that can minimize possible long-term risks, such as dollar-cost averaging, gradual investment, etc.
Long-term investing also means that your digital funds will be stored more securely and less exposed to attacks and frauds. Keeping your virtual coins offline substantially reduces the chances of external threats and risks. Hackers can not steal digital funds from your cryptocurrency hardware wallet if it is kept in an offline regime. While software wallets can be vulnerable to malware or attacks, hardware wallets can go online when users want to trade or perform any other operation and then be turned offline to ensure portability and great security.
Digital coins for the long-term portfolio
It is important to choose the most appropriate cryptocurrencies for the long-term portfolio and outline an effective plan for its building. Thus, there are several crucial indicators which will help you to make a right choice.
Also known as market capitalisation, this indicator illustrates the share of market cap that a digital currency has relative to the whole market. The bigger market capitalisation is, the more influential a particular coin becomes. Market share is a great factor which can help to determine the prospects of a particular cryptocurrency in the long run. Thus, a well-designed long-term portfolio should not include cryptocurrencies with a low market share (lower than $1bln). Coins with an insignificant market capitalisation are more unstable and easy to manipulate.
When evaluating long-term perspectives of a particular digital currency, we need to understand whether the idea behind it has a potential to contribute to a certain field (finance, banking, e-commerce, education, etc). It can also be a good idea to check the project’s website, white paper and community. For example, Binance Coin also has a great applicability, because it plays a crucial role in maintaining the Binance ecosystem.
Transactions and daily volumes
Cryptocurrency’s daily volume and a total number of successful transactions is also an important indicator if you want to design a good investment portfolio. Well-established cryptocurrencies have a large daily volume, which should not be confused with spam transactions or zero-value.
Top 4 cryptocurrencies for your investment portfolio
80% of low-risk portfolio
Bitcoin is the most well-known cryptocurrency on the market that should be considered by every investor interested in a long-term profit. It was launched in 2009 with the main goal to create a viable alternative for traditional banking, finance, money and fiat.
7% of low-risk portfolio
With a great market capitalisation and daily volume, Ethereum is more than just a well-known cryptocurrency which is generated through mining and farming. It also stands for an innovative blockchain network powered by smart contracts that allows users to build decentralised applications and create tokens.
6 % of low-risk portfolio
ZCash is a digital currency which prioritizes advanced transparency, privacy and anonymity. It is based on zk-SNARKs, or Zerocoin protocol, which keeps all executed transactions entirely transparent and protected. The platform is kept secure and does not disclose the users’ personal records, such as identity, passwords or amounts transacted. Information on transactions is encrypted without the need to disclose spend-parties. Users can apply zk-SNARKs mechanism to ensure that the operation was open and transparent.
4% of low-risk portfolio
Monero is an innovative privacy coin which focuses on the best security protocols as its key characteristics. This virtual currency involves a special type of cryptography to make sure that a maximum number of its transactions become inconspicuous and unlinkable. Monero is probably the best coin which involves security settings like stealth address, Tails OS and ring signature. Monero can be purchased via different cryptocurrency exchanges, such as Godex.io.
Portfolio Design and Risk Evaluation
Global market investors with neural risk attitude normally design their long-term portfolio with 50% bonds and 50% equities. The latter are more volatile than bonds but in the long run they bring higher profit. In this case, investors with low-risk attitude would spend more on bonds as a more stable option.
Cryptocurrency investors generally believe that Bitcoin is the best option for long-term strategies because it is more stable and predictable compared to the other altcoins which often depend of Bitcoin’s position on the market. All cryptocurrencies can be divided into four risk-related groups: low risk (usually referred to Bitcoin HOLD strategy), medium risk (top cryptocurrencies with a high market cap that are used for active trading), high risk (altcoins) and gambling (newly emerged coins with low market caps). Thus, it always depends on a particular investor, his goals and risk profile when it comes to building a good long-term portfolio.
With thousands of different cryptocurrencies available on the market, it is important to consider as many factors and indicators as you can to ultimately make the best decision on your long-term portfolio. Your final trading portfolio should also estimate your attitude to risk and speculations.