Crypto trading strategies are a tool for investors to better manage both short-term trades and long-term investments. Understand why a trading strategy is important in a volatile market, consider some popular strategies and learn about some crypto-specific approaches to investing.
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 trading strategy important?
For crypto investors, having a clear trading strategy that utilises a range of analytical tools can help to develop a well-informed and consistent approach to operating within the crypto market. A considered strategy can better facilitate a diversified portfolio that allows investors to identify opportunities and trends while mitigating the risks of a volatile market.
Fundamental and technical analysis
Most trading strategies rely on insights from both fundamental and technical analysis for the assessment of potential investment opportunities.
Tip: When planning a well-balanced crypto portfolio, investors should rely upon a combination of fundamental and technical indicators.
Fundamental analysis relies on the “real-world” information that is available about cryptoassets, such as whitepapers, company reports, global news stories or market sentiment. These factors can be used to indicate the value of an asset relative to the wider geo-political context.
Technical analysis relies on data and patterns formed on crypto charts to make predictions about future price movements. Various charts and charting tools exist to offer different indications regarding the performance of a cryptocurrency. Short-term crypto traders may be able to use these indicators to time entry and exit points.
Crypto trading strategies
Different strategies and indicators can be more or less useful in different trading scenarios. For short-term crypto trades, certain technical indicators prove popular due to the insights they can offer.
For investors considering longer term crypto investments, their strategy is more likely to include certain fundamental indicators that reflect market sentiment, as these can be a useful tool for insights into the wider context of the market.
Moving averages
Moving averages and trendlines are technical indicators that can help investors to plot the course of a cryptoasset’s price over time. This can allow them to establish long-term trends and potentially understand when 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 drive sharp price movements in the short or long term. For example, the Crypto Fear and Greed Index can be used to analyse the general feeling amongst investors.
Long-term crypto investment strategies
There are some popular strategies that investors may rely on for long-term investment into the crypto market.
HODLing
HODLing refers to buying and “holding” a cryptoasset for longer periods. For a “HODL” strategy to be successful, investors rely on the price of the cryptocurrency rising over time.
Tip: Some people think HODL originated as a typo, while others argue it stands for “Hold on for dear life”.
DCA
Dollar cost averaging (DCA) is when an investor incrementally buys into the market over time, rather than making a singular deposit at a particular price. Investors DCA to average the price at which they buy into a cryptoasset, to protect against an unfavourable 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 (interest-like rewards) from their crypto holdings by lending them to a Proof of Stake (PoS) blockchain network. Staking is common on, but not limited to, decentralised exchanges; most exchanges have processes in place that enable investors to stake certain crypto holdings fairly easily.
Please note that staking services are not available to UK-residents who registered with eToro on or after February 8 2022.
Please refer to the Terms and Conditions for further information.
Popular crypto investment strategies
In addition to staking, there are a vast array of investment strategies that are unique to crypto investors.
Yield farming
Yield farming is another strategy that crypto investors can leverage to create passive income from their holdings. Crypto investors can lock (or “loan”) their crypto to a decentralised finance (DeFi) project or platform, for a set time period, and earn interest-like rewards as a result of providing them with this liquidity.
Investing in ICOs
Investing in Initial Coin Offerings (ICOs) provides investors with the opportunity to find and invest in crypto projects in their infancy. This presents the chance to find undervalued assets with the potential to grow in size, utility or popularity, and thus potentially in price.
Copy Trading
Copy Trading is a popular strategy amongst investors of all asset classes, but can be especially popular for those still finding their feet in the crypto market. It allows investors to utilise the expertise of others by emulating the moves of other traders in real time. It can be automated, so is considered more user-friendly than other options.
How to select an 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 that are new to the crypto market should select an investment strategy that prioritises portfolio diversification and risk management, while also offering the opportunity to leverage market conditions favourably.
Visit the eToro Academy and learn more about trading and investing.
Quiz
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 position. 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 take an introspective approach to determining their risk tolerance, considering the type of investor they are (active or passive) and their investment goals (short- or long-term). Investors should never risk more than they can afford to lose, factoring in their budget and portfolio diversification into all of their decisions.
- How often should I change my crypto strategy?
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There is no ideal frequency for changing strategy, but crypto investors should remain open to the idea of adjusting their approach as market conditions or personal circumstances change. Predicting the future of crypto is impossible, but analytics can enable 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.