The most popular cryptocurrency, Bitcoin, has been around since 2009. Although seasoned investors have been in the crypto markets for nearly as long, the exponential growth in popularity of Bitcoin and other cryptocurrencies soared in recent times.

During the height of the coronavirus pandemic, when the US government announced a $2 trillion relief package, a significant portion of that found its way into the cryptocurrency market.

Bitcoin reached its all-time high in April 2021. At over $64,000, the largest cryptocurrency had clocked 900 percent returns in one year. These stats made the retail investors, who had not yet joined the frenzy, come rushing towards these highly volatile assets. Several newer investors made decent profits. However, for a lot of other investors, the story was a bit different. Such participants had to exit the market with bitter experiences after losing their entire capital.
Over time, crypto markets have matured. Several hedge funds and top investment banks are actively participating in these markets now. Cryptocurrencies are rapidly evolving into an asset class. They offer the perfect amalgamation of diversification and add ‘alpha’ to portfolios.

When it comes to investing, it is often the simple things that emerge as winning combinations. Rather than looking for 10x returns in a few days, investors should be looking to make 6-7 percent on their investment per month. Reinvesting these profits would result in 100-125 percent annualized returns. This way, investors would essentially be doubling their capital every year.

Some investors might argue regarding the perfect entry or exit from the crypto market. It is best to assume that nobody can time the markets perfectly. Therefore, the prudent thing would be to take a simple approach towards investing. This method is called ‘Dollar Cost Averaging.’ It refers to systematically investing in regular intervals. This strategy removes the painstaking work of attempting to time the markets. It is a simple yet incredibly powerful way to build long-term wealth.

The exit strategy could be a bit tricky for the DCA style of investing. One way to exit could be following the market sentiments. Although this involves taking time to do a bit of research, it is worth the time and effort. Markets usually do not work on consensus.

Another exit strategy could be doing the reverse of what everyone around is saying. If everyone around is saying that markets are bound to go higher, the opposite happens. One of the most recent examples would be one of the highest liquidation events a couple of weeks back. El Salvador started using Bitcoin as legal tender, and the president even tweeted to commemorate the same. It was instantly re-tweeted several times. People were waiting for a massive rally, and markets crashed within an hour. One popular saying across the financial markets is, “Buy on the rumor, sell on the news.”

Technical analysis is another popular strategy followed by millions of traders and investors. Since so many people follow this technique to enter and exit the market, it works a majority of the time. The most simple tools in technical analysis are the RSI and MACD indicators. Investors and traders need to pay attention to the ‘oversold’ and ‘overbought regions’ in these two indicators.

If learning about technical indicators is too much work, one of the most simple tools in technical analysis is ‘trend following.’ The trend is said to be your friend. If the general trend is up, you do not sell. If the general trend is down, you do not buy more.

For naive investors, the cryptocurrency markets could be tricky terrain. However, a bit of study and effort into picking trades would go a long way in building wealth in crypto. It is a very important asset class that needs to be in every investor’s portfolio.

The author, Edul Patel, is CEO and Co-founder at Mudrex, a Global Crypto Investment Platform. The views expressed are personal

First Published: Oct 06, 2021, 04:42 PM IST