Cryptocurrency Investment Strategies

Since Bitcoin launched, investors have made billions of dollars in the cryptocurrency market.

 

New opportunities for investment and profit continue to present themselves as the market expands and diversifies. While consumers are becoming increasingly comfortable using digital currencies as alternatives to fiat currencies, many users remain unsure how to invest in the cryptocurrency market in profitable ways.

The volume of funds investors have available to invest, their tolerance for risk and the time frames in which they seek to realize result typically determines which methods of investment are most appropriate and effective for them. For example, consumers interested in longer-term investment opportunities may be attracted collecting currency and crowdfunding opportunities. Investors looking for shorter-term returns on investment may prefer venture capitalism or peer-to-peer loans. Currency collection is ideal for investors with only small amounts of starter funding. Consumers with larger balances available can potentially see the best return on investment from venture capitalism.

Collecting Currency

Collecting currency is sometimes also referred to as stockpiling. On its face, stockpiling or collecting cryptocurrency tokens looks much like slowly building a savings account in a traditional bank. Investors add additional tokens to their wallets piecemeal as financial resources allow. Over time, they accumulate substantial stockpiles of their preferred currencies.

Cryptocurrency stockpiling is notably different from establishing traditional savings, however. Fiat currencies stashed in mainstream bank accounts generally do not change in value. They may accumulate modest amounts of interest over time, but the actual value of the currency itself will remain the same. As the current interest rate for high-interest savings accounts typically falls between one-and-a-half to two percent, savers can expect small, slow and steady growth of their assets.

Cryptocurrency values, by contrast, are famous for fluctuating wildly. Functionally, this can result in enormous gains of hundreds or even millions of dollars in value within a matter of hours for digital currency stockpilers. Investors can capitalize on these abrupt upswings in several ways, depending on their personal beliefs about digital currencies and their preferred investment strategies.

Investors may “cash out,” turning their cryptocurrency earnings into fiat currency and reinvesting them into assets that are more traditional. They may buy up other types of cryptocurrencies, particularly those that are considered to be among the most stable of options, thereby diversifying their accounts and promoting more stable long-term values. Investors who are intentionally in for the long haul may decide to simply stay the course and do nothing, allowing their assets to continue to grow with the market in anticipation of maximizing their future gains.

Collecting currency can be an ideal option for investors seeking to invest affordably over time. Coins can be added in small amounts as funding becomes available. Investors who have the capacity to mine coins can use that method to add to their accounts almost for free. Consumers who focus on stockpiling one or two deflationary currencies can potentially, over time, acquire a relatively large share of the currency, thus giving themselves the opportunity to contribute meaningfully to its stability in the marketplace.

Crowdfunding

Crowdfunding is an investment strategy in which new cryptocurrencies are developed and it can work in one of two ways. The first step in either method is for project founders to create a new digital currency. For crowdfunding purposes, project founders pre-select a total number of tokens for the currency. They then “mine” or create the full number of possible tokens. Those tokens are then sold in an Initial Coin Offering (ICO) to interested investors. From there, two options exist.

The first option is for the cryptocurrency itself to be the investment. Investors buy a stock of coins in the ICO and then hold onto them, anticipating that the value of the coins will go up as it gains popularity. This approach is similar to buying stock in a start-up company when it goes public and sitting on the shares in hopes that the company will succeed and the value of those stocks will explode.

The second possibility somewhat parallels venture capital investments. Project leaders use the income from the ICO to launch a business, product or service. Investors then have the opportunity to convert their tokens into shares of the company or to sell them back to the project leaders at a profit.

Venture Capital

Cryptocurrency provides unique opportunities for venture capitalism. In standard venture capitalism, investors provide money for a start-up business or project under clearly spelled-out terms. Investors expect that the business or project will achieve success within a set period of time. Once success is achieved, investors may be repaid with interest or rewarded with company stock or other assets of value.

Traditional venture capitalism is often a very open process. It can involve large amounts of administration and potentially high banking fees as money is moved around in significant quantities. Cryptocurrencies, by contrast, offer complete privacy. Funds can be moved around quickly at little to no cost. Depending on the type of digital currency used and the particular laws in play where investors live, it can also potentially reduce the amount of taxes investors would otherwise have to pay on their capital gains.

 

However, consumers considering cryptocurrency-based venture capitalism must bear in mind that nearly all venture capitalism is considered high-risk. Returns are not guaranteed. Investors should only choose this option if they have sufficient assets that they can comfortably afford to lose their entire investments.

Peer-To-Peer Loans

Peer-to-peer loans are loans made from one business to another business or from one individual to another individual (as opposed to loans made to any party by a certified traditional financial institution). Peer-to-peer loan terms are negotiated directly between parties but often rely on current market standards for baseline interest rates and other terms. Peer-to-peer loans may be made in any size.

Cryptocurrencies have significantly expanded interest and participation in peer-to-peer loans for several reasons. First, digital currencies offer investors and borrowers previously unseen opportunities to transfer large sums of money between themselves quickly and at little or no cost. Traditionally, such transfers would have carried heavy fees from mainstream banking institutions and might have taken days to process.

Second, cryptocurrencies allow both investors and borrowers to bridge the gaps between fiat currencies easily and inexpensively. This is particularly evident in loans that happen across national borders. Borrowers in countries whose fiat currencies are subject to high inflation may struggle to get viable loan terms through traditional means. Because cryptocurrencies operate in a separate space from fiat currencies, however, they can often find a more level playing field for their financial needs in the digital currency market.

As with some other forms of cryptocurrency investing, investors may find that the privacy and variable tax laws related to digital currencies work to their benefit. While some types of cryptocurrency profits are taxable in some places, investors may be able to avoid not only the fees historically associated with peer-to-peer loans but the heavy taxes usually associated with their profits, as well.

 

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