5 Strategies to Position Crypto in a Down Market
Prepping your portfolio for long-term success requires looking at the big picture. When crypto is in a down market, prices might seem attractive compared with the heights from which they fell — “on sale,” you might even say. But some investors might be skeptical of buying the dip, knowing that a price bounce isn’t guaranteed. Others might be content to do nothing. It’s impossible to say how specific cryptocurrencies will perform in the months ahead. But using battle-tested investment strategies can give your portfolio a better chance of long-term success.
Dollar-cost average This strategy embodies the investing maxim “you can’t time the market” by emphasizing agnostic consistency over waiting to deploy your assets at the optimal moment. Instead of relying on luck to guess whether the market has hit bottom, dollar-cost averaging means committing to a routine — buying $250 of Bitcoin on the first day of every month, for example — that doesn't take market conditions into account. You buy on schedule whether the price is going up or down. This strategy isn’t good for maximizing short-term gains. But, over time, this consistent buying can smooth out the effects of volatility — and cryptocurrency is notably volatile. Some of the top crypto exchanges will dollar-cost average for you if you set up a recurring purchase.
Review your asset allocation Asset allocation refers to the mix of all your investments, including stocks, bonds and real estate. Owning investments of many asset types is another way to diversify. Because crypto is so volatile, it's generally recommended to invest only what you can afford to lose; as a general rule, invest no more than 10% of your portfolio in risky assets like these. You can adjust your personal target allocation of stocks, bonds and other assets to match your risk tolerance and time horizon. Generally speaking, if you need those funds soon, it’s a good idea to have a bigger percentage of conservative investments, such as high-yield savings accounts or short-term bond funds, to avoid major swings in value.
How does cryptocurrency work? Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice [1] . Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
How are cryptocurrencies created? One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
