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Guide to Crypto Investment Strategies

Cryptocurrency adoption is skyrocketing, but is it too late to get in the game? We explore several crypto investment strategies that any investor can explore.
Guide to Crypto Investment Strategies

There is an increasing number of institutions such as PayPal, Square, Grayscale are getting into the digital assets management space amidst growing acceptance of their utility and prevalence.

The case for cryptocurrencies in your portfolio

There are several reasons why investors might want to own cryptocurrencies aside from pure speculation.

1) Participation in a decentralised economy

Most blockchain networks require transacting in their own native tokens. For example, the Ethereum network requires Ether to transact, and the Harmony network requires Harmony One tokens to transact. The Bitcoin network requires you to transact in Bitcoins, which is merely just one representation of a blockchain network.

Ethereum’s use case goes beyond transfer of value as in the case of Bitcoin – it extends to even things like decentralised applications and smart contracts using the Ethereum Virtual Machine.

The Ethereum blockchain is also currently used to tokenize the US Dollar through stablecoins. For example, the USDC stablecoin allows digital dollars to be moved over the Internet. USDC is issued by regulated financial institutions, and backed by fully reserved assets, and redeemable on a 1:1 basis for US dollars.

Some popular dApps include decentralised exchanges, which can be used to swap tokens from one person to another. The industry is still nascent, so there aren’t much high value use cases to begin with, but as the industry matures, more developers will be building new use cases on blockchain networks – and that might potentially be revolutionary.

Blockchain use cases. Source: McKinsey

However, not all cryptocurrencies that are currently being traded and listed on exchanges play a part in the future blockchain ecosystem – some of which may be privately controlled by enterprises as part of a private blockchain network.

Hence, investing in cryptocurrencies is not directly an investment in the potential of blockchain technology, depending on how the adoption of blockchain technology in the future takes place.

2) Hedge against real world assets

The second reason I can think of is really as a hedge to real world financial assets. A hedge works if the correlation of asset returns are negatively correlated – meaning they don’t move together.

Take for example the prices of REITs and stocks – while both might not be directly equivalent assets, their prices move roughly in-line with each other. They have a relatively high correlation of between 0.68 and 0.78. If the prices of stocks go down, REITs tend to follow, and you might end up wiping your entire portfolio if both crash at the same time.

Instead, if you hold assets such as gold, a traditional hedge to stocks, then when stock prices are falling, the price of gold might even go up because people are looking for safe assets. The net effects of the two is that your portfolio wouldn’t as volatile and you wouldn’t be completely wiped out.

Cryptocurrencies can be viewed similarly as a hedge to real world financial assets, whose prices have been artificially inflated by the Fed’s easy money policies which have no where to go other than buying financial assets. If you believe that the system is broken, or if you want to take a counter-position in case this is a bubble that might burst, you’d want an uncorrelated asset to hedge your positions.

This Decrypt article (potential bias) says that the correlation of Bitcoin – a popular cryptocurrency – to the S&P 500 is 0.16. Coindesk research (also potential bias) puts the 60-day rolling average correlation floating around 0.30 for the month of June 2020.

3) A new asset class with its own interesting investment opportunities

Although it’s still in the early stages, regulators have not fully caught up on its implications and potential, which makes it interesting for risk takers who dare to make bold investment bets that may payoff with a huge potential upside.

For example, there are platform like Republic Crypto that allows startups to raise capital through public and private sales and tokenise their platforms. There are solutions like Unstoppable Domains that provide domain name services on the blockchain which makes them resilient to censorship.

However, risks exist - there are not a lot of regulatory protection for your investments, and if you make a wrong transaction, you’re unlikely to ever recover your tokens – which makes crypto rather out of reach for the common folk at this time.

Now that we've gotten the investment thesis out of the way, here are some simple investment strategies that any investor can participate in.

High-yielding stablecoins strategy

Let’s start with the least risky strategy; stablecoins are digital assets that are pegged to a stable asset, like the US Dollar. They come with the benefits of being stable (i.e. less volatile) unlike traditional cryptocurrencies.

A stablecoin like USDC – issued by Circle – is a digital representation of US dollars on the blockchain, and it is supported by many digital wallets, exchanges, DeFi protocols, savings, lending and payment services.

Stablecoins are increasingly being used as a medium of exchange. Global remittances and cross-border payments are a natural use case for stablecoins given their ease of international transfer.The Rise of Stablecoins, Coinmetrics

A high-yielding stablecoin strategy works by investing into stablecoins and parking them in a lending platform like BlockFi, Nexo, Crypto.com or Celsius, and earn an annual yield of between 8% to 10% on your stablecoins.

For example, BlockFi offers an 8.6% APY on stablecoins like USDC, PAX and GUSD paid monthly, which means you can get up to $860 in total interest annually on a $10,000 deposit.

BlockFi interest account calculator

Alternatives like Nexo and Celsius exist too. Nexo pays interest daily while Celsius pays interest weekly.

Regardless of which platform you choose, risks exist when using depositing any asset to such platforms, and there have been cases of fraud, theft and bankruptcy, which means you might potentially lose 100% of your funds.

Higher yields do come with higher sets of risks and the space is still relatively nascent. One way to mitigate this risk is to spread your funds out across multiple platforms, but only invest what you can afford to lose.

Stablecoin-BTC growth strategy

If you can take more risks, you might want to consider an allocation to a riskier digital asset like Bitcoin (BTC) as part of your digital asset portfolio.

Bitcoin is an open-source peer-to-peer digital currency with no central authority or banks managing it. There are 21 million BTC available in the world, ever, and you can read its whitepaper here.

An 80% stablecoin-20% BTC allocation allows you to participate in some of the upside of digital assets since most cryptocurrencies have prices that are highly correlated to the price of BTC.

If you want, you can also add a third level where you diversify into other digital assets like Ethereum, but this means taking on additional levels of risks for higher levels of potential gains.

BTC-PAXG real-world hedge strategy

If you believe that the long-term value of Bitcoin will increase because of its scarcity and increased adoption, then you might see it as a digital version of gold.

Bloomberg published a report in April 2020 about its outlook on Bitcoin and it finds that Bitcoin and Gold show price convergence with endurance and its price correlation with gold has jumped the highest since 2010.

This real-world hedge strategy utilizes BTC and tokenized Gold (PAXG) to hedge against real-world currency risks in the midst of unprecedented monetary stimulus and eventual inflation.

Momentum/trend-following strategy

The trend-following strategy basically uses momentum-based indicators to protect from losses in downtrends and capture subside on the uptrends.

There are many ways to participate in such a strategy. For example, if you want to trend-follow on the price action of ETH/USD, you could manually trade on cryptocurrency exchanges based on technical indicators or use an automated bot to do so.

There’s also a tokenized version of this strategy by Set Protocol with its ETH RSI 60/40 Crossover Set which is a tokenized strategy on the Ethereum blockchain to automatically balance between ETH and USDC based on momentum indicators.

Set Protocol’s ETH RSI 60/40 crossover set 1Y performance

Implementing such a trading strategy means you can follow larger crypto trends and reduce losses when the trend turns bearish.

Venture capital altcoin strategy

The final strategy is probably the riskiest strategy illustrated here but perhaps where the biggest potential gains lie.

Where I see this strategy is like you being a venture capitalist and participating in early stage projects as an investor (through the token) and speculating on its upside potential.

Since such investments are usually loss-making, you can expect to make a heavy loss on most of them. However, there will be some investments that might pay off handsomely if you get lucky or right with identifying them.

For example, Celsius Network’s CEL has risen 3671% in 1 year and Thorchain’s RUNE has risen 1700% over the same period.

Concluding thoughts

There are many opportunities in the digital asset space, which is relatively new and niche. Most people, however, don’t understand the space nor the possibilities.

The risks are far higher compared to the traditional financial system. However, higher risks usually bring about far greater upside for those who can navigate the space well.

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