Crypto Compass: Your Guide to Long-Term Investing

The rollercoaster ride of cryptocurrency is a major draw, yet also a potential source of anxiety. The lure of quickly multiplying wealth attracts many, but these digital assets can also suffer dramatic price plunges. For some, this volatile nature makes crypto an ideal opportunity to buy when prices are low, sell high, and rapidly increase wealth.

Experienced investors understand that building wealth typically requires time, careful planning, and a consistent strategy. Despite being a relatively new asset type, cryptocurrency could be a reasonable candidate for long-term investment strategies. Let’s explore how to invest in crypto with a long-term perspective, among other considerations.

The relatively short lifespan of cryptocurrencies offers some insights into their potential as long-term investments. Consider Bitcoin and Ethereum, the two leading cryptocurrencies based on market value. Since its inception in 2009, Bitcoin’s value has risen by approximately 12,000%, while Ethereum has appreciated over 92,000% since 2015. An early investment in either could have resulted in significant wealth accumulation.

Since Bitcoin sparked the cryptocurrency surge over a decade ago, many digital currencies have witnessed substantial gains. This surge has led to the introduction of numerous alternative cryptocurrencies and trillions of dollars invested in the sector. Does this indicate that crypto is a “good” long-term investment? The answer depends on your perspective on the industry’s current state and future trajectory, including the possible impact of governmental regulations.

Many cryptocurrency advocates who believe in its sustained viability have embraced the “HODL” strategy. This term, short for “hold on for dear life,” addresses the extreme price fluctuations characteristic of crypto markets. Bitcoin, for instance, has experienced ten declines of 40% or more over the past decade. The HODL approach is rooted in the assumption that despite these downturns, the asset’s value will eventually recover and continue to increase.

With over 10,000 cryptocurrencies in existence as of early 2022, conducting thorough research on individual coins is crucial before investing. Due to the largely unregulated nature of cryptocurrency, the field is vulnerable to financial scams and fraudulent activities. Here’s a look at some leading cryptocurrencies that may hold potential as long-term investments:

Bitcoin: As the first cryptocurrency, Bitcoin has been a dominant force in the digital currency realm since its creation. Bitcoin holds the largest market capitalization by a significant margin, exceeding the combined market capitalization of the next 20 largest cryptocurrencies. A limited supply of Bitcoin exists, with only 21 million coins to ever be mined, nearly 19 million of which are already in circulation. Even with the rapid growth and evolution of the crypto market since Bitcoin emerged, it continues to be regarded as the standard for digital assets.

Ethereum: Ranking as the second-largest cryptocurrency based on market capitalization, Ethereum has had a significant effect on the world of digital currency and blockchain technology. Unlike Bitcoin, which primarily functions as a store of value, Ethereum is a comprehensive network with its own cryptocurrency, known as Ether. Beyond serving as a tradeable currency similar to Bitcoin, Ether is used to power applications and contracts built on the Ethereum network, giving it more utility compared to Bitcoin. This enhanced utility positions Ethereum as a potential long-term asset.

Tether: While Bitcoin and Ethereum often experience high volatility, Tether, the third-largest digital currency by market capitalization, seeks to provide greater stability. Tether is a stablecoin, a cryptocurrency tied to a traditional fiat currency or commodity. Tether is designed to mirror the value of the U.S. dollar, providing investors with a much more stable investment option compared to other cryptocurrencies, but with considerably less potential for gains.

Cardano: The sixth-largest cryptocurrency by market capitalization, Cardano, is a proof-of-stake blockchain platform that validates transactions using existing tokens. The Cardano network uses ADA, its native coin, which has a capped supply, similar to Bitcoin. While approximately 33.6 billion ADA tokens are in circulation today, only 45 billion will ever be mined.

Beyond simply purchasing a set quantity of a particular cryptocurrency and holding it indefinitely, several strategies can be applied to cryptocurrency investing with a long-term outlook. Regardless of the strategy you employ, it’s important to only invest funds you can afford to lose, given the unpredictable price movements common among many cryptocurrencies.

Dollar-Cost Averaging: Dollar-cost averaging involves investing a fixed amount of money on a regular schedule over a certain timeframe. For example, if you plan to invest $10,000 in an asset, dollar-cost averaging would enable you to spread your investment over a year by purchasing $833 of the asset each month.

When using dollar-cost averaging to invest in cryptocurrency, the amount of cryptocurrency you acquire with each investment depends on the coin’s current trading price. This means when the price of a cryptocurrency is high, your periodic investment will purchase fewer coins and vice-versa. Given the potential price swings in many cryptocurrencies, dollar-cost averaging can help avoid placing all your money when prices are at a high point. While this approach can lower that risk, it can also decrease the possible benefits of investing more when prices are particularly low.

Staking: Staking refers to a process in which a crypto investor holds coins in their digital wallet and dedicates them to support the network, which uses them to validate additional transactions. Much like dividends paid on certain stocks, investors participating in staking can earn rewards, such as extra coins or interest. As a result, staking can be a valuable long-term investment strategy that allows you to gradually grow your holdings or investment income. However, staking is only available with cryptocurrencies using a proof-of-stake model (as opposed to a proof-of-work model), like Cardano.

Buy the Dips and HODL: Market timing represents one of the most challenging and potentially high-risk investing approaches. Accurately predicting the performance of a specific stock, asset class, or industry is not possible. However, if you can take advantage of cryptocurrency volatility by buying when prices drop, your investment has the potential to generate significant long-term gains.

Indirect Investment via Bitcoin ETFs: The initial Bitcoin exchange-traded funds (ETFs) were launched in 2021, providing investors with the chance to include Bitcoin exposure within their portfolios without directly owning the cryptocurrency. These funds may invest in Bitcoin futures or blockchain-related companies, rather than directly holding Bitcoin. By choosing to invest in a Bitcoin ETF, you can also avoid potential security vulnerabilities sometimes related to storing digital assets.

Like all investments, allocating your funds to cryptocurrency involves inherent risks. Just like stocks and other securities, the coin’s price can decline rapidly after your purchase. However, cryptocurrency also presents unique risks that typically don’t affect those investing in stocks, bonds, and mutual funds.

One major concern is the potential for increased government regulation. The surge in cryptocurrency popularity in recent years is partially attributable to its decentralized and unregulated nature. No central bank or government has oversight over these currencies. However, more aggressive governmental action towards regulating digital currencies could significantly slow down growth.

As previously stated, the internet has become a breeding ground for crypto-related fraud. According to the Federal Trade Commission (FTC), between October 2020 and May 2021 alone, nearly 7,000 people reported losing $80 million in cryptocurrency scams.

According to Emma Fletcher of the FTC, “Online, individuals may appear friendly and ready to share their ‘tips’. However, this can also be part of a scheme to get you to invest.” She also noted that some of these arrangements are based on referral systems, where new “investors” are recruited through previously existing investors.

Furthermore, the method you use to store your digital assets carries major importance and potential risks. While keeping your assets with an online exchange is convenient and simple, it might expose them to hacking. Also, losing the password to your digital wallet can cause your assets to be permanently lost. As the FTC notes, “because you typically transfer cryptocurrency directly without an intermediary such as a bank, there is often no one to turn to if you encounter a problem.”

These warnings shouldn’t necessarily deter you from considering cryptocurrency as a potential long-term investment. Rather, you must recognize and understand the potential threats you could face as a crypto investor.

The launch of Bitcoin in 2009 and the ensuing growth of cryptocurrencies have changed the landscape of the financial world. Numerous investors have put money into these digital assets, drawn not only to their impressive rates of return, but also by their potential as decentralized and unregulated assets for the long term.

If you’re considering investing in cryptocurrency as a long-term strategy, entering the market with a well-thought-out plan is important. Select one or more cryptocurrencies and only invest funds you can afford to lose should the investment decline in value. This strategy allows you to withstand potential volatility while holding the asset long term. When first starting out, focus on cryptocurrencies with a long track record and/or large market capitalization, but always consider the specific risks involved with cryptocurrency.

• Having access to expert guidance can offer confidence when you begin investing. A financial advisor can guide you in investment decisions aligned with your risk tolerance, timeframe, and financial aims. Locating a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors in your locality, giving you the opportunity to interview them and decide which advisor is best for you. If you’re ready to find an advisor who can help you to reach your financial objectives, get started now.
• Visualizing how consistently investing in a diverse portfolio can make your money grow over time can serve as significant motivation for beginning to invest. SmartAsset’s investment calculator can show how your portfolio can grow in value over the next 30 years.
• Asset allocation pertains to how your portfolio is distributed among various asset classes. SmartAsset’s asset allocation calculator can assist you in determining how to divide your portfolio among stocks, bonds, and cash, based on your risk preferences. Try it out to see how your asset allocation should look.

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