There is a lot to be learned about crypto investing before you dive into it. This article will cover Fees, Volatility, Investment returns, and Active vs. passive investing. Cryptocurrencies are a new, exciting, and potentially lucrative investment option, so it is important to do your research before you invest. Read on to find out more! Also, remember that there is no one right way to invest in the crypto market, and it is always best to learn as much as you can about a given project before investing.
Active vs. passive investing
Passive vs. active crypto investing is often a debated topic in the cryptocurrency space. Both strategies can be effective, and can help you grow your crypto portfolio. Active investors seek to buy low and sell at a premium, while passive investors follow a buy and hold mentality. Both strategies aim for market returns over the long term. The key difference is the time horizons for each. Passive investing requires no hands-on practice and is typically considered a long-term strategy.
Although both methods can help you earn high returns, active investors are prone to risk and require a significant amount of capital to invest. In active crypto funds, however, the goal is to generate alpha – the excess return that the portfolio of the fund earns over the broader market. Active funds aim to gain alpha by picking the right cryptocurrencies at the right time. This strategy is comparable to stockpicking in the equity space, with significant potential to earn significant alpha.
There is plenty of discussion about the cost of fees when it comes to investing in cryptocurrencies, but the reality is that there are many different ways to do it. For example, if you choose to buy your cryptos using a brokerage, the fees that you pay could easily run into the six-figure range. Another common mistake is to pay an annual flat fee that reflects a flat fee scale, like 1%. Over the course of the investment, fees can eat up a considerable amount of your portfolio.
Whether or not to pay a maker/taker fee will depend on the exchange you use. Most exchanges charge a percentage of the amount you spend, so be sure to compare these costs to other exchanges. Likewise, if you’re trading cryptocurrencies, you may want to avoid exchanges that hide their fees in the spread. While most exchanges have low trading fees, don’t assume that these fees are the total cost of your trades. It’s better to pay a little more and have fewer fees than to pay thousands more in exchange for low trading volumes.
The volatility of cryptocurrency is no stranger to investors, and for good reason. After all, it’s impossible to predict the future of an asset without some degree of risk. While the price of a cryptocurrency is still fairly new, it’s already increasing at an astounding pace. Bitcoin prices, for example, increased by 20% during the COVID pandemic. At the peak of April 2020, Bitcoin prices were up over 200%. Since then, the price has fluctuated at a rate of 68% a year – considerably higher than the S&P 500’s average volatility of the prior year.
There are many reasons why crypto is volatile. Some are security concerns, other factors affect the price, and perceived value of cryptocurrencies. There are also “whales,” who hold large numbers of a particular cryptocurrency. These whales increase volatility in an asset. The Crypto Volatility Index measures the volatility of bitcoin and Ether in relation to the S&P 500. In the days after the stock market crash, mainstream assets, including stocks, had much more volatility than bitcoin.
Cryptocurrency investments can offer impressive returns, but they are not without risk. Unless you are familiar with the market and how to properly analyze them, trading and investing in cryptocurrencies can be a challenge. The return on investment, or ROI, is one way to gauge the potential for success. There are a number of different components to ROI, but the most important is the percentage of your investment that you will receive back. Liquid has created a beginner’s guide to ROI, describing how it works and why it is important.
While some studies have claimed that cryptocurrencies offer better diversification than conventional investments, others find these benefits are limited to short-term investors and question whether adding a cryptocurrency to a traditional portfolio adds any value. Aside from being a risky investment, cryptocurrency investments follow a fat distribution tail pattern, meaning that their returns are asymmetric. In fact, the most efficient cryptocurrency is Bitcoin, which has a twenty-fold ROI.