Introduction
Few invest in cryptocurrencies without understanding the technology behind it. Many still perceive cryptocurrency investments as a way to become rich quickly. This lack of understanding about cryptocurrencies will impact your buy and sell decisions. I believe that understanding how cryptocurrencies work is imperative before investing in it. Once you understand the technology behind cryptocurrency you will be able to appreciate the benefits of holding cryptocurrencies for a longer time and thereby executing a “Buy and Hold” investment strategy.
In this article let us understand why “Buy and Hold” strategy can be applied to investments in cryptocurrencies.
Buy and Hold strategy
The buy and hold strategy is a passive investment technique in which investors continue to hold onto their investments, regardless of the market conditions. In high volatility markets like cryptocurrencies, it is very important that investors understand the importance of holding their cryptocurrencies for at least 4–5 years.
Taking a lesson from Warren Buffett’s investment strategies. When deciding whether or not to invest in a company, Warren Buffett looks for businesses that will continue to have competitive advantage decades down the line. Warren Buffett said this in an interview, and I quote: “Nobody buys a farm based on whether they think it’s going to rain next year”. “They buy it because they think it’s a good investment over 10 or 20 years”. This idea of understanding the business and then deciding to invest in the business for long-term can be applied to investments in cryptocurrencies.
It is true that the cryptocurrency market is undervalued. For example, Bitcoin has a current market capitalization of 115 billion US dollars. It is estimated that in 4 to 5 years, bitcoin can reach a market capitalization of approximately 500 billion. This is an average estimation but it is crucial to note that bitcoin market capitalization can easily go above 500 billion US dollars if conditions are favorable and there is a wider acceptance of cryptocurrencies. It is important to note that it takes time for bitcoin to reach this market capitalization of 500 billion US dollars, therefore it’s good to be patient and hold your bitcoins.
Invest in cryptocurrencies long-term
Most of the people who lost their money by buying cryptocurrencies are speculators, therefore it is very important to invest in cryptocurrencies with the idea of holding the investment long-term(like 3–5 years). For example, if you buy 10 bitcoins for 62,600( based on exchange rate on 31st October 2018) and hold these 10 bitcoins with you for 3–5 years then you can be sure that you can make a profit. But instead, if you continuously buy and sell bitcoins, there is a high chance that you will make losses because of high volatility in the Bitcoin market presently. Therefore you should perceive Bitcoin as a long-term investment.
Conclusion
In today’s world with many assets to choose from, it’s getting hard to invest in one asset and hold it for long. Having patience is most important for investing in an asset. Patience is even more important for a cryptocurrency investor because the cryptocurrency market is still in its infancy and it takes time to mature. So instead of speculating, one should consider buying and holding cryptocurrencies for long-term.