STAKING

How To Choose The Right Investment Horizon For Cryptocurrencies?

Investment horizon refers to how long an investor will hold onto an asset before cashing in. It is critical in investing as it helps in determining the holding period to compensate for the risk of a particular security.

However, setting an investment horizon for cryptocurrencies isn’t so straightforward. This is because there are over 18,000 different tokens and it is difficult to determine which one will outperform others over a certain period.

Moreover, rug pulls, and other financial scams in the recent past have led to diminished investor trust. In such delicate situations, investors find themselves in a soup when deciding whether they should remain invested over the long-term or look for short-term returns.

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To arrive at the ideal investment horizon, investors must first understand the fundamentals of the cryptocurrency at hand. One should also look out for the market capitalisation of the cryptocurrency and 24-hour trading volumes, as they are good indicators of the currency’s performance.

The investment horizon is up to the investors:

In a conversation with CoinDesk, crypto analyst Armando Aguilar, who was also a former digital asset strategist at Fundstrat Global Advisors, said, “The crypto and blockchain space is still in its early stage. Holding periods depend on the investors.”

If you are a trader, your goal is to leverage the market volatility and realise profits. But, if you wish to make gains over six months or one year, you must engage in extensive reading and be updated with the current as well as upcoming developments. These include network upgrades, hard forks, forged partnerships, projects under development, and the forward roadmap. Historically, innovation has always impacted asset prices.

Novice investors who have a limited understanding of crypto often invest with the hope of making a quick buck. This is not an advisable as market volatility could swing your bets either way. Whereas, for crypto market veterans, investment strategies pan out over many years.

Similarly, venture capitalists and other long-term investors are always on the lookout for potentially disruptive technology that is undervalued. When the technology gets adopted on a large scale, the success of the project significantly jacks up the price of the cryptocurrency. Since the adoption and growth of new technologies takes time, this investment strategy requires patience.

There are also cryptocurrency holders who do not actively engage in trading. These investors believe in getting rewarded over the long term – a common phenomenon in equity markets. Their gains may come from simply holding the crypto assets for long enough or ‘staking’ their crypto towards the development the network, which then rewards them further. Different networks have varying criteria regarding the minimum period of staking, and thus the investment horizon differs.

The benefit:

Staying invested in an asset with immense future applications is beneficial to all investors. Not only does the asset price grow with time, but so does the scale of the underlying technology. Here’s the performance of Bitcoin over the last four years, as shown by crypto investment platform Revix:

Since Bitcoin was the first blockchain to come into existence with a limited supply, the cryptocurrency has appreciated in value by a large margin YoY. The same is also possible with other cryptocurrencies whose blockchains contribute to decentralised finance (DeFi) and solve current issues.

“Blockchain technology is what powers cryptocurrencies,” said certified financial planner Marguerita Cheng to CoinDesk. “One way of benefiting from cryptocurrency without taking on as much risk is to invest in the underlying technology, digital payments or fintech. That’s a way in which you don’t have to deal with FOMO. Maybe you’re not going to get as much upside, but you’re still going to benefit from that exposure.”

(Edited by : Priyanka Deshpande)

First Published:  IST

Traciwininger
Author: Traciwininger

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