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The short version

  • Nobody should buy crypto for the first time or take on a larger position without having a clear strategy for maximizing their investment.
  • By buying based on risk tolerance, researching white papers, practicing dollar-cost averaging, and more, you can hedge your risk and maximize your returns.
  • Crypto is still 100% speculative and ultra-risky, but these strategies will maximize your investment – and minimize the downsides.

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1. Forget the FOMO and let risk tolerance guide you

One of the most common mistakes that new crypto investors make trying to maximize crypto investments is diving in with too much capital. They don’t want to “miss out” on the next bull run, so they pour thousands, even tens of thousands, into their very first trade.

But FOMO isn’t an investing strategy, and anyone who bought BTC in Q4 2021 is learning that lesson the hard way.

A better strategy is to forget about crypto for a moment and instead reassess your risk tolerance.

Your risk tolerance will tell you how much of your portfolio you can comfortably allocate — both mentally and financially — to the “ultra high-risk/speculative” investment category where crypto lives. That number usually falls between 1% and 10%, with an average of around 5%.

Now that you’ve replaced subconscious FOMO with a reasonable portfolio allocation that falls within your risk tolerance let’s go shopping.

2. How do you know which cryptos to buy?

As a 100% speculative investment vehicle, cryptocurrencies don’t have the usual meat for investors to chew on. They don't have P/E ratios, earnings reports, pending FDA approvals, and C-Suite scandals. There's not even a clear metric for float. But they do have white papers.

Even if you don’t have a CS background, a crypto dev team’s white paper can reveal critical, market-relevant intel like:

  • The problem being solved
  • Core design principles
  • Leadership experience
  • The competitive landscape
  • Challenges facing mass adoption

And more. That’s why some white papers read more like pitches than blueprints.

For example, pretend it’s 2008: the global markets are collapsing, and Satoshi Nakamoto publishes a white paper on something called “Bitcoin.” Even in its protozoan stage, Bitcoin seems like it can solve a ton of issues.

Similarly, the Ethereum white paper may be long and technical — but if your takeaway was “Bitcoin with better storage,” that might be enough to make you throw $100 at the ICO.

Combined, your ETH and BTC holdings would now be worth hundreds of millions.

That’s why crypto forums mention DYOR (do your own research) almost as much as they mention HODL. Crypto can be researched, and poring through white papers is the single best way to maximize a crypto investment.

Is the white paper you're reading incomprehensible, riddled with typos, or worse — you couldn’t find a white paper in the first place? All three are major red flags to investors.

If you’re not convinced, other informed investors won't be, either.

Plus, a white paper that’s poorly written (or missing entirely) could even be a sign that the cryptocurrency is a scam. The SQUID crypto, which famously ended in a $3.36 million rug pull, actually did have a legitimate-looking website and a white paper.

But anyone who read the white paper would’ve seen typos, grammatical errors, and the technical blueprint for a rug pull: “The total prize pool is instantly transferred to the winner of the game.”

So, while it’s ill-advised to follow your gut into a crypto trade blindly, don’t hesitate to follow your gut out. More often than not in crypto, bad gut feelings end up vindicated.

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3. Invest with the intent to HODL

Crypto tends to be unpredictable in the short term but trends upwards in the long term. That’s why one of the key tenets of maximizing a crypto investment is to HODL.

In stark contrast to r/wallstreetbets, most of the memes on r/cryptocurrencymemes aren’t about buying or selling — they’re about HODLing (aka holding on for dear life).

So, while it’s ill-advised to follow your gut into a crypto trade blindly, don’t hesitate to follow your gut out. More often than not in crypto, bad gut feelings end up vindicated.

While the self-deprecating memes are funny, the community rallies around the HODL banner because it’s the only way to eke some consistent gains and stability out of such a volatile asset class.

So if you’re intent on buying crypto, go in with the express purpose of HODLing long-term. And when the dip happens, find solace in the memes.

4. But don’t be afraid to sell high

While HODLing crypto long-term is a solid investing strategy, don’t hesitate to sell high if you’re ready to exit. Maximizing your crypto investment doesn’t have to mean jumping out right before the bubble pops.

Besides, your crypto should only comprise around 5% of your total investment portfolio, meaning you’re not banking on your crypto gains to retire. It’s just speculative — even fun.

So there’s nothing wrong with quitting while you’re up, cashing in your chips, and trying another casino. Just remember to give the IRS their cut of your capital gains.

5. Hedge your risk through dollar-cost averaging (DCA)

Now that we’ve covered how much crypto to buy, when should you buy it? And how often? With so much volatility in the crypto market, how can you possibly time it right?

Experienced crypto investors use dollar-cost averaging (DCA) to parse out trades and hedge risk. For the uninitiated, DCA is simply investing the same amount regularly regardless of the asset’s current market value.

For example, let’s say you want to buy $6,000 worth of ETH. That’s a lot, and if you time it wrong, you could lose most of it.

Instead, you could divide the lump sum by 12 and purchase $500 worth of ETH on the 1st of every month. This way, you’ll be buying in at different prices throughout the year. And in the end, the average price you pay will be Ethereum's average market value for the year.

It’s worth mentioning that dollar-cost averaging doesn’t just hedge your risk — it removes a lot of the stress of buying crypto, too.

6. Consider staking for a trickle of interest

Some platforms like Binance and Coinbase offer staking for select cryptocurrencies, which is like a short-term crypto CD. Lock your crypto up for as little as 30 days, and you can generate up to around 2% to 9% interest on it, depending on the coin.

Cryptos like Ethereum, Tezos, and Cardano offer staking, and rewards are paid out in the crypto you’re staking.

Now, I don’t think you should buy a crypto just because it offers staking — it’s more of an “if you already have some, might as well stake it” kind of thing. But it could generate a nice bit of interest if you end up taking a large position in a stake-able coin.

More: Best crypto staking and lending platforms

7. Diversify

Even in the untamed wilderness of crypto investing, you can hedge your risk — and thus maximize your investment — through diversity.

As you build your crypto portfolio, you might consider building a base of high-cap cryptos and allocating 30% to promising altcoins with impressive white papers.

Before defaulting to a 40-70% allocation of Bitcoin like many new HODLers do, keep in mind that BTC is not the cryptocurrency world’s S&P 500. It doesn’t always rebound; there’s nothing reliable/conservative about it.

Remember that you’re investing in technology, and Bitcoin is the oldest of the bunch. It's far from being a hedge against inflation; in fact, Bitcoin’s days may be numbered.

8. Protect your investment

Naturally, one of the most important rules of maximizing your crypto investment is ensuring it doesn’t go to zero overnight.

The crypto markets aren’t regulated or protected like the NYSE, and as a result, crime is running rampant. A record $14 billion worth of crypto was stolen in 2021 alone through hacks, scams, and phishing, a 516% rise from 2020 levels.

Thankfully, effective DIY security measures exist in the crypto world — and one of them literally involves a safe. To prevent hacking and theft, many long-term HODLers will store their keys offline using a “cold wallet” like a hard drive, a USB stick, or a purpose-built product like a Ledger.

This removes the possibility of your private keys being stolen from an online database, which has happened to major exchanges like Coinbase and trusted hot wallets like Metamask.

Just don’t lose your wallet. A man in Britain has been digging through landfills since 2013, trying to find a lost hard drive with 7,500 BTC on it. Instead, keep it in a safe, stationary place like a safety deposit box.

As for phishing, I’ll keep this one short: never share your private keys, learn how to spot a crypto scam, and stay vigilant. Nobody thinks their crypto will get stolen, but here we are, $14 billion later.

The bottom line

While buying crypto may always be high-risk, it doesn’t have to be a shot in the dark, either. Follow the info and strategies in this guide and you can rest easy knowing that you’re maximizing your crypto investments.

Further reading:

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About the Author

Chris Butsch

Chris Butsch

Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

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The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.