Deep Dive #2: Developing an Investment Strategy

A deep dive covering the benefits of having a crypto investment strategy/strategies, common strategies, my approach to developing a strategy, & the Strategies/assets I currently hold

This article aims to provide a framework outlining the steps I take to develop a strategy as well as why I believe having an investment strategy is beneficial. I would advise using this as a framework to develop your own set of strategies. There is no perfect guide, but hopefully, this will provide you with a strong start. If you have any questions when reading, please comment on the article, and I will be happy to respond. Also, as always, this is not financial advice (Full Disclaimer at the bottom, I include this everywhere : ) )

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Table of Contents

1. How does having an investing strategy benefit you?

2. Investment Goals

3. Common Strategies

4. Developing a strategy

   1. Complete research on your space of choice (In this case it’s crypto but more specifically it could be NFT’s, DE-FI, etc.)

   2. Form predictions for that space

   3. Look for evidence to disprove/prove your predictions/assumptions

   4. Create an initial version of your strategy using your research, predictions, & investing goals to create guidelines you can apply

   5. Assess how it might perform

   6. Test it out & Improve it

5. Different Strategies I use

6. Etoro Strategy

7. Buy and Hold Based Strategy

8. High Risk Altcoin Strategy

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How does having an investing strategy benefit you?

The goal of investing is to grow our money or, more specifically, to grow our buying power by moving it between different assets depending on which assets have better risk/reward ratios. Here are some of the benefits:

• Creating an investment strategy allows us to achieve our goals more efficiently by ensuring that the individual investments we make are supported by the information we have collected and that they aren't randomly made.

• They allow us to easily remember what our goals are (In terms of what we want to buy, time frame, etc.) when making individual investment decisions.

• They allow us to balance out weaknesses of different asset types in a systematic way.

• Investment strategies teach us more when we make mistakes as they provide a clear set of decisions we have made that we can then in the future reflect on and determine whether they covered everything accurately or if they need adjustments. Investing in individual assets can provide insights like these, but it's challenging to decide an unexpected outcome was due to an error on your part and not due to an unlucky outcome. A sample size of one isn't always helpful. When you group assets under a strategy and the shared set of assumptions you have set you can more easily see patterns that may have been missed with only 1 asset.

• Having an investment strategy is a shortcut to speed up your vetting process when deciding to invest. When assessing an individual asset, you can compare it against your strategy to see if it's a good fit for any of them. If it's not, you can create another strategy or decide it doesn't align with your goals & not invest. If it aligns with one of them, you can then vet it using the process you have already defined for that strategy (compare it against any assumptions you have made/potential outcomes).

• Having a strategy helps prevent mistakes. When you create a strategy, you create a set of guidelines to follow based on the information you have collected & the decisions you have made. This allows you to be more consistent as all of your thoughts are laid out so that even if you make an exception to one of your guidelines, you will still have several others that will help to guide your decision.

• It allows you to make better decisions under pressure. You can reference your notes/thoughts you made with a relatively unlimited time to consider while in optimal conditions when making a time-sensitive choice (depending on the asset, this could mean minutes to days of time to choose). In short, it allows you to get help from yourself when you were in your best state when you are at your worst (Ex: If you could make decisions for a sleep-deprived version of yourself when you aren't sleep-deprived)

• It helps to prevent you from getting caught up in the flow of the markets. If you have the urge to FOMO into an investment, you can create guidelines for yourself in your strategy to specifically prevent this or to help you calm down and make a more balanced decision (Ex: you could set a limit to how much you can invest on a snap decision or you can have a list of times where FOMOing in burned you in the past).

• Assessing individual assets is also essential, but strategies allow us not to lose sight of the forest for the trees.

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Investment Goals

Before creating a strategy, I would recommend determining your investment goals as they will determine how you will invest. These are some of the questions I think will help you prepare to create an investment strategy.

• What time frame are you looking to invest for (Are the funds you plan to invest going to be needed in a year or not for 10+ years)?

• What type of time commitment are you looking to spend when investing (In terms of research, tracking market conditions, time committed per week, etc.)? 

• What level of risk are you looking for (Are you OK with 80% swings in price (up/down), or are you looking for more stable assets)?

• What percentage do you aim to earn by investing?

• How much are you safely able to invest (By “safely able to,” I mean how much you can add without needing to remove it before you are ready to in order to make the amount of profit you are looking for) ?

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Common Strategies

• Active Investing: When you take an approach that requires you to actively buy & Sell as well as monitor market conditions)

  • Lump-Sum Investing: When you invest by adding all the funds you have available/plan to invest at once rather than spreading it out. For this, you will often aim to find a good point to enter in with your assets (Ex: If there was a crash in an asset you were interested in)

  • Value Averaging: This is similar to Dollar Cost Averaging, but you try to predict the asset’s future value, and you then average in more or less based on how close or far it is to the value you predict it should be worth.

• Passive Investing: When you take an approach where you don’t actively buy and sell, thereby minimizing how much attention you have to pay to the markets)

  • Hodling (Buy & Hold): This is where you buy and hold an asset regardless of what the market does.

  • Dollar-Cost Averaging: This is where you add funds at set time intervals regardless of what the market is doing.

  • Value Investing: This is where you look for assets that are undervalued when comparing their current price to their inherent or potential value (Ex: You notice a company is currently valued at $10 Million, but everyone has forgotten they own an asset that is worth $20 Million making the current value of $10 Million inaccurate).

• Contrarian Investing: This is where you take actions that are the opposite of what everyone feels is going to happen (Ex: Bitcoin just crashed down 50% and you decide to invest because you think this is a bargain price. It shoots up 300% and you sell instead of buying like everyone else).

• Growth Investing: This is where an investor looks for assets that are showing high growth and then invest regardless of whether they think the asset is overvalued or not.

• Yield Farming: This is a crypto-specific strategy where you lend or stake your coins to earn money from transaction fees/interest.

• Index Investing: This is where you purchase an index of an asset where one share counts as holding several assets under the umbrella of the index.

I want to note that while you can invest solely by taking one of these routes, I look at them as parts of an investment strategy rather than a complete strategy. I use several of these approaches mixed in different ways to implement more well-rounded strategies. The one on Etoro has some elements of DCA (I add funds every several months to the strategy), Value Averaging (I buy and sell depending on if I think the market is overheated or not), Hodling (I plan to hold some funds no matter what), Contrarian Investing (I buy when the price is going down and sell when it moves upwards), Etc.