Impossible Questions: What Should Your Crypto Investment Strategy Be?

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Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Trading crypto can be a minefield. Each coin has its own community and ambitions, and each decentralised finance protocol is its own complicated puzzle box. We can’t tell you the best crypto to invest in or guide you when to buy a particular cryptocurrency, but we can at least tell you how some people analyze crypto, the types of trades you can make, how to read a crypto chart and how to go about implementing a trading strategy. But the most important things to do before investing? Heavily research all of your investments, never invest more than you can afford to lose and prepare yourself, emotionally as well as financially, for the volatile swings of the crypto market.

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Crypto trading: the basics

Crypto trading involves buying, staking and selling cryptocurrencies and investment products. You buy something with the hope that something good will happen — that the price of your invested assets will increase, that you will earn interest or yields or more crypto from the product in which you have invested your money, or that a price of the coin you have shorted will fall. Once that event has happened, you plan to sell it. You might hold your Bitcoin forever and only sell it for other assets, like a new house, car, or college tuition. Or you might sell it for regular money, like the Canadian or US dollar, as soon as it reaches some magic number.

Most of this trading will take place on exchanges and protocols. There are thousands of cryptocurrencies, each with their own markets. Cryptocurrency exchanges are the most popular place to trade cryptocurrencies, and the more advanced versions of these trades might look just like a stock trading app. Exchanges specialise in different things. You can trade on options exchanges or trade cryptocurrency ETFs and crypto stocks on public stock exchanges. OpenSea and Rarible are exclusively for trading NFTs, or non-fungible tokens, which are crypto’s version of art. Crypto exchanges make money from fees and, in some cases, investing any funds you store in the wallets they provide.

Protocols are decentralised applications that are powered by smart contracts — self-enforcing financial contracts that are powered by blockchains. Protocols won’t accept regular money, like US or Canadian dollars. Instead, they’ll only accept cryptocurrencies native to the blockchain on which they are based. Uniswap only accepts ERC-20 Ethereum tokens, for instance.

Two of the best-known ways to analyse cryptocurrency: fundamental and technical analysis

The two schools of thought that apply to securities analysis are pertinent for the crypto markets. The first is fundamental analysis and the second is technical analysis. Fundamental analysis, also known as value investing, is all about determining the fundamental “worth” of an asset. Is Bitcoin useful? Does it do things that will make people value it? And so on. NFTs might be worth something, a fundamental analyst might argue, because they will disrupt the art industry, creating new opportunities for digital artists and distributors. Token analysis can also assess which cryptocurrencies to avoid; a poor roadmap, janky whitepaper (the manifesto of a token), or clunky code suggests that something might not be worth your time.

Technical analysis is quite different. It cares less about the intrinsic value of an asset and instead focuses on whether the past performance of an asset has anything to say about its future value. (Given the volatility of crypto, this is a stretch.) Forget the “‘use cases” of Bitcoin, the technical analyst might think. For example: Say, Shiba Inu coin is up 1,000% in the past month, and the mathematical formulas they plugged into the company supercomputer indicate that it might rise another 2,000% next week.

Some people think that technical analysis is little more than pointless, fantastical projections of lines on a chart that can be justified by any post-hoc argument a crypto day trading strategist comes up with. Without context, technical analysis can look no different than financial tea leaves.

But advanced traders use technical analysis to program high-frequency trading bots, and make millions from doing so. It’s just that a lot of the crypto technical analysis you might find on Twitter and YouTube is not performed by qualified traders from hedge funds.

Crypto trading techniques

As the crypto market matures, more complicated trading techniques have emerged to make the most of the evolving decentralised financial products offered by crypto protocols. Below are some of the more advanced trades that you can use to trade crypto. Note that some of these, like margin trading and yield farms, are best reserved for advanced traders who understand the risks involved.

Margin trading

Also known as leveraged trading, margin trading is where you borrow money to increase the size of your investment. While you can increase your profits if the market moves in your favour, margin trading comes with considerable risks, and your position could be closed, or liquidated, if the market turns against you.

Most crypto exchanges let you trade on leverage, and some with leverages of up to 120x. To trade on margin, you’ll have to post collateral. If the market moves against you, the brokerage might post a margin call in order to let you maintain your position. If you can’t afford the margin call, you could lose all of your money.

Trading bots

Trading bots are bits of code that automatically place trades to make the most of quick price movements, or to profit from small price differences across exchanges (known as arbitraging). You can code a bot yourself, or create a bot using a service like 3Commas, Trailty, Superalgos, or CryptoHero.

Interest accounts and yield farms

Some services operate like crypto robo-advisors or high-interest savings accounts. These remove the need to crunch some of the complicated mathematical calculations needed for technical crypto strategies but require you to heavily vet the worth of the service you’re using.

Some companies offer you yield on your investments. These yields are often quoted in annual percentage yields, or APYs. The companies make money by lending out your crypto at a higher rate and throwing you some of the profits.

Other services are decentralised, and they let you earn interest on your crypto by lending it out to other users. Some pay you in governance tokens—platform-specific tokens that operate in their own markets. Yet more services function as robo-advisors that shift your crypto across these platforms to earn lots of these tokens. Some blockchains let you stake, or lock up, coins on the blockchain network to process transactions. You are rewarded with newly minted coins for doing so, a little like Bitcoin mining but without the need for expensive equipment.

All of these investments carry several risks. Although the companies must comply with laws (unlike bits of code on decentralised platforms), they are subject to legal and economic risks. Companies can receive cease and desist orders or lose money by investing funds in a protocol that is hacked. And the APYs are constantly shifting in response to the state of the crypto market.

DeFi protocols are subject to “smart contract risk.” They could be, and frequently are, hacked. Newer ones are often unaudited and since the industry champions a culture of anonymity, there is little accountability. Some protocols take advantage of these tricks and function as outright scams, disappearing with customer funds.

Options, futures, ETF and crypto stock trading

You could also invest in options and futures contracts — bets on the future prices of a cryptocurrency. Or you could invest in a Bitcoin ETF or fund on a public stock exchange and try to profit from the discount or premium at which the ETF trades. You could invest in the stocks of cryptocurrency companies or one of the half dozen mining companies that are on the U.S. and Canadian stock markets. Each represents a different claim on the future of crypto.

Frequently Asked Questions

The way to invest crypto smartly in Canada is to do so carefully and while being mindful of risk. Don’t rush into the latest meme coin without first looking at your finances and assessing your risk tolerance. Stick with regulated exchanges if possible, or try to account for unregulated venues in your risk assessment before trading. Diversify your investments so that you’re not dependent on the success of a single coin.

This is very hard to do, as there are no traditional means for assessing a coins value. Some people believe market cap is a sign of strength. Others look at the track record of the founders. Whatever you do, be sure to research your decision.

This is up to you. Peer-to-peer exchanges are riskier than crypto platforms, but all crypto has risks. Some venues are unregulated, some do not protect your deposits and some only accept cryptocurrencies. Do your research before parting with your money.

Nobody can answer this for you. You have to decide for yourself. Possible considerations include the tax implications of selling at a certain price, whether you think the coin is likely to rise or fall in the future, and your emotions when selling. Preparation is key. A long-term cryptocurrency strategy can account for more volatility than a short-term strategy.

That depends on what the price of the token your shorting does, and no one can predict future performance. Shorting cryptocurrency can be a good strategy if your guess is corect, but if it’s not, shorting can be expensive, since you have to pay money over time to maintain your position.

Margin trading in crypto involves trading on leverage. In other words, by using your money to temporarily borrow more money. Trading with more money than you own can increase your profits, but it can also increase your losses should the market turn against you.

Reading this page is a good start. You can also learn about cryptocurrencies from news sources like Coindesk, The Block, and Decrypt, as well as from mainstream media outlets like Bloomberg.

Social media is rife with interesting analysis and content, but be mindful that a lot of the advice you may receive may come from people with vested interests.

If you’re still confused, the best way to learn about crypto is by joining its community. All the major coins and DeFi protocols have active Discords and subreddits full of knowledgeable people who can answer your questions.

Last Updated May 5, 2022

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