9 min readInvesting in crypto is often associated with short-term gains (or losses), as crypto is a historically volatile asset class. However, smart investors know that an investment strategy is built for the long term. Instead of making quick bets, they build a diversified investment portfolio over time. In this article, we will explain how you can apply this to crypto, thanks to crypto ETPs.
5 Reasons to Invest in Crypto over the Long Term
Looking further into the future makes a lot of sense for anyone investing in cryptocurrency. It’s easy to get swayed by headlines and announcements, but crypto investment is better understood as a long-term endeavour.
Cryptocurrency Moves in Cycles
You might have heard of bull and bear markets. These animal metaphors refer to two diametrically opposed market phases. In a bull period, prices are rising, and the market is expanding. In a bear period, prices are falling while the market is contracting.
Crypto has experienced several bear and bull markets over the course of its history. These periods can last for a few weeks or several months.
Bitcoin experienced a 3-months euphoria in 2017, when its price rose from 4k$ to 20k$. This was followed by a bear period, as Bitcoin dropped under 3k$. Another bull period took place in 2020-2021, with prices jumping up from 5k$ to 60k$. Again, prices fell under 20k$ in the months immediately after.
What’s the lesson here? Some crypto assets have proven they can rebound after strong downturns - it’s worth keeping an eye on the market even when it looks slow. Investors who had bought big just before a crash suffered serious losses, while early-adopters stood to make big wins - or still not recoup their investment if the asset does not recover. But predicting cycles is no easy task, and investing smaller amounts on a regular timeline and over the long-term can help smooth these variations.
Cryptocurrencies are experiencing growing adoption…
Crypto is a teenager: Bitcoin was unveiled in 2009, Ethereum in 2015. Both have surged in popularity in the last few years, as exemplified by the number of unique addresses (the “account number” used for making transactions). There are over 170M unique Ethereum addresses… and over 1Bn Bitcoin addresses (source: Glassnode, May 2023).
… and the technology keeps expanding
Crypto is an innovative field, and has already proven it can reinvent itself. Processes are regularly improved, allowing for faster and more efficient transactions. The latest revolution is ETH’s Merge, which took place in December 2022. After this upgrade, transactions on the ETH blockchain consume 99% less energy.
Low-barrier to entry: capitalise on small initial crypto investment
There is no “minimum” amount required to invest in crypto. One could invest as little as a few dollars a month, and benefit from spectacular rises in value over time.
Diversification strategy: you don’t have to go all-in on crypto to reap its rewards
We have seen that crypto is volatile, and easy to acquire. This makes it a good candidate for diversification within a portfolio. We dive deeper into this topic in our article on diversification with crypto.
How to Invest in Crypto: Timing Matters
As an investor, you would like to buy when prices are low, and sell when they have reached their peak. But how can you identify this sweet spot? There is no easy answer: it takes time and effort to analyse the market. Luckily, there are tools to assist you with this.
Research, research, research
Learn everything you can about the crypto you want to invest in. Check its historical performance, underlying technology, leadership board… All this information is available online, even if retrieving it can prove time consuming. But it’s not a step you can skip. Our Knowledge section is dedicated to providing information on major crypto and ongoing trends.
MVRV Score
The Market Value to Realised Value Ratio charts whether an asset is undervalued or overvalued relative to its current value. Typically, a high MVRV score tends to indicate Bitcoin is overvalued; a low score could mean it’s undervalued.
Dollar-cost averaging and savings plan: sticking to your goals
Dollar-cost averaging (DCA) is an investment classic. It consists in buying a fixed amount on a regular basis - for example, 100$ in Bitcoin every week - regardless of price variations. This method is sometimes also referred to as a “savings plan”, when you put aside a portion of your income for investment purposes.
If you invest according to a predetermined savings plan , you don’t “care” whether Bitcoin is in a bull or bear period. You keep buying the predetermined amount, with the objective to smooth out your investment cost over time. You may then be able to lower the average cost per investment and reduce volatility and drawdown in your portfolio. This method can also prevent making poorly-timed lump sum investments.
Think globally
Investing in cryptocurrency, whether you follow the DCA method or other technical indicators, has to be part of a wider, diversified, investment strategy. It’s up to you to design it, based on your financial objectives and risk appetite.
A word of warning: even over the long-term, your capital is at risk, and you might not recoup your losses. That’s why it’s so important to diversify your portfolio.
Diversifying with Bitcoin over the long-term
Let’s have a look at 3 portfolios, active from October 2015 to November 24, 2022, with quarterly rebalancing:
1) Standard portfolio is composed of stocks (60%) and bonds (40%).
This is the “standard” asset repartition in traditional finance.2) This portfolio adds 4 percent of gold vs the standard one.
3) This one introduces 4 percent of Bitcoin in the portfolio instead of gold. Its rounded composition is therefore stocks (57%), bonds (39%), and Bitcoin (4%).
Result: Portfolio 3 (4% of Bitcoin) is the top-performing portfolio
Performance: A 4% Bitcoin allocation improved annualised returns from 6.9% to 14.4%, compared to portfolio 1.
Risk: Despite BTC’s volatility, the portfolio as a whole is not significantly more volatile (10.4% vs 9.3% for portfolio 1). Its maximum drawdown (the maximum drop from a peak to a low) stands at 22.9%. However, portfolio 2 (gold) had lower volatility and drawdown, as gold was a steadily rising asset on the period.
Decorrelation: With as little as 4% of Bitcoin in the portfolio, correlation to portfolio 1 is reduced by almost 8%. This is a further indication that Bitcoin is a suitable asset for diversification purposes.
Based on this analysis, a long-term (8 years) and crypto-diversified portfolio performed optimally compared to more traditional approaches.
Crypto ETPs: Your Long-Term Investment Allies
You’re convinced that investing in the long-term is the right strategy for you. But how should you start buying cryptocurrency, precisely?
ETPs (short for Exchange-Traded Product) are securities trading on regulated securities exchanges and offering exposure to a variety of assets - including digital assets. Crypto ETPs come with several advantages that make them especially attractive for long-term oriented investors.
Ease of use
ETPs can be bought via your bank or broker, and traded like any security. There is no need to tinker with unregulated exchanges or expensive legacy funds.
Seamless integration into your portfolio
ETPs are natively part of your asset portfolio. This makes for convenient management, especially if you follow the DCA technique. It also means you can quickly rebalance the weight of assets within your portfolio - if you had decided to invest 10% in digital assets for example.
In some countries, ETPs can also be eligible for tax breaks.
Utmost transparency
CoinShare’s Physical ETPs are backed by physically-held portfolios of digital assets secured by Komainu & Ledger’s technology, ensuring funds reflect their underlying asset’s value.
XBT Provider ETPs - CoinShares' pioneering ETPs in the Nordics - are hedged by digital currency held in either physical or synthetic form by the guarantor of the ETPs (CoinShares Capital Markets). This hedge can be consulted at any time, ensuring total transparency for investors and the peace of mind of a securely hedged product.
Investing for the Future
Investing comes with opportunities… and risks. This is true for any asset class, crypto included. Opting for a long-term view can mitigate some of these risks, as long as you take the time to study the market and keep a cool head when making decisions.
If you would rather follow a more passive approach, investing regularly into the crypto ETP of your choice can be a rewarding approach.
CoinShares offer Physical ETPs for a variety of crypto. Check our Crypto ETP catalogue, along with more data about performance, rewards, and fees. Located in the Nordics? You might be interested in XBT Provider by CoinShares, offering Bitcoin and Ether ETPs in both EUR and SEK.
Please remember, there are still risks associated with the XBT Provider’s ETPs, such as counterparty and volatility risks, that they are complex products, may be difficult to understand and have a high risk of capital loss.