Investment Strategy (Amount, Regularity, Liquidity)
Before making a purchase decision, it is advisable to consider how much capital you want to exchange into Bitcoin, over what period and with what regularity, how long you intend to hold Bitcoin, and when you might need your capital for other investments. It’s also worth considering whether you might want to make regular purchases.
Bitcoin is a relatively liquid investment vehicle that can be liquidated within one to three days, depending on the provider.
Essentially, two investment strategies are distinguished: Trading and “buy and hold”. While “buy and hold” is a long-term investment, trading focuses on short-term profit-taking.
Since the price of Bitcoin, due to its currently low market capitalization, is subject to significant fluctuations, especially for newcomers, it may be advisable to invest gradually, for example, through a savings plan. This investment strategy is called Dollar Cost Averaging (DCA). In contrast, the Market-Timing strategy aims to always catch the optimal time for buying and selling, which requires some expertise. Market-Timing can be further divided into two sub-strategies: Trend Investment Strategy and Turnaround Investment Strategy
“Buy and Hold” Strategy (HODL)
“Buy and hold” refers to a long-term strategy in which investors buy Bitcoin and hold it for an extended period (often years or decades), usually on a hardware wallet. This strategy is also called “HODL’n” by Bitcoin enthusiasts, stemming from a typographical error of the word “hold.”
Since the total number of Bitcoin that can ever be created is fixed at 21 million, and the expenditure of time and energy in the form of work, as well as the use of resources, becomes more efficient over time, a long-term price increase in Bitcoin is expected, particularly against inflationary currencies. This is also referred to as the deflationary characteristic of Bitcoin.
If you want to buy Bitcoin, you can do so directly through the Ledger Live app. You only need a Ledger hardware wallet, and you can then send Bitcoin directly to your wallet via the app. Selling is also possible directly through the app. You can get the Ledger hardware wallet using the following link:
Trading
Trading is an investment strategy that primarily aims to take advantage of short-term market price fluctuations by exploiting informational advantages to generate profits. Profits in trading are based solely on the losses of others, as no real value can be created in the short duration of the trade.
To be successful in trading in the long term, it is necessary to regularly possess such informational advantages, a feat that only a few market participants achieve. Professional traders, who are well-versed in all the indicators, patterns, and market mechanisms that have short-term effects on prices, may be successful with this strategy in the long run. These traders continuously monitor the market and analyze charts and news almost daily.
Dollar Cost Averaging (DCA) / Average Cost Strategy
The idea behind the DCA strategy is that it is difficult to determine the best time to buy Bitcoin. Markets are often volatile, and it can be challenging to predict the bottom of a price drop or the peak of a price rally. This is especially difficult due to the various influencing factors affecting the price of Bitcoin. Many of these factors are nearly impossible to predict, such as political decisions and laws, media attention, global economic events, natural disasters, etc. By using the DCA strategy, the risk of a poor entry point is reduced. For example, if you invest in Bitcoin in installments over a period of 5 years, you will benefit from the average price increase at the end of the observation period, despite temporary fluctuations, while reducing the risk of losses due to an unfavorable entry point.
This investment strategy can reduce the price fluctuation risk, but it also has a dampening effect on potential gains/returns as well as potential losses. For this reason, this investment strategy is particularly suitable for people who are not familiar with market mechanisms and influencing factors, or who do not want to engage with them regularly, but want to participate in the long-term market development of Bitcoin.
Market-Timing Strategy
In Market-Timing, investors try to predict Bitcoin price fluctuations in order to align their decisions to buy or sell Bitcoin with the optimal time. The goal is to buy at the lowest possible price and potentially sell at the highest price.
Trend Investment Strategy
The trend investment strategy is a subcategory of the Market-Timing strategy. Here, one tries to determine if a short-term development precedes a long-term trend based on various indicators. This happens, for example, when certain events cause investor enthusiasm to grow, leading to increased demand and higher prices.
Turnaround Investing Strategy
With this investment strategy, one tries to determine whether a turnaround in the future can be expected based on various indicators. This is the case, for example, in a bear market with particularly positive or in a bull market with particularly negative headlines. Large transactions can also be an indicator of a trend reversal, as it is generally assumed that professional investors with large Bitcoin holdings have better information and are more likely to obtain it.
Influencing Factors on Bitcoin Price
It is not possible to predict the actual development of market prices in terms of timing and magnitude. Numerous books point to this, citing long-term studies. However, there are certain influencing factors that affect the price of Bitcoin, and considering causal relationships, conclusions can be drawn about the development of Bitcoin prices.
Below are some key influencing factors/indicators on the price of Bitcoin, which can also influence each other:
- Supply and demand (media presence / Google keyword search / transaction frequency)
- Bitcoin Halving
- Regulation / Laws and Bans
- Adoption and Acceptance
- Market Sentiment / Sentiment
- Macroeconomic Factors
- Large Market Movements
Based on past price developments, one can develop a prognosis for future price developments. While it is not certain that past market patterns will repeat in the same timeframe and to the same extent in the future, there are certain market mechanisms in Bitcoin that allow reasonable conclusions about certain price developments. For example, a Bitcoin halving event occurs approximately every four years, reducing the inflation of Bitcoin and limiting the total number of Bitcoin to around 21 million.