Can traders be successful when investing in an uncertain market?

Uncertain markets may make for some risk, but they often produce the greatest rewards, Bitcoin being just one example of an asset that has exceeded expectations despite market conditions.

Uncertain markets are defined by those that are hard to forecast how they will perform in the future. For example, it is nearly impossible for anyone to time a recession, pinpointing the exact start and end dates and which projects will thrive in difficult times. Although this can be scary, especially for new investors, these uncertain markets can also be the most profitable, providing investors with an excellent opportunity to position themselves strategically for triple or quadruple-digit earnings.

Regardless of the impact of the COVID-19 pandemic recovery, investors may still do well to enter the market even in a volatile area like the cryptocurrency industry. Although many investors still remain skeptical about investing funds, the potential to grow their assets exists. For example, those holding Bitcoin over the year were likely delighted when Bitcoin exceeded $65,000 after dropping as low as $28,000 earlier in the year. The mindset investors are then encouraged to take is not if they should invest, but how.

What makes investing in an uncertain market difficult?

Even with the best tools at an investor's disposal, it can be difficult to predict where the market is headed with 100% accuracy.

Even with the most talented of experts, it can be hard to paint an accurate picture of where the market is headed and where you should be putting your money. While Bitcoin is still expected to hit over $100,000, this is still only a mere prediction, leaving many investors to ask where they should be allocating their money in the time being.

Is diversification an adequate strategy for investing in the cryptocurrency market?

Diversification has been met with controversy, namely, because of the amount of technical knowledge needed to truly diversify a cryptocurrency portfolio.

Typically, the piece of advice that gets passed down to investors the most is “diversify.” The thought process being “don't put all your money into a single asset.” The belief is that there are thousands of assets, so spreading your investment out can help to mitigate some of the inherent risks with going all-in on one asset. While this makes sense in traditional markets, this viewpoint has been met with the opposing opinion that diversifying is only a myth. In part because many of the top cryptocurrencies are closely correlated with Bitcoin, and the marketing story used to differentiate one coin from the next, takes away from a proper evaluation of the coin, including the code itself. In contrast to public companies that users buy stock from, evaluating the potential of a cryptocurrency project is a lot more complex and requires more technical knowledge.

For these reasons, the strategies for investing in cryptocurrency become a little more complex than diversification.

What other strategies are recommended for investing in cryptocurrency?

Investors are often encouraged to leverage one of two strategies, either building out a list of medium to high-risk coins or looking at how the coins mimic the price of Bitcoin.

First, experts will suggest that users choose a few currencies in their portfolio (1-3) and build a varied list of coins and tokens that range from medium to high risk. This list should include several stablecoins, cryptocurrencies backed by a “stable” asset.

The second strategy considers how coins follow Bitcoin. By considering how each coin mimics the price fluctuations of Bitcoin, users can gain some insight into the direction a coin may follow. Unfortunately, on the other side of things, less popular coins (specifically those selling for less than $1) may increase significantly more, regardless of how Bitcoin performs. However, taken together, Bitcoin’s influence over the price of other coins is actually stronger today than it has been in previous years, as evidenced in correlation research that has compared top currencies on the market like Ripple.

The bottom line is no matter which strategy an investor decides to take (if they choose either), the most crucial part about navigating an uncertain industry is remaining in the know of new market trends and positioning themselves accordingly. Therefore, investors must remain well-informed in recent news and have the capabilities to act on new information as it appears, adjusting their portfolios accordingly.