Before investing money, a cryptocurrency investor must decide on a personal strategy. Working without a strategy is like playing in a casino. As stated in Wikipedia, an investment strategy is a set of rules, patterns of behavior and procedures that an investor follows when choosing an investment portfolio.
When developing a personal strategy for investing in cryptocurrencies, it is necessary to determine the risks, time horizon and profit targets. Only after that you can proceed to the next step - creating a portfolio that matches this strategy.
What is a reserve fund strategy?
With regard to cryptocurrency investing, the reserve fund strategy involves reserving 5-10% of the portfolio to test new ideas. This part of the portfolio will look different for everyone, depending on the main set of positions. For example, a conservative investor who has only Top 10 coins in his portfolio should add several lower-cap assets to his reserve fund. If the portfolio is already sufficiently diversified - both in assets and in the strategies used - the reserve fund will be used for completely different purposes. You can buy coins at the stage of pre-sales, purchase a masternode or engage in mining.
Thus, the reserve fund must meet two requirements:
- reserve fund strategies differ from those used in the main part of the portfolio;
- the size of the reserve fund should not exceed 10% of the total portfolio value.
What is a reserve fund for?
Reserve Fund promotes active learning
The advantage in the market is always the one who has a large amount of information. By allocating part of the portfolio to a reserve fund, the investor forces himself to leave his comfort zone and explore new strategies for working in the cryptocurrency market. This allows him to notice good opportunities before others.
Reserve fund helps to find undervalued assets
It is common for humans to fall under the influence of herd behavior, or groupthink. Although everyone understands that the market crowd is often wrong, we follow it again and again because it seems safer and easier to us. Since most people follow the herd instinct, the most popular investment vehicles are incredibly overpriced. The smart investor is always looking for undervalued assets. They cannot be popular by definition. But the mere fact that an asset is unpopular does not mean that it is undervalued and will grow in value. In many cases, there are good reasons for unpopularity. Nevertheless, by taking a skeptical position, contrary to the mood of the bulk of market participants, a trader can find real hidden gems.
Diversification reduces volatility
By taking the 10% of your portfolio under the most ambitious experiments, you can reduce the overall portfolio volatility. But only under the condition that the reserve fund does not have direct correlation with the main positions.
The reserve fund helps to keep from chasing the assets taking off
The presence of a clearly formulated investment strategy does not allow to give in to emotions when making decisions. When the entire cryptocurrency market goes up, it is difficult to stay away. However, this situation is not conducive to making wise investment decisions.
Having diverted to the risky experiments (which include the pursuit of soaring coins) of the entire 10% of his portfolio, the investor gets the opportunity to try new ideas. And even if they end in failure, the bulk of the capital will be saved.
Knowing that the funds allocated for risky ideas are strictly limited, the investor begins to more rationally approach the selection of projects for experiments. This preserves opportunities for interesting investments, but has a positive effect on the quality of decisions made.
It should not be all 10% funds invested in one experiment. It is better to invest on 5% in two projects or on 2% in five projects.
Reserve Fund helps to find new ways to make money
Experimenting with different strategies can be found something worthy of attention. Suppose, initially, an investor deals only with buying the best cryptocurrencies, but over time it may turn out that he likes to study the technologies and practical application of those products that offer cryptocurrency projects. As a result, he can focus on fundamental analysis.