By This question is asked often, and we’re assuming that most people are talking about their profits from trading crypto on a daily basis. In that case, the best way to reinvest would be to simply trade it, compounding the profits into your trading capital. If it’s from a specific coin, then rebalancing your portfolio every few days, maximum, should lock in profits in surges pretty well. Constant vigilance is important as coins surge and retracts pretty quickly in the crypto sector.
Compounding capital has a few different strategies that we’ll try to cover.
What is Compounding?
Compounding capital simply means compounding the capital returns from trading or portfolio gains. What that means is that if you were to make 5% today, you would essentially add that 5% to your base sum for tomorrow.
An example of this is if you started with $1000 and made 10% on a position today. Tomorrow, you would start with $1100 and if you made another 10%, then on the third day you would start with $1211, on the fourth, $1332.10, and so forth. This means you are using 100% of your profits to create more profits, exponentially growing your capital base. This particular strategy is great for day traders, as it continually grows their seed money and reinvests it for more. A good resource to use for calculating how quickly the profits go up with this type of strategy is a compound interest calculator. This is the most basic strategy for reinvesting profits.
Reinvesting Profit
A second strategy is to take a small portion of your profits and reinvesting the other portion. This is usually done so that eventually you are cashed out and running on 100% profit. This means that, at the point where you have taken out your original investment, you are no longer capable of losing any of your original seed money.
Other investors may actually take out 100% of profits until they bank their original seed money, as it returns their original capital sooner.
Either strategy is a great hedge against future losses or the market one day losing its profitability. This is also a good strategy if you borrowed your seed capital and want to pay less interest, though our advice is never to borrow for a volatile investment like cryptocurrency.
Investing Profits into New Coins
Some traders and speculators use a strategy where they maintain a large portion of their portfolios in the main coins, like BTC, LTC or ETH. When they see significant profits or they close a trade and buy back in at a lower price, they use a part of the profits for deep speculation. That means they’re picking extremely new coins or ICOs that have a high risk but high rewards ratio as well.
For example, if you were today trade 1 BTC and turn it into 1.2 BTC, these traders will invest the 0.2 BTC on a very young coin or ICO that they think has a shot at delivering 10x-100x returns. If that particular project becomes successful, it means they were among the first investors and would receive the early adoption rewards that typical cryptocurrency success delivers.
This strategy is great for investors who are looking to increase their portfolios and want to hold positions in a plethora of high return potential coins, but don’t want to risk too much of their trading capital.
Investing into Mining
Another very profitable strategy is to invest trading profits into mining or vice versa. This strategy is for those investors who are a little bit more tech savvy and prefer to have more than one source of coin income. It works by using your initial capital to either actively trade or actively mine. If you actively mine, then profits are deposited directly to your exchange accounts, becoming the capital to trade with. If you actively trade, profits are deferred to buy cloud mining contracts or mining hardware.
This means that even in a slow or stagnant market, you are still making profits, and if mining difficulty was to increase or ROI was to become higher, your trading profits would offset some of those losses. This is likely the most difficult strategy to employ as it requires knowledge of both trading cryptocurrency and mining cryptocurrency.
Putting Profits Away
A final strategy is one where traders take profits and put away those profits in the form of coins. This strategy is used when a trader wants to keep a portion of their capital away from the risks of daily trading.
For example, if you were to actively trade BTC, and you were to turn 1 BTC into 1.2 BTC, the 0.2 BTC would be sent to a cold storage wallet and held as a long position. This way, your overall long position on your base coin or coins will increase and not be put at risk in active markets.
This strategy doesn’t, however, allow for quick access to your coins in the event the market begins to turn. One common strategy to hedge against this fact is to take short positions, when the market is bearish, on leverage, to offset the potential losses your banked coins would be taking.
For example, if you have 10 BTC in your cold storage and the market was to turn and look bearish, you would leverage 1 BTC x10 and take a short position. If the market goes down, you would make enough profits to cover the lower value of the coins you have in storage.
This particular strategy requires expert level trading skills as leverage and short positions are not easy or suggested unless you have a deep understanding of the markets. If, in the example above, the market was to go up 10 percent prior to going down, you would not be covered from the losses as you would have been margined out. Predicting the exact point at which the market will turn is extremely difficult and trades generally can go against you before moving in your favour. That means that unless you have “strong hands” (don’t panic sell or get scared off a position) you shouldn’t attempt these types of trades.
Professional Knowledge and Assistance
While all these strategies are great examples of reinvesting daily interest back into the cryptocurrency markets, thus ballooning your capital and ultimately your profits, they do require considerable market knowledge, trading strategy and understanding of crypto technologies to be effective. Most people are not professional traders and will likely find it difficult to make profits, especially during bear market conditions (down trending markets).
A larger number of people in the cryptocurrency markets have made the majority of their returns and grew their capital during an extended period of growth and bull trending. During these periods, even amateur traders can make decent returns with little trading or market experience. Even people who simply held long positions on Bitcoin saw returns in excess of 1500% in 2017. With other coins like Ethereum or Litecoin, returns were even higher. These exuberant returns have built a false sense of confidence in the amateur trader community within the cryptocurrency markets. These same traders believe it was skill and not market dynamics that delivered them these returns.
Unfortunately, the majority of them will learn that this is not the case in the current bear market.
If you are a professional trader, you are welcome to attempt these strategies and will potentially be successful. If you are not a professional level trader, these strategies may result in losses far greater than simply holding your positions for the long-term and not actively trading.
How CoinBeat Can Help You
For those people who are not comfortable trading actively, or don’t have the time to devote to a 24-hour, 7-days-a-week market like cryptocurrency, CoinBeat looks to bring a professional level trading to the average investor. CoinBeat connects cryptocurrency investors with professional cryptocurrency traders, writers and analysts. Through our publication, investors can mimic or copy the portfolio, indexing strategies, trades and positions of professional traders that give daily and weekly advice to our readers.
This means that even if you are not comfortable using the strategies described above, you can still trade and make profits to reinvest into your holdings. Make sure you subscribe to CoinBeat to get the latest and greatest from around the industry first.
Follow CoinBeat on Facebook, Twitter & Telegram
Subscribe to our CoinBeat Newsletter
Submit an article to CoinBeat
View live Marketcap Prices here
Comments