Cryptocurrency Hodling Strategies

Now that you’ve done your pre-hodling homework, it’s time to discuss hodling strategies that can help you achieve your investment goals.

Use the Minimum Expected Return to Choose Your Cryptocurrencies

After determining your minimum required rate of return, it’s time to do a bit more research for hodling cryptocurrencies that have the highest chances for success.

In particular, you must research on the average rates of return on your prospective cryptocurrencies, particularly if you plan to buy those that are already being publicly traded.

Why? It’s because tokens being sold through ICOs don’t have past prices to compute average returns with.

For illustrative purposes, let’s say that after doing your research, you find that the average annual returns on Bitcoin, Ethereum, and Litecoin were 30%, 20% and 25%, respectively.

If your minimum required rate of return is 18%, which of the three would you choose? Chances are, you’d go for Bitcoin without batting an eyelash because it has the highest average annual return at 30%.

I wouldn’t say it’s wrong but what I can say is that it’s incomplete.

Why? When comparing actual returns to average returns, they’re rarely the same. Actual returns aren’t equal to the average, but they tend to be within the range of the computed average in most cases.

This means that actual returns can be higher or lower than the computed average by up to a certain amount.

To optimize your chances of being able to achieve your minimum required rate of return, you’ll need to choose investments whose most conservative estimated or forecasted future returns equal or exceed your minimum.

And for this, you’ll need to compute for the standard deviation, which measures the volatility of returns or how far can you reasonably expect returns for a specific investment to be from the mean or average return computed. Allow me to illustrate this in a way that you can easily understand.

Let’s say that the computed standard deviation for Bitcoin, Ethereum, and Litecoin were 15%, 3%, and 7%, respectively.

What do these figures mean? It means that you can reasonably (not perfectly) expect the return for Bitcoin this year to range from 15% (30% -15%) to 45% (30% + 15%), where 15% is the lowest expected return for Bitcoin for next year.

For Ethereum, the annual return for this year to range from 17% (20% – 3%) to 23% (20% + 3%) and for Litecoin from 18% (25% – 7%) to 32% (25% + 7%).

Now, compare the lowest expected returns for each of the three cryptocurrencies. Bitcoin’s is 15%, Ethereum’s is 17%, and Litecoin’s is 18%.

Given your minimum required rate of return, the wise choice would be Litecoin because its lowest expected annual return for this year is the only one that satisfies your 18% minimum requirement.

Without the benefit of standard deviation, you could’ve gone for Bitcoin, which has a reasonable chance of registering a lower annual return than your required minimum.

And even though its mean or average annual return’s the highest, it’s also the most volatile with the highest standard deviation, which resulted in the lowest among the low end of the expected return spectrums.


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