Know your time horizon

Investments can be held for any period of time, ranging from just seconds to decades. The length of this period is referred to as time horizon. There is no such thing as a “right” horizon, this depends on individual objectives. Knowing your horizon is, however, extremely important when it comes to choosing a certain type of investment and asset allocation. A longer time horizon allows for more aggressive risk-taking than a short horizon. The obvious reason for this is that there is more time to make up any losses.

Investing and risk

Since there is a lot of risk involved with investing in cryptocurrencies, this should be considered an aggressive investment even when properly diversified. Bitcoin’s 30-day volatility can easily exceed 30 percent, but even 70 percent or more for alternative cryptocurrencies is not uncommon. Volatility is a statistical measure, with the number indicating a 32 percent chance that the price of the investment will move by more than the indicated percentage (either up or down). A longer horizon is therefore a requirement, as there is a good chance of unrecoverable losses on the short term. In case of a short horizon, an investment in cryptocurrencies should therefore be avoided. Lastly, knowing your horizon can also save a lot of emotional stress that can be caused by (negative) swings in the investment’s value during the holding period.

Investing versus Trading

Investing should be distinguished from trading, as investing concerns building wealth through buying and holding. Trading, on the other hand, is about building wealth through more frequent buying and selling. The main aim of trading is to outperform buy-and-hold investors. Depending on the trading style, the holding period may vary from seconds to months. The trading style depends on other factors such as available monetary resources, available time, experience, risk tolerance and personality.