on the crypto
Just when it seemed that the cryptocurrency market was finally stabilizing after the sharp sell-off of the beginning of the year, came the overnight crash of the FTX cryptocurrency exchange and a wave of panic selling by the cryptocurrency investors. Understandably, many investors are now concerned about the future of their cryptocurrency portfolios and some are looking to exit the market entirely in search of less risky assets.
Things might look precarious in the near term, especially when some of your favorite cryptocurrencies are down 20% or more in just one week. However, now is not the time to abandon the kind of long-term thinking that is key to unlocking future wealth. Here are three steps you can take to focus on the long run and become a better cryptocurrency investor.
1. Focus on large-cap cryptocurrencies
Just two cryptocurrencies – Bitcoin and Ethereum – account for more than half of the total cryptocurrency market capitalization. Bitcoin has a market capitalization of $320 billion and Ethereum of $148 billion, while the total value of the entire cryptocurrency market is $833 billion. That's why some investors refer to Bitcoin and Ethereum as "blue-chip cryptos." On a relative basis, these two cryptocurrencies are less risky and less volatile than the rest of the cryptocurrency market.
Of course, these two cryptocurrencies don't offer anywhere near the security and risk protection of stock market blue chips, but they do have a certain margin of safety. Bitcoin, for example, has been around since 2009 and Ethereum since 2015. They have already experienced major market downturns and have recovered each time. Conversely, the newer cryptocurrencies launched during the last bull market simply don't have a track record of rebounding, so we don't know what will happen this time around.
2. Diversify
In the cryptocurrency world, some investors like to call themselves “Bitcoin maximalists” or “Ethereum maximalists”. This is their way of saying that they only invest in a single cryptocurrency and they have exhausted their portfolio on that crypto name. All other cryptocurrencies, they say, are unable to offer the same kind of risk-reward. This may have been a successful strategy when the cryptocurrency market was still very new, but in many ways it breaks one of the core rules of successful investing: Don't put all your eggs in one basket.
In other words, diversify, diversify, diversify. Today, there are literally thousands of different cryptocurrencies to choose from. Just as the key to a successful stock portfolio is diversification, the key to a successful cryptocurrency portfolio is diversification. If you look at the top 100 cryptocurrencies on CoinMarketCap, for example, you can break them down into different baskets. By choosing cryptocurrencies from several of these baskets, you can add basic diversification to your portfolio.
For example, a basket of cryptocurrencies could include all level 1 blockchain projects, such as Ethereum, Cardano, Solana and Avalanche. These are some of the best-known cryptocurrencies with the highest market shares. Other baskets could include stablecoins, gaming and metaverse cryptocurrencies, decentralized finance (DeFi) cryptocurrencies, and meme coins.
3. Focus on cryptocurrencies with proven utility
Finally, one way to build a long-term investment mindset is to focus on cryptocurrencies that have a proven track record. In the cryptocurrency world, “utility” has a very specific meaning: it refers to blockchain projects that have real use cases. For example, Ethereum has a very real utility: Non-fungible tokens (NFTs) can be minted and traded on various exchanges. Ethereum also offers smart contracts, decentralized applications and games based on the blockchain.
In contrast, meme coins like Dogecoin or Shiba Inu offer very little utility. Investors buy them because they can skyrocket, not because they have intrinsic value. A good rule of thumb would therefore be to avoid meme coins during any down market, as they only tend to rise during crypto bull markets.
