By Konstantin Boyko-Romanovsky, CEO and Founder of Allnodes.
Historically, the cryptocurrency market has not correlated with the traditional market, which has helped investors diversify their holdings into cryptocurrency investments. However, when current global economic conditions including high inflation, rising interest rates and stagflation returned bear market sentiment, the stock and crypto markets took a hit. Since blockchain is an emerging technology, cryptocurrencies have plunged in tandem with tech stocks and markets have become correlated. However, this does not mean that investors should stop investing in technological change with a temporary lack of meaningful diversification. On the contrary, blockchain will bring profound changes to our daily lives, business operations, finance, real estate, and healthcare, among others. Instead, investors should focus on adding strategically chosen crypto assets to their portfolios to ensure long-term gain.
There are three key things to remember when assessing the validity and value of cryptocurrencies. The first is the size of the blockchain network. The larger the network, the more active and valuable it is. It is imperative to dig a little deeper to understand whether the network activity is genuine or just a large community of coin followers without much development. Large and healthy blockchain networks offer so-called network effects that multiply the value of a cryptocurrency. However, the size of a network alone is not enough to gauge the validity of a given crypto asset – sometimes smaller networks feature winning technology.
The next thing to keep in mind when evaluating crypto assets is technology. Investors should ask questions such as “What problem does this blockchain solve?” ‘Is this a unique, scalable and viable solution?’ “Are there any use cases or likely future use cases that will revolutionize the way we do things? The value is probably there if the research leads to curious and stimulating answers.
Finally, it is better to diversify crypto investments by theme or utility than to focus on coins in the top 10-15 cryptos by market capitalization. A blockchain may have a large network and a large market capitalization, but may technically be inferior to another blockchain trying to solve identical problems. Also, a dodgy coin can suddenly skyrocket due to hype, only to crumble down the road due to lack of utility, development, flimsy technology, or poor management and organization. With these possibilities in mind, it’s best to research and diversify. Picking a handful of blockchain projects that solve real-world problems in various industries is a diversification strategy investors should consider.
Finally, a long-term investment strategy could include an asset in a crypto portfolio that generates additional yield on top of its potential price appreciation. Passive income on investments, or staking, is a process of securing Proof-of-Stake (PoS) networks with locked collateral. Staking generates interest-like staking rewards for the same coin as the staked asset. Investors can compound this interest indefinitely, resulting in higher potential gains.
Thorough research is recommended before pursuing any financial investment, but is especially crucial in cryptocurrencies.