By Konstantin Boyko-Romanovsky, CEO and founder of Allnodes.
Historically, the cryptocurrency market did not correlate with the traditional market, which helped investors diversify their investment holdings with cryptocurrencies. However, when current global economic conditions, including high inflation, rising interest rates, and stagflation, turned market sentiment bearish, both stock and crypto markets took a hit. Since blockchain is an emerging technology, cryptocurrencies plunged in tandem with tech stocks, and the markets became correlated. However, this does not mean that investors should stop investing in technological evolution with a temporary lack of significant diversification. On the contrary, blockchain will lead to profound changes in our daily lives, business operations, finance, real estate, and healthcare, among other things. Instead, investors should focus on adding strategically chosen crypto assets to their portfolios to ensure a long-term payoff.
There are three essential things to remember when assessing the validity and value of cryptocurrencies. First is the blockchain’s network size. The more extensive 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 merely a large community of coin followers without much development. Large and healthy blockchain networks deliver what’s called network effects that multiply the value of a cryptocurrency. However, the size of a network alone is not enough to evaluate the validity of a given crypto asset – sometimes, smaller networks come with winning technology.
The next thing to keep in mind when evaluating crypto assets is technology. Investors should ask questions like ‘What problem is this blockchain solving?’ ‘Is it a unique, scalable, viable solution?’ ‘Are there any use cases or probable future use cases that will revolutionize how we do things?’ Value is likely there if the research leads to curious and thought-provoking answers.
Lastly, diversifying crypto investments by theme or utility is better than focusing on coins in the top 10 to 15 cryptos by market cap. A blockchain can have a big network and a sizable market cap but may technically be inferior to another blockchain trying to solve identical problems. Also, a questionable coin can suddenly soar to the top due to hype, just to flop down the road for lack of utility, development, shaky 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-life problems in various business sectors is one diversifying strategy investors should consider.
Finally, a long-term investment strategy could include an asset in a crypto portfolio that yields an additional return 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-up collateral. Staking generates staking rewards analogous to interest in the same coin as the staked asset. Investors can compound this interest indefinitely, resulting in higher potential gains.
In-depth research is recommended before pursuing any financial investment, but it is especially crucial in cryptocurrencies.