Just as it looked like the crypto market was stabilizing after a steep sell-off earlier this year, along came the meltdown of cryptocurrency exchange FTX, followed by a wave of panic selling from crypto investors. Many investors will now be concerned about the future of their crypto portfolios, with some now looking to exit the market entirely.
Things may look precarious in the short term, especially if some of your favorite cryptos have been knocked down a further 20% or more over the last couple of weeks. But now is not the time to abandon the long-term thinking that is key to unlocking future wealth. Here, we propose some steps to take to focus on the long run.
Focus On Large-cap Cryptos
Just two cryptocurrencies — Bitcoin and Ethereum account for more than half of the total crypto market capitalization. Bitcoin boasts a market cap of $320 billion, and Ethereum’s market cap stands at $148 billion, while the value of the crypto market, on the whole, is $833 billion. That is why investors refer to Bitcoin and Ethereum as the “blue-chip cryptos.” On a relative basis, the two cryptocurrencies are less risky and considerably less volatile than the rest of the crypto market.
But these two “crypto blue chips” don’t offer anywhere near the safety and risk protection of the stock market blue chips. However, they do come with a certain margin of safety. Bitcoin has been around since 2009, and Ethereum, since 2015. They have both endured sharp market downturns before and bounced back each time. In contrast, the newer cryptos launched during the last bull market simply do not have the same track record of bouncing back, so nobody really knows what will happen this time around.
In the cryptocurrency world, some investors like to think of themselves as “Bitcoin maximalists” or “Ethereum maximalists.” This is a way of saying that they will only invest in a single cryptocurrency, and they’ve maxed out their portfolio on that one crypto name. Every other crypto, they say, simply cannot offer the same kind of risk-reward upside. That may have been a successful strategy while the crypto market was very new, but in many ways, this breaks one cardinal rule of successful investing; don’t put all your eggs into one basket.
In other words, diversify. Today, there are literally thousands of cryptocurrencies to choose from.
If you check out the top 100 cryptocurrencies, it is possible to divide them into different baskets. By choosing cryptos from several of those baskets, it is possible to add a certain amount of diversification to your portfolio.
For example, one crypto basket might include all the Layer 1 blockchain projects, like Ethereum, Cardano, Solana, and Avalanche. They are some of the best-known cryptos with the largest market caps. Other baskets might include stablecoins, gaming and metaverse cryptos, DeFi (decentralized finance) cryptos, and meme coins.
Focus On Cryptocurrencies With Proven Utility
Another way to build a long-term investment mindset would be by focusing on cryptos demonstrating proven utility. In the crypto world, “utility” means blockchain projects that have real-world use cases. For example, Ethereum has real utility: You can mint and trade NFTs (non-fungible tokens) on different marketplaces. Ethereum also offers decentralized applications, smart contracts, and blockchain-based games.
In contrast, meme coins such as Dogecoin or Shiba Inu offer very limited utility. Investors will buy them because they can skyrocket in value and not because they have any inherent value. One good rule of thumb is to avoid meme coins in a market downturn, as they tend to go up only during bull markets.
Avoid Market Timing
As a final piece of advice, do not try to time the market. Rather than buying low and selling high, many crypto investors actually end up buying high and selling low. To put it another way, they only get involved when it is already frothy and speculative, and they will cash out when the market has a steep sell-off; they buy Bitcoin when it’s trading at $68,000 and would now be contemplating getting out of crypto entirely.
Instead of focusing on short-term trading gains, you might want to focus on building a long-term mindset. By following the three basic rules above, it is possible to best position yourself for long-term success in the market.