By Konstantin Boyko-Romanovsky, CEO and Founder of Allnodes.
Historically, the cryptocurrency market has not been correlated with the traditional market, which has helped investors to diversify their investments with cryptocurrencies. However, when current global economic conditions, including high inflation, rising interest rates, and stagflation, shifted market sentiment to the downside, both the stock and crypto markets took a hit. Since blockchain is an emerging technology, cryptocurrencies crashed along with tech stocks and markets correlated. However, this does not mean that investors should stop investing in technological developments with a temporary lack of significant diversification. Rather, 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 long-term returns.
There are three essential things to remember when evaluating the validity and value of cryptocurrencies. 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 if the network activity is genuine or just a large community of coin supporters without much development. Large and healthy blockchain networks offer what are called network effects that multiply the value of a cryptocurrency. However, the size of a network alone is not enough to assess the validity of a given crypto asset; sometimes smaller networks come with winning technology.
The next thing to consider when evaluating crypto assets is technology. Investors should ask questions like “What problem is this blockchain solving?” ‘Is it a unique, scalable and viable solution?’ ‘Are there use cases or possible future use cases that will revolutionize the way we do things?’ Value is likely to exist if the investigation leads to curious and thought-provoking responses.
Lastly, diversifying cryptocurrency investments by theme or utility is better than focusing on coins that are in the top 10-15 cryptocurrencies by market cap. A blockchain may have a large network and a sizeable market cap, but it may technically be inferior to another blockchain trying to solve identical problems. Also, a questionable coin can suddenly rise to the top due to hype, only to fail through lack of utility, development, unstable technology, or poor management and organization. With these possibilities in mind, it’s best to do your research and diversify. Choosing a handful of blockchain projects that solve real-life problems across various business sectors is a diversification strategy that investors should consider.
Finally, a long-term investment strategy might include an asset in a cryptocurrency portfolio that yields an additional return on top of its potential price appreciation. Passive investment income, or staking, is a process of securing escrowed proof-of-stake (PoS) networks. The stake earns stake rewards analogous to interest in the same currency as the staked asset. Investors can compound this interest indefinitely, resulting in higher potential earnings.
Deep research is recommended before making any financial investment, but it is especially crucial in cryptocurrencies.