Crypto investing 101: How to choose cryptocurrencies for your portfolio
As of March 2022, there are about 18,000 cryptocurrencies in existence, and their values fluctuate wildly. The stakes are high; if you happen to put all your eggs in the wrong basket, you may wake up one day with all the fruits of your hard work down the drain. So here are three guidelines to help you on your quest to grow your wealth in crypto.
Learn the basics of cryptocurrency
As a newbie investor, your first homework is to do research. It pays to have a solid grasp of cryptocurrency and blockchain technology. Today’s dominant currency is Bitcoin, but its market share has decreased significantly, from 65% in 2020 to only 40% in 2022.
We’re entering what experts call alt-season, where many altcoins (or any coin that isn’t Bitcoin) is poised to outperform Bitcoin, long hailed as the crypto king. Despite this, the crypto market is still heavily influenced by Bitcoin’s price actions.
Some other concepts to explore are:
- HODL, which stands for hold on for dear life, is a long-term approach to crypto investing
- Custodial and non-custodial wallets, where you’ll keep your crypto assets
- Stablecoins, a type of cryptocurrency that’s tied to a stable reserve asset (like the US dollar and gold) and may be appealing to people with a low risk appetite
Look at investment factors
Never choose cryptocurrencies on a whim. Monitor these three investment factors:
Market capitalization, also known as market cap, is the total dollar value of all the coins that have been mined. To get the market cap, multiply the number of mined coins by its current price.
Market cap is a trusted metric when choosing the best coins to invest in. Generally, investors trust a currency with a larger market cap because it has a high growth potential and a track record of relative stability. A high market cap also means the currency can withstand a lot of investors cashing out, without dramatic price drops. They’re considered a lower-risk investment.
As of April 2022, Bitcoin has the largest market capitalization at over $763 billion, followed by Ethereum ($364 billion) and Tether ($82 billion).
Consider investing in cryptocurrencies with a limited supply, like Bitcoin. Its founder capped the total Bitcoin supply at 21 million to mimic the finite supply of gold. As of December 2021, 18.77 million Bitcoin have been mined and are in circulation.
When the supply runs out, many experts predict a large price increase. Although future Bitcoin prices depend on regulation and adoption, it’s safe to say that several years into the future, Bitcoin will be one of the most scarce resources in the world.
The more use cases, the more valuable a cryptocurrency could become. Use cases drive adoption and investment. Let’s look at Bitcoin and Ethereum. While Bitcoin is considered digital gold, Ethereum offers a lot more use cases.
Through a combination of innovative features like smart contracts, Ethereum, powered by its native currency Ether, offers revolutionary solutions in gaming, supply chain management, web browsing, decentralized finance, and NFTs.
Be mindful of your portfolio
Exciting as it sounds, cryptocurrency is still a volatile asset. It’s still young, too, unlike the stock market that’s been around for hundreds of years and has centuries’ worth of data to predict its behavior. As such, experts recommend that crypto should not exceed 10% of your investment portfolio.
Of all cryptocurrencies, Bitcoin (BTC) is one of your safest bets. So as a newbie investor, you can allocate much of your portfolio (around 75%) to Bitcoin. Some also place their bets on Ether (ETH), the second largest in market cap. After months of navigating your way through these two, you can venture out to the rest of the top 10 coins.
Like other forms of investing, cryptocurrency is not a one-and-done project. The most successful investors always keep tabs on crypto values, read white papers, and follow the news. Knowledge gives you the best chances amid the ebb and flow of the crypto market.