How to find the best cryptos to invest in…
Warren Buffett once called bitcoin “rat poison squared.”
In a different 2020 CNBC interview, he explained, “Cryptocurrencies have no value and they don’t produce anything. They just sit there. You can stare at it all day and no little bitcoins come out.”
Buffett made his fortune investing in productive, cash-generating businesses like Apple and Geico insurance.
As Buffett said, bitcoin doesn’t produce anything. Some folks have likened it to digital gold. It just sits there.
This is true for cryptocurrencies. But remember, most cryptos are not cryptocurrencies.
Dozens of real crypto businesses produce millions of dollars in cash flows each day. That means we can determine their value like you would a stock.
Here’s how we at RiskHedge find the best cryptos to invest in…
Focus on the business behind a crypto…
You can compare how much revenue Ethereum rakes in each year to its market cap to get an idea of how “expensive” or “cheap” it is — just like a stock.
In RiskHedge Venture, we evaluate crypto opportunities just like Warren Buffett assesses a stock. We analyze the underlying business.
It’s important to understand that almost no one else views cryptos as businesses, yet. The vast majority of crypto investors have a trading mentality. They aim to find a hot crypto… ride it higher… then jump quickly to the next hot trade.
This can be a profitable strategy. But it’s not nearly as profitable as our strategy. Which is to identify great crypto businesses very early on, and hold them as they flourish.
Why?
I’ve chatted with lots of folks who achieved big riches in crypto. They all have one thing in common: conviction.
Specifically, they had conviction in the underlying purpose of the crypto they were invested in.
Their conviction allowed them to hold cryptos they believed in through the big ups and downs that are unavoidable in crypto. And to ultimately reap massive financial gains.
Here are some basic questions my team and I first ask when we’re evaluating a crypto:
- Who are the key people involved?
- What does the company actually do?
- What important problem is it solving?
- How much money is it making?
- How fast is the business growing?
- What advantage does it have over competitors?
- What are the “tokenomics?”
Tokenomics is one of the most important — if not the leading driver — of a crypto’s price.
Think of each crypto project as its own little economy. A crypto’s token economics defines how money (tokens) is distributed and earned in its economy. It’s an important field crypto insiders, including me, love to geek out about.
A well-designed token can cause mediocre projects to soar. Bad tokenomics can weigh on even the best, fastest-growing cryptos. Tokenomics lay out the rules for how many tokens are in circulation, new tokens created, how the token is used and accrues value from the underlying business, and much more.
Evaluating cryptos like businesses also helps us avoid bad ones…
I expect crypto to be the greatest financial opportunity of our lifetime.
Even so, I know 90%+ of the roughly 22,000+ coins out there are worthless. Most of them are trash and will go to zero.
This isn’t much different than the stock market. There are 4,200+ companies listed on US markets. I wouldn’t touch 4,150 of them.
It’s worth mentioning that crypto is unique in that it has real-time financial reporting. There’s no “earnings season” in crypto. Blockchains allow us to see everything in real time.
We can see how much money a business made today… or how many users were on its platform. It’s like getting a daily earnings release. This helps us pinpoint fast-growing projects early and invest in them.
Another key part of our strategy is taking advantage of “the Coinbase effect.”
Coinbase is the largest crypto exchange in the US with over 108 million registered users. Tens of millions of Americans use it to buy cryptos.
But the vast majority of cryptos aren’t on Coinbase. There are currently more than 22,000 coins listed on crypto database coinmarketcap.com. You can only buy around 250 of them on Coinbase.
When Coinbase adds a new crypto, it’s a big deal. It means millions of investors get a chance to buy it for the first time. This often causes its price to rise dramatically. Top crypto research firm Messari found the average returns five days after a coin lists on Coinbase is 91%.
Buy cryptos before they list on Coinbase or other major exchanges like Gemini and Kraken if you want to see outsized gains.
How much of my crypto portfolio to allocate to major cryptos vs. smaller altcoins?
I suggest adopting the lopside barbell strategy.
The barbell strategy is a portfolio construction tool that strikes the right balance between risk and reward. It does so by investing in two distinct types of assets, on both extremes. On one end, you have “safer” assets.
On the other, you have “higher upside” assets. Just like a barbell, you’ll load it on either end, with nothing in the middle. This will allow you to potentially earn higher returns… while the “safe” portion cushions potential losses. (I put “safer” in quotes because crypto is an early-stage technology, and no crypto has a comparable level of safety to financial assets like government bonds, cash, and certain groups of stocks.)
Here’s how it works: You would put the majority (75% to 90%) of your crypto investments in the safer portion. The other 10% to 25% would be allocated to higher-upside assets. So, your crypto portfolio would resemble a lopsided barbell:
In my RiskHedge Venture crypto advisory, I recommend investing 75% of your crypto allocation to “safer” and bigger cryptos, like Bitcoin, Ethereum, and Solana. Then, I recommend putting the remaining 25% into higher-upside tokens.
Please note: Crypto is just one asset in an overall portfolio. I recommend putting around 1% to 2% of your total assets into crypto — and definitely no more than 5%.
P.S: Here are 3 smaller cryptos I recommend buying today.
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P.S: For more insights and analysis, subscribe to my investing letter The Jolt⚡.
I publish fresh research on cryptocurrencies and stocks every M/W/F.
— Stephen McBride, Chief Analyst at RiskHedge
