Crypto prices are telling us that there is a storm brewing if it isn’t already here, so the sensible thing to do is batten down the hatches.
But what exactly does this mean for market participants in the cryptocurrency space? What actions can and should you take to preserve your heritage?
Increasingly, it looks likely that the US Federal Reserve’s FOMC will raise rates by at least 0.75%, with 1% being a distinct possibility.
Crypto investors have never been so obsessed with the price of borrowing money, or at least not when it comes to the old kind of money we know as fiat.
The flow of goods and services of course depends on the cogs of trade oiled by an abundant supply of liquidity. But too much of that cash in the wrong place can cause problems, and one of them is inflation.
Inflation is the most obvious sign of malaise that crypto devotees won’t hesitate to shout we told you – all that funny QE money just staved off the crisis.
But the storm is what it is and will envelop everything before it, including cryptos, so how do you prepare for it?
1. Don’t realize your losses
The first rule of investing also applies to crypto: don’t realize your losses by selling. We’ll moderate this later, but as a general rule, don’t sell unless you have to.
Your favorite portfolio management tool is sure to flash red. But if you’re happy with the investment in all those coins you’re holding, stop running the app every hour and let it rest. Maybe turn off some of those watchlist notifications as well.
As he often does, legendary investor Warren Buffett sums it up nicely:
“The first rule of an investment is not to lose [money]. And the second rule of investing is to remember the first rule.”
2. Time in the market does not time the market
Another useful adage to be aware of at this point is the ultimate folly of trying to figure out when to enter and exit the market. The normal herd practice is to buy high and sell low.
Smart investors do the opposite, they try to buy low – or at least when others flee the market and decimate prices – and sell high.
That doesn’t mean you should sell everything, go into cash, and wait until you think the bottom is hit.
Even the best on Wall Street can’t answer those calls properly, and they charge you top dollar for their active mutual funds that claim to do so.
The best strategy is to stay in the market but adjust and rebalance, which we discuss below.
3. Become a crypto value investor
Warren Buffett is the classic value investor and that’s one of the reasons he hates crypto with a vengeance.
He doesn’t know how to measure value in crypto because there are no profits and, supposedly, therefore no net income and dividends to pay out to shareholders.
It may be a generational bias, but there are a lot of crypto companies and assets out there that produce profits and pay dividends, so much so that the SEC has knocked on the door of some of these entities, or will be – here’s looking at your Ethereum Foundation!
So there are fundamentals that can be valued, which ultimately resides in the value that a network represents, whether in data storage, games, value transfer, etc.
So the value investor is looking for companies, or in our case coins, that are undervalued by the market. You might say it’s a tough call because everything is undervalued right now. True to some extent, but some more than others.
Is BNB coin undervalued?
Exchange coins such as Binance Coin (BNB) are extremely undervalued, for example, one might argue, given that Binance is likely to emerge from this crypto winter as an even bigger and more dominant exchange than it was. already is.
Is Ethereum undervalued?
Ethereum, it could be argued, is also a contender as a particularly undervalued network, given the success of its Merge upgrade.
Granted, there is still a long way to go before proof-of-stake becomes a meaningful reality for end users, but in the eyes of a value investor, Ethereum has just become a cash cow for network validators.
Gaming is a sector where revenue is generated by a multitude of networks and the games that are run on them. There is no indication that this trend is slowing down – on the contrary, it should accelerate.
So, in addition to some network-level games, such as Decentraland and The Sandbox, there are new kids to watch, such as Battle Infinity and Tamadoge.
4. Be a bottom-up investor
Don’t be too dogmatic in your approach. Even if you take the value approach and have a bias towards certain industries and subsectors, don’t let that blind you to a very good outlook.
Bottom-up investors treat each case as it comes, analyzing companies on a case-by-case basis, even if they operate in a sector deemed unfavorable. We can apply the same approach when it comes to cryptography.
You may have determined that commercial-level crypto cross-border payments are going to be squeezed by the advent of central bank digital currencies, but does that mean you should dismiss all opportunities in this area out of hand.
What if Ripple wins its lawsuit? There could be a huge increase in the price of his XRP token and he could see the adoption rocket as one of the leaders in the space.
5. Banish short-termism
The difference – or at least one of them – between a speculator and an investor is time.
The speculator is looking to make a quick buck while the investor takes a longer term view, which will usually be measured in months and years rather than hours and days when it comes to the speculator.
Warren Buffet once said:
“The purse is a device for transferring money from the impatient to the patient.” Remember that this is also true in crypto.
6. Run your winners
Unfortunately, many investors don’t do the rational thing. As soon as a position becomes profitable, the banker’s temptation is strong.
At first glance, this may seem like a sensible approach, but more often than not, investors will close winning positions too soon, only to miss out on big future profits.
Granted, at times like this, when the market is moving as one on a downward trajectory, there doesn’t seem to be much to choose between winners and losers.
However, within your total portfolio allocations, there will be some that perform better than others – they could still be the ones that contribute the most to future returns.
7… cut your losses
Another way human psychology works against the best interests of the smart crypto investor is when our hearts attach us to a losing position.
We said earlier don’t realize losses by selling, but sometimes it makes sense if the situation is not recoverable.
Some coins are cheap for a reason – in fact, there are thousands of them among the approximately 20,000 listed by coinmarketcap.
Perhaps the technology is irrecoverable, the path to user growth is irretrievably blocked, and the business model has been destroyed. If so, get out.
8. Capital preservation with passive income
When billions evaporate from the markets daily and inflation runs rampant, it starts to scare. Where can you park your money and keep it from devaluing?
Previously, the answer was government debt (treasury bills) and savings accounts. But savings accounts still pay a pittance, and the only bonds worth buying are Treasury inflation-protected securities, or Tips, as they’re called.
Luckily, there is a safe port for your wealth to be found in crypto-staking.
Staking may have gotten a bad rap after the implosion of a group of crypto lenders triggered by the TerraUSD debacle. However, not all staking is the same.
Staking your coins to secure a valuable network is different from throwing it into the black box of tricks that underpins the algorithmic financial engineering of the unstable stablecoin TerraUSD.
Stake with a network that has demonstrable traction like Ethereum
Admittedly, staking on Ethereum requires you to hold a minimum of 32 ETH, which is the threshold to become a validator and may be beyond the means of many.
This will earn you enough – around 12% by some estimates if you include the burn effect that all ETH holders enjoy – to beat inflation at its current rate.
However, you can entrust your ETH to intermediaries of one type or another who will stake on your behalf, so you will receive less of a return, but it will still be much better than a savings account.
And there are alternatives to Ethereum – but go for the protocols and service providers with the deepest pockets.
These entities may not have the best returns, but they are much less likely to fail. Many of these intermediaries will be among the larger, longer-established crypto exchanges, such as Kraken, Coinbase, and Binance.
9. Look at the big picture (other asset classes)
Professional investors say that, along with compound interest, asset allocation is the key to successful investing.
In this way of thinking, it’s not so much about the stocks or coins you invest in, but the asset class weightings (percentage of holdings) you choose for your portfolio.
From a crypto investor’s perspective, that means asking tough questions about what percentage of your wealth you have in crypto, and is that an amount you feel comfortable with in terms of your own profile? of risk.
To state the obvious, if crypto is 5% of your net worth, you’re going to take a different attitude to a 20% drop in total asset class market cap than if you have 50% of your wealth. linked in crypto.
If you have cash in reserve, crashes are a huge opportunity
If you have cash in reserve and relatively small amounts related to crypto, stock market crashes are huge opportunities.
Likewise, if you’re on the other end of the spectrum and you’re totally okay with your net worth, then even if your best bet is to hang in there, after the winter is over, look back and remember how you felt then, and add some diversification to your portfolio by investing in other asset classes.
A crypto core with larger satellite holdings might be better – and keep your blood pressure in check during the next seasonal burst.
10. Don’t Panic
Easier said than done. The best way to avoid panicked decision-making that you’ll regret later is to have a plan. I hope we have provided some guidance in this regard.