After a challenging year, should investors still consider investing in crypto in 2023?
2022 was brutal for cryptocurrency and nonfungible token (NFT) investors. Bitcoin
BTC =$16,858 hit its yearly low on Nov. 21, almost exactly a year after it reached its all-time high price of $69,044. After such a tumultuous year, how should crypto investors plan for 2023?
Firstly, this space has critical risks worth considering before investing.
Macroeconomic risks:
Investors must recognize the macro and systemic risks impacting the crypto industry as 2023 draws near. The war in Ukraine has led to an energy crisis caused by sanctions on Russian energy. The United States Federal Reserve’s monetary policy response to inflation continues to unsettle markets. The crypto contagion from recent bankruptcies continues injecting volatility into the market, with increasing regulatory pressure and miner capitulation likely to continue into the new year.
Ukraine war, inflation and rising interest rates:
The economic fallout from the war in Ukraine has impacted the global economy. Russia is one of the largest energy sources in the world — particularly for Europe — and sanctions on Russian energy have led to a crisis in several European countries, with prices skyrocketing and supplies dwindling.
Economic shutdown policies implemented by governments in response to the COVID-19 pandemic — accompanied by massive expansions in the money supply — have led to soaring inflation in the United States, Europe and around the world.
Central banks have tried to address inflation by increasing interest rates, putting downward pressure on equity markets and crypto prices throughout 2022. A possible escalation of the war in Ukraine, with stubbornly high inflation and interest rates, could bring more pain for investors in 2023.
The Crypto Contagion:
The contagion effect caused by the collapse of Terra in May still haunts the crypto markets. The failure of FTX in November saw Bitcoin hit another new cycle bottom. The ripples caused by these major events haven’t settled yet.
Many firms have declared bankruptcy, and as they look to pay back creditors, they may liquidate their crypto assets, which could trigger fresh sell-offs in the crypto market. Investors should be mindful of this as they enter the new year.
Regulatory pressures:
Crypto regulations have been coming to the U.S. for some time. The dramatic events of 2022 have only increased the probability that regulations will advance in 2023.
Regulatory clarity could help the crypto space in the long run by attracting institutional capital. However, centralized protocols, stablecoins and centralized exchanges would likely experience a disruptive period in the short term. If a popular stablecoin like Tether
USDT = $1.00 or USD Coin (USDC) comes under regulatory scrutiny, that could cause market turbulence.
Miner Capitulation:
If Bitcoin prices continue to fall, pressure on miners will increase. Bitcoin mining is a capital-intensive business, and falling prices make it unsustainable for these businesses to function. As a result, miners are forced to sell Bitcoin to cover costs, putting downward pressure on the price.
Miner capitulation is a feature of previous bear markets and can mark the low point of the bear phase.
Aside from these risks, the crypto market never fails to throw in some surprises like Terra and FTX. It is good to keep that in mind when thinking about investing.
Smart investing in 2023:
This section is not pumping cryptocurrencies or projects. It offers a general strategy for smart investment that could mitigate risk and limit losses.
Cash is king, as some say. It helps to keep cash reserves in a bear market, as it is hard to predict a black swan event. These events could be great sniping opportunities to buy some discounted cryptocurrencies and NFTs.
Allocate a percentage of your portfolio to blue-chip cryptocurrencies:
Investing is about capital preservation. Investing in blue-chip cryptocurrencies like Bitcoin and Ether ETH = $1,219 is a smart move.
Layer-1 and layer-2 blockchains:
The next step toward investing in riskier assets is researching layer-1 and layer-2 blockchains, excluding Bitcoin and Ethereum. It might be worth spreading exposure across blockchains that have survived at least one bear market and then looking at new blockchains that sound promising.
Some layer 1s worth mentioning are Solana, Avalanche, Polkadot, Cardano and Aptos. Some layer 2s are Polygon, Arbitrum and Immutable. Before making an investment decision, research and understand the pros and cons of each project. Read white papers, assess roadmaps, and explore the community.
Investing in layer-1 or layer-2 blockchains is generally a lower risk than investing in an application. For example, investing in Ethereum is lower risk than investing in an Ethereum-based decentralized finance (DeFi) application like Uniswap. This is because Ethereum has thousands of decentralized apps and its price is resilient to the failure of one application. However, if Uniswap fails, investors in the application will lose their money.
This is a general risk management point rather than a criticism of Uniswap.
When choosing layer-1 and layer-2 blockchains, it’s wise to have a backup investment option for every primary option. For example, if someone is bullish on Solana, they might want to hedge themselves by investing a smaller amount in the so-called “Solana-killer” Aptos.
In short, Aptos is to Solana what Solana was to Ethereum one cycle previous. Such shadow investments will help build a robust and balanced portfolio.
Airdrops
It is hard to forget the Ethereum Name Service (ENS) and ApeCoin APE = $3.59 airdrops in the last cycle and, more recently, the Aptos (APT) airdrop. The Web3 space is filled with new, often credible projects. Projects need an army of people to test their products. Investors can get involved in projects early to be eligible for an airdrop when they have a token launch.
DeFi projects on Ethereum used airdrops extensively in the previous cycle. There are no reasons to think that won’t be the case this time. 2023 promises to be a year with many new projects being tested.
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