Should investors consider investing in cryptocurrency in 2023, despite a difficult year?
2022 was a bad year for cryptocurrency and nonfungible token (NFT) investors. Bitcoin BTC $16,850 reached its yearly low on November 21, almost exactly a year after reaching its all-time high of $69,044. How should crypto investors plan for 2023 after such a turbulent year?
To begin, there are critical risks to consider before investing in this space.
Macroeconomic Risks
As 2023 approaches, investors must be aware of the macro and systemic risks affecting the cryptocurrency industry. The Ukraine conflict has resulted in an energy crisis caused by sanctions on Russian energy. The Federal Reserve of the United States monetary policy response to inflation continues to unsettle markets. The crypto contagion from recent bankruptcies continues to inject volatility into the market, with increasing regulatory pressure and miner capitulation likely to continue into the new year.
Ukraine’s Civil War, Inflation, And Rising Interest Rates
The economic fallout from the Ukraine war has had an impact on the global economy. Russia is one of the world’s largest energy sources, particularly for Europe, and sanctions on Russian energy have caused 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, combined with massive expansions in the money supply, have resulted in soaring inflation in the United States, Europe, and around the world.
Central banks have attempted to combat inflation by raising interest rates, putting downward pressure on equity markets and cryptocurrency prices throughout 2022. A possible escalation of the war in Ukraine, combined with persistently high inflation and interest rates, could cause more pain for investors in 2023.
The Cryptovirus
The fallout from Terra’s demise in May continues to haunt the crypto markets. Following the failure of FTX in November, Bitcoin entered a new cycle bottom. The repercussions of these major events are still being felt.
Many companies have declared bankruptcy, and to repay their creditors, they may liquidate their crypto assets, causing new sell-offs in the crypto market. Investors should keep this in mind as the new year begins.
Regulatory Pressures
Crypto regulations have been on the way to the United States for quite some time. The dramatic events of 2022 have only increased the likelihood that regulations will advance in 2023.
Regulatory clarity may benefit the crypto space in the long run by attracting institutional capital. However, centraliscentralizeds, stablecoins, and centraliscentralizeds are likely to face disruption in the short term. If a popular stablecoin, such as Tether USDT, is $1.00 If the USD Coin (USDC) is subjected to regulatory scrutiny, it may cause market volatility.
Mine Capitulation
If Bitcoin prices continue to fall, the pressure on miners will increase. Bitcoin mining is a capital-intensive business, and falling prices make it unsustainable for these operations to continue. As a result, miners are forced to sell Bitcoin to cover costs, putting downward pressure on the price.
Miner capitulation has been seen in previous bear markets and can signal the end of the bear phase.
Aside from these dangers, the crypto market is full of surprises, such as Terra and FTX. When considering investing, keep that in mind.
In 2023, make smart investments.
This section does not promote any cryptocurrencies or projects. It provides a general strategy for smart investment that could reduce risk and limit losses.
Some say that cash is king. It is beneficial to keep cash reserves in a bear market because predicting a black swan event is difficult. These events could provide excellent opportunities to purchase discounted cryptocurrencies and NFTs.
Allocate a portion of your portfolio to blue-chip cryptocurrencies.
Investing is about preserving capital. Investing in well-known cryptocurrencies such as Bitcoin and Ether ETH $1,219 is a wise choice.
Layer 1 and layer 2 blockchains
The next step toward investing in riskier assets is to research layer-1 and layer-2 blockchains, excluding Bitcoin and Ethereum. It may be worthwhile to spread exposure across blockchains that have survived at least one bear market before looking at new blockchains that appear promising.
Layer 1s worth mentioning include Solana, Avalanche, Polkadot, Cardano, and Aptos. Polygon, Arbitrum, and Immutable are some layer 2s. Before making an investment decision, research and comprehend the benefits and drawbacks of each project. Read white papers, evaluate roadmaps, and learn about the community.
Investing in layer-1 or layer-2 blockchains is generally less risky than investing in an application. Investing in Ethereum, for example, is less risky than investing in an Ethereum-based decentralized finance (DeFi) application such as Uniswap. This is because Ethereum has thousands of decentralised apps and its price is resilient to the failure of a single app. However, if Uniswap fails, the application’s investors will be out of pocket.
This is a general risk management point rather than a criticism of Uniswap.
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When selecting layer-1 and layer-2 blockchains, it is prudent to have a backup investment option for each primary option. For example, if someone is bullish on Solana, they may want to hedge by investing a smaller amount in the so-called “Solana-killer” Aptos.
In a nutshell, Aptos is to Solana what Solana was to Ethereum one cycle ago. Such shadow investments will aid in the development of a robust and well-balanced portfolio.
Airdrops
It’s difficult to forget the Ethereum Name Service (ENS) and ApeCoin APE.
tickers down $3.59
airdrops in the previous cycle, as well as the Aptos (APT) airdrop more recently. The Web3 space is teeming with new, often credible projects. Projects require an army of people to test their products. Investors can get involved in projects early in order to be eligible for an airdrop when the token launches.
Airdrops were widely used by DeFi projects on Ethereum in the previous cycle. There’s no reason to believe that won’t be the case this time. 2023 promises to be a year of many new projects being tested.
History Rhymes
In the previous cycle, many exponential gain patterns emerged. Look out for similar themes in this cycle. ENS domains were a big hit in the previous cycle. As decentralized name services gain popularity, it may be worthwhile to keep an eye on projects that are developing their own.
Defi had a great run in the previous cycle. GameFi and metaverse tokens also performed well. In the coming years, Defi and GameFi could become the next big thing.
SocialFi has taken off in recent months, with several promising projects emerging. This could be another ENS-like opportunity for the next cycle.
Memecoins had some luck in the previous cycle, as did Dogecoin DOGE. $0.08 With Elon Musk’s backing, the project remains intriguing. However, before investing in meme coins, use caution.
Follow The Money
This rule of thumb does not always apply, but it can with the proper amount of diligence. It is worth keeping an eye on the investment choices of venture capital funds such as a16z, Sequoia Capital, Solana Ventures, Coinbase Ventures, and others.
They don’t always make the best decisions, but their portfolios would be a great place to start and narrow down to a few good investment candidates. However, investing in new names that are application-tier projects is generally smarter after the crypto market has bottomed and recovered in anticipation of the next bull run.
There is no magic formula for making millions in the cryptocurrency space. The general strategy should be to buy low and sell high. As a result, 2023 is not a bad time to start because market prices are low.
Furthermore, the time spent in the market is preferable to the timing of entry. The longer investors stay in the market and follow the ground rules as often as possible, the higher their returns will be. Despite market cycles and volatility, crypto and NFTs are generally linear markets, and a prudent investment strategy should help generate positive returns.
