How to Optimize Your Crypto Investment Portfolio

[ad_1]

Understanding the basics of blockchain and crypto can help you invest more confidently and profitably.

By Billy Endres

With thousands of cryptocurrencies available to buy and sell across centralized and decentralized trading platforms, confidently building a portfolio can be confusing and stressful.

But it doesn’t have to be. 

The basis of any financial investment is simple, and cryptos are no different. 

Before investing in any asset, it’s crucial to understand what you’re buying, its value proposition, and whether it has a long-term and sustainable utility.

Many investors lack an understanding of crypto technology and terminology, which can be detrimental to their portfolio performance and investment confidence.

For example, do you know the difference between a crypto coin and a token?

Many people don’t. And while this categorization may seem arbitrary, it’s a significant consideration.

To help optimize your investment portfolio and diversification strategies, let’s break down some crypto basics that are often overlooked.

Crypto “currencies”

Cryptocurrencies or “crypto” has become an all-encompassing term for blockchain-based projects with a tradeable listing. This is primarily due to Bitcoin’s original purpose: To act as a peer-to-peer digital payment coin, or “currency.” 

However, the rapid evolution of decentralized technologies has seen thousands of projects released over the past decade, many of which have a utility unrelated to digital payments or currency.

Some of the most notable use cases for crypto now include:

  • DeFi
  • Network governance
  • Oracle solutions
  • Decentralized storage
  • Platform and exchange utility

As a term, “cryptocurrency” isn’t likely going anywhere. But its intended meaning has undoubtedly changed and will likely continue to do so as new blockchain use cases develop and evolve.

Coins vs. Tokens

While discussing cryptos, you’ll probably have heard mention of coins and tokens.

Although coins and tokens are both considered cryptos, these terms are often interchangeably or incorrectly used.

So, what’s the difference and why does it matter?

Coins. Coins are cryptos that are native to their blockchain. Among other things, investors can use them for transactions such as paying gas fees and receive additional coins as an incentive for securing the network via staking or mining. 

Popular blockchain coins include:

  • BNB Smart Chain (BNB)
  • Cardano (ADA)
  • Ethereum (ETH)
  • Polkadot (DOT)
  • Polygon (MATIC)

Tokens. Decentralized projects built on these blockchains issue tokens rather than coins for trading.

The potential utility of tokens is infinite and only dictated by the project’s functionality and development. Common use cases for tokens include network governance and voting rights, trading or earning discounts and access to exclusive platform features.

Popular blockchain tokens include:

  • ApeCoin (APE)
  • Chainlink (LINK)
  • Filecoin (FIL)
  • Trust Wallet Token (TWT)
  • Uniswap (UNI)

While each project has a utility and an intended purpose for its coin or token, it’s important to understand what this utility is and how it can impact the asset’s price.

Recognizing opportunity

Many investors operate under a default strategy: Buy Bitcoin and Ethereum during bear markets and altcoins during bull runs. 

This strategy makes sense, considering Bitcoin and Ethereum are the largest cryptocurrencies by market cap, and are typically less volatile than low-cap altcoins. However, there have proven to be better bear market alternatives in some instances.

Recent market data shows that exchange tokens as a niche have outperformed Bitcoin and Ethereum throughout the current bear cycle. This includes both centralized exchange tokens such as GateToken (GT) and KuCoin Token (KCS) and decentralized exchange (DEX) tokens like Aave (AAVE) and Pancake Swap (CAKE). 

This niche’s relatively positive performance is primarily due to the utility of the tokens in providing trading discounts and incentives in a market that never sleeps.

Other recent notable themes include DeFi summer and the layer-1/layer-2 blockchain race. 

Throughout the bull run of 2020 to 2021, many DeFi projects witnessed exponential growth and provided early investors with returns of +1,000%. Traders took advantage of the high yields these platforms offer0, and as a result, the total value locked (TVL) in DeFi grew to a peak of over $150 billion.

While this was a resounding positive for DeFi, it significantly impacted Ethereum as the leading blockchain supporting DeFi protocols.

The increased number of decentralized applications (dApps) built on the Ethereum blockchain caused network congestion, high gas prices and slow transaction processing times, which led to the rise of smart contract-compatible Ethereum alternatives.

In an attempt to capitalize on rising yield rates and drastically reduced fees, traders opted to explore other blockchains such as Avalanche (AVAX), Kadena (KDA) and Near Protocol (NEAR), causing prices of these coins to soar. 

Recognizing an opportunity at the right time can prove lucrative in crypto and is generally not a difficult task.

Tools, including CoinMarketCap’s categoriesDeFiLlama’s DeFi TVL and LunarCrush, can help filter through the noise and help identify what’s trending and why.

Identify market movers to diversify your portfolio at the right times and capitalize on what’s hot — be it play-to-earn games, NFTs, layer-2 chains or any other crypto sub-niche.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

[ad_2]

Image and article originally from www.nasdaq.com. Read the original article here.

By admin