Ways to approach cryptocurrency investing in 2023

2022 has been a brutal one for cryptocurrency and non-fungible token (NFT) investors. Bitcoin (BTC) hit its yearly low on Nov. 21, almost exactly one year after hitting its all-time high of $69,044. After such a tumultuous year, how should cryptocurrency investors plan for 2023?

First, this space has critical risks that are worth considering before investing.

Macroeconomic risks

Investors need to recognize the macro and systemic risks impacting the cryptocurrency industry as 2023 approaches. The war in Ukraine has led to an energy crisis caused by sanctions on Russian energy. The Federal Reserve’s monetary policy response to inflation continues to unsettle markets. Cryptocurrency contagion from recent bankruptcies continues to inject volatility into the market, with mounting regulatory pressure and miner capitulation likely to continue into the new year.

War in Ukraine, inflation and rising interest rates

The economic fallout from the war in Ukraine has had an impact on the global economy. Russia is one of the largest energy sources in the world, especially for Europe, and sanctions on Russian energy have led to a crisis in several European countries, with skyrocketing prices and dwindling supplies.

Government-impacted lockdown policies implemented by governments in response to the COVID-19 pandemic, accompanied by massive expansions of the money supply, have led to rising inflation in the United States, Europe and around the world.

Central banks have been trying to tackle inflation by raising interest rates, putting downward pressure on stock markets and cryptocurrency prices throughout 2022. A possible escalation of war in Ukraine, with inflation and stubbornly high interest rates , could cause more problems for investors in 2023.

The contagion of cryptocurrencies

The contagion effect caused by the Terra crash in May still haunts the cryptocurrency markets. The failure of FTX in November saw Bitcoin hit another new cycle low. The ripples caused by these major events have not yet subsided.

Many companies have filed for bankruptcy and as they seek to pay off creditors, they may liquidate their crypto assets, which could trigger new selling in the cryptocurrency market. Investors should take this into consideration as they enter the new year.

Regulatory pressures

Cryptocurrency regulations have been on the way to the US for some time. The dramatic events of 2022 have only increased the likelihood of the regulations moving forward 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 near term. If a popular stablecoin like Tether (USDT) or USD Coin (USDC) comes under regulatory scrutiny, it could cause market turmoil.

Capitulation of the miners

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 to operate these businesses. As a result, miners are forced to sell Bitcoin to cover costs, putting downward pressure on the price.

The capitulation of miners is a feature of previous bear markets and may mark the low point of the bear phase.

Apart from these risks, the cryptocurrency market never fails to throw some surprises like Terra and FTX. It is good to keep this in mind when thinking about investing.

Invest smart in 2023

This section does not pump cryptocurrencies or projects. It offers a general strategy for smart investments that could mitigate risk and limit losses.

Money is king, as some say. It helps maintain cash reserves in a bear market, as a black swan event is difficult to predict. These events could be great sniping opportunities to buy some discount cryptocurrencies and NFTs.

Allocate a percentage of your portfolio to blue-chip cryptocurrencies

Investing means preserving capital. Investing in blue-chip cryptocurrencies like Bitcoin and Ether (ETH) is a smart move.

Level 1 and level 2 blockchains

The next step towards investing in riskier assets is to look into layer 1 and layer 2 blockchains, excluding Bitcoin and Ethereum. It might be worth spreading exposure among blockchains that have survived at least one bear market and then looking at new blockchains that look promising.

Some noteworthy layer 1s 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, evaluate roadmaps, and explore the community.

Investing in layer 1 or layer 2 blockchains is generally lower risk than investing in an application. For example, investing in Ethereum is less risky 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 resistant 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.

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When choosing layer 1 and layer 2 blockchains, it is advisable to have a backup investment option for each primary option. For example, if someone is bullish on Solana, he may want to protect himself by investing a smaller amount in the so-called “Solana-killer” Aptos.

In short, Aptos is to Solana what Solana was to Ethereum a cycle ago. Such shadow investments will help build a solid and balanced portfolio.

Air launches

It’s hard to forget the Ethereum Name Service (ENS) and ApeCoin (APE) 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 in advance to be eligible for an airdrop when they have a token launch.

DeFi projects on Ethereum have used airdrops extensively in the previous cycle. There’s no reason to think it won’t be the case this time around. 2023 promises to be a year with many new projects being tested.

The story rhymes

Many exponential gain patterns have emerged in the previous cycle. Watch out for similar themes in this cycle. ENS domains have been a big hit in the last cycle. As decentralized name services become more popular, it might be worth looking at self-developing projects.

DeFi has done very well in the last cycle. GameFi and Metaverse tokens have also worked well. DeFi and GameFi could become the next big thing in the coming years.

SocialFi has taken off in recent months, with several promising projects emerging. This could be another ENS-like opportunity next cycle.

Memecoins have had some luck in the last cycle and Dogecoin (DOGE) remains an interesting project with the backing of Elon Musk. But be careful before investing in memecoins.

Follow smart money

This rule of thumb doesn’t always work, but it can with the right amount of due diligence. It is worth keeping an eye out for the investment picks of venture capital funds such as a16z, Sequoia Capital, Solana Ventures, Coinbase Ventures, and others.

They don’t always make the right choices, but their portfolios would be a great place to start and polish up to a few good candidates for investments. However, investing in new names that are application-level projects is generally smarter after the cryptocurrency market has bottomed out and recovered in anticipation of the next bull run.

There is no secret sauce to making millions in the crypto space. The general approach should be to buy low and sell high. Therefore, 2023 is not a bad time to start, as market prices are low.

Also, time spent in the market is better than times to market 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, cryptocurrencies and NFTs are generally linear markets and a diligent investment strategy should help generate positive returns.

This article does not contain investment advice or recommendations. Every investment and trading move carries risk and readers should conduct their own research before making a decision.