Editor’s note: With the final month of 2023 upon us, it’s time to look at the investment of the year so far: cryptocurrencies. The main two are up 69% and 127%, respectively. Smart investors should never ignore gains like that. But without the right understanding, it can seem overwhelming. We turn to Beth Canova, managing editor of our sister newsletter — Weiss Crypto Daily — to help us on that front. Here’s what she recently had to say …
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| By Beth Canova |
We know that the world of crypto can be overwhelming, especially to newcomers.
Altcoins, DeFi, DEXs, dApps, the acronyms go on and on and that’s just the beginning. That’s why today, we’re going to try and demystify it to make your future explorations in the space smoother.
Crypto assets can be divided into four major categories.
- The Market Leaders (> $5 Billion Market Cap): Namely, Bitcoin (BTC, “A”) and Ethereum (ETH, “B+”) with a few select others. These are the most well-known, secure and reputable coins. While they are reliable, they may only provide minimal returns — that is, twofold to threefold gains in the next bull run.
Yes, in crypto, two- or threefold gains are considered low returns, especially in a bull market. Coins above $5 billion in market cap fall into this category.
- Large-Caps ($500 Million - $5 Billion): These are usually well-established coins, which have survived more than one cycle. Think big name altcoins like Solana (SOL, “C+”) and Arbitrum (ARB, Not Yet Rated).
- Mid-Caps ($100 Million - $500 Million): Returns of 50-fold over a cycle for these coins are not unheard of. They are typically new and experimental projects, which demonstrate a lot of promise.
- Small-Caps (< $100 Million): These coins can achieve returns as high as 100-fold. They are also very risky and can fade to irrelevance.
Keep in mind that the categories above are listed in terms of decreasing reward and increasing risk.
This means that while we expect larger caps may not offer high returns, they have lower risk. Smaller caps may offer higher returns but are, of course, riskier.
But crypto categories go further than just market capitalization. You should also be aware of how your portfolio is leveraged to the …
Crypto Sectors
Like in traditional finance, the crypto market has developed into sectors that behave in different ways. This is important because different valuation methods apply to different sectors.
Sectors are also known as “narratives” — stories people tell each other explaining why a particular coin will perform well. Indeed, the crypto market is acutely in tune with these narratives. They have a lot of power in shifting investor sentiment.
And the main narratives in crypto now are:
- Layer-1s, also known as smart-contract platforms: These are the foundations on which blockchain technology is built. And they include Ethereum, Solana, Avalanche (AVAX, Not Yet Rated), Cosmos (ATOM, “C+”) and Fantom (FTM, “C+”).
These blockchains facilitate large volumes of transactions daily. They power the computations behind the decentralized applications built on them. Examples of decentralized applications are the following categories:
- Decentralized Finance or DeFi: These protocols replicate all the instruments of traditional finance on the blockchain. They consist of decentralized exchanges — also called DEXes — perpetual DEXes for derivatives, lending protocols for the lending and borrowing crypto assets, yield aggregators that enable yield optimization across a variety of assets and platforms and others.
- Crypto AI: Also known as decentralized AI. Typically, a crypto AI project involves a decentralized network of computers coordinating to perform some sort of artificial intelligence-related computation. Cryptocurrencies then facilitate the monetary incentivization of all parties involved.
Prominent examples in this narrative include The Graph (GRT, Not Yet Rated) and Render (RNDR, Not Yet Rated).
- Real-World Assets (RWA): Think NFTs as an example here. These cryptocurrencies tokenize real-world assets and put them on chain. These assets typically include artwork, real estate, credits, Treasury bills and bonds.
- GambleFi: On-chain casinos. These platforms allow you to bet on various casino-type games like card games, roulette and horse racing. And you don’t have to gamble on them to make money through them. You can also buy the token for a GambleFi platform to invest in the house. And as the saying goes, the house always wins, so investments in this sector can be quite lucrative.
- Interoperability, aka cross-chain bridges: Dozens of blockchains exist. Cross-chain bridges are what link them together. People pay a transfer fee when transmitting assets from one blockchain to another. Owning a token in one of these projects allows one to gain revenue share from transaction fees of all these assets worth millions in daily transaction volume.
This is one example of a crypto pick-and-shovel play. Think cryptos like THORChain (RUNE, “B-”) here.
As an investor, your goal is to choose coins which can achieve significant gains while minimizing downside. To do this, it’s best to plan ahead for each asset.
Select a narrative you are bullish about. Then, select how much risk you’re willing to tolerate and search for cryptos within that narrative that have a market cap that’s in line with your risk tolerance.
You’ll still need to research each token to determine whether its fundamentals are strong enough to carry it through the volatile markets, but these first steps should help you narrow down the vast crypto landscape to target only the opportunities you really want.
Additionally, consider mapping out a realistic capital gains goal — what price increase you can reasonably expect from that particular asset in a set time — before investing. At the same time, consider the potential downside and how far to the downside you’re willing to tolerate the price dropping.
This way, you’re prepared ahead of any turbulence and have a plan of how to respond to any market volatility. And that’s the best way to avoid an irrational, emotional response and protect your capital.
Still, keep in mind that, there are no hard guarantees in crypto. That’s why you should never invest any money in crypto that you cannot safely afford to lose.
And keep in mind that we have a host of tools available to you to help you in this journey, including …
- Our Weiss Crypto Ratings — which tell you at a glance whether our team considers an asset worthy of your attention.
- Our instant alert system that will inform you of any price or ratings change. Just select “Add Alert” on any crypto asset on our site to sign up for that crypto.
- Our customizable lists that let you build a paper portfolio in one convenient place. You can curate multiple lists by clicking “Add to my list” on any crypto asset on our website.
All these tools are free and available any time, so there’s nothing stopping you from getting started!
Best,
Beth Canova
