Since the new year, the collective crypto market cap has increased by about 60% and is at levels not seen since June 2022. With this renewed momentum, crypto is back on the radar for investors.
Because of this rally, it is likely that some new investors will consider getting involved in crypto. If you’re one of them, there are a few things to keep in mind to ensure your portfolio is set up for success.
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1. Simplicity wins
Keeping a simple portfolio is crucial for risk mitigation as crypto is one of the riskiest asset classes out there. Diversification is also important, but don’t overcomplicate your portfolio. You need to ensure your portfolio has adequate exposure but is not overweight in the most speculative assets.
Keep in mind that it’s not uncommon for obscure cryptocurrencies to become worthless and no longer exist.
2. Volatility is part of the game
Another thing to keep in mind is that the cryptocurrency market is very volatile – orders of magnitude more volatile than the stock market. It’s not uncommon for the value of cryptocurrencies to fluctuate wildly over the course of a year. Not to mention, these assets can fluctuate by double-digit percentages in one direction or another on a daily basis.
However, the volatility should not discourage investors who aim to invest in cryptocurrencies for the long term. Therefore, short-term moves as a feature of emerging asset classes should be overlooked.
The best strategy is to be patient and not make spontaneous decisions based on short-term price movements. Instead, keep a long-term perspective and trust that, like many innovative technologies of the past, the value of cryptocurrencies will increase over time as usage increases.
3. Threat of regulation
Another key difference is that the cryptocurrency market is less regulated than the stock market — but that could change very soon.
In response to the 2022 disasters that saw several crypto companies go bankrupt and some cryptocurrencies implode, US officials are stepping up efforts to contain the cryptocurrency market.
In 2023, there have already been several lawsuits against some of the most well-known companies, such as coin base and Binance. Based on the current development, it looks like officials may eventually target cryptocurrencies themselves and not just the companies offering products revolving around them.
Create a game plan
So, given these three points, what can investors do today to ensure they are minimizing risk and maximizing upside?
Well, it’s actually quite simple – only invest in the most decentralized cryptocurrencies with a proven track record.
When using this strategy, two options become the most obvious: Bitcoin (BTC -0.18%) And ether (ETH 0.67%). By buying these two, investors cover all three of the points above.
Together, these two account for more than 60% of the total value in the cryptocurrency market. Simply put, as they go, so does the rest of the market usually. Investors can keep their portfolios simple by prioritizing Bitcoin and Ethereum.
In addition, they also have the largest market caps in crypto. This means they are inherently less volatile than some of their counterparts. That’s not to say they aren’t volatile, but daily fluctuations tend to be less pronounced and frequent.
Finally, as some of the most decentralized cryptocurrencies, Bitcoin and Ethereum are less likely candidates for government regulation. Based on comments from regulators, it appears that cryptocurrencies that are highly centralized and operate more or less as public entities operating behind a cryptocurrency facade are the most targeted. Unlike Bitcoin and Ethereum, most cryptocurrencies are likely to avoid regulatory restrictions.
RJ Fulton has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.
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