2022 was brutal for investors in cryptocurrency and non-fungible tokens (NFT). Bitcoin (BTC) hit its yearly low on Nov. 21, almost exactly a year after hitting its all-time high of $69,044. After such a tumultuous year, how should crypto investors plan for 2023?
First, this area harbors critical risks that are worth considering before making an investment.
Macroeconomic Risks
Investors need to recognize the macro and systemic risks impacting the crypto industry as 2023 approaches. The war in Ukraine has led to an energy crisis caused by sanctions against Russian energy. The US Federal Reserve’s monetary policy response to inflation continues to unsettle markets. Crypto contagion from recent bankruptcies continues to bring volatility to the market, with increased regulatory pressure and miner capitulation likely to continue into the new year.
War in Ukraine, inflation and rising interest rates
The economic consequences of the war in Ukraine have affected the world economy. Russia is one of the world’s largest sources of energy — particularly for Europe — and sanctions on Russian energy have created a crisis in several European countries, with prices soaring and supplies dwindling.
The economic shutdown policies implemented by governments in response to the COVID-19 pandemic – accompanied by massive monetary expansion – have led to rising inflation in the United States, Europe and around the world.
Central banks have attempted to counter inflation by raising interest rates and putting pressure on stock markets and crypto prices throughout 2022. A possible escalation of the war in Ukraine, with persistently high inflation and interest rates, could cause further pain for investors in 2023.
The crypto contagion
The contagion effect caused by May’s collapse of Terra is still haunting the crypto markets. FTX’s failure in November saw Bitcoin hit another new cycle bottom. The waves caused by these major events have not yet died down.
Many companies have filed for bankruptcy, and as they try to repay creditors, they could liquidate their crypto assets, which could lead to new sell-offs in the crypto market. Investors should pay attention to this at the beginning of the new year.
regulatory pressure
Crypto regulations have been coming to the US for a while. The dramatic events of 2022 only increased the likelihood of regulation 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 disruption in the short term. When a popular stablecoin like Tether (USDT) or USD Coin (USDC) comes under regulatory scrutiny, it could cause market turmoil.
miner surrender
If bitcoin prices continue to fall, the pressure on miners will increase. Bitcoin mining is a capital-intensive business, and falling prices are making it unsustainable for these companies to function. As a result, miners are forced to sell bitcoin to cover costs, putting downward pressure on the price.
Miner capitulation is a feature of previous bear markets and may mark the bottom of the bear phase.
Aside from these risks, the crypto market keeps failing to offer some surprises like Terra and FTX. It’s good to keep this in mind when thinking about investing.
Smart investing in 2023
This section does not pump cryptocurrencies or projects. It offers a general strategy for smart investing that could mitigate risks and limit losses.
Cash is king, as some say. It helps maintain cash reserves in a bear market as it is difficult to predict a black swan event. These events could be great sniping opportunities to buy some discounted cryptocurrencies and NFTs.
Allocate a percentage of your portfolio to blue-chip cryptocurrencies
Investing is about capital preservation. Investing in blue-chip cryptocurrencies like bitcoin and ether (ETH) is a smart move.
Layer 1 and Layer 2 blockchains
The next step to investing in riskier assets is to explore Layer 1 and Layer 2 blockchains, with the exception of Bitcoin and Ethereum. It might be worth spreading exposure across blockchains that have survived at least one bear market, and then looking at new blockchains that sound promising.
Some layer 1s worth mentioning 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 whitepapers, rate roadmaps and explore the community.
Investing in Layer 1 or Layer 2 blockchains is generally a lower risk than investing in an application. For example, investing in Ethereum comes with less risk 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 resilient to one application going down. However, if Uniswap fails, investors in the application will lose their money.
This is more of a general risk management point than a criticism of Uniswap.
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When choosing between Layer 1 and Layer 2 blockchains, it is wise to have a backup investment option for each primary option. For example, if someone is bullish on Solana, they might want to hedge 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 earlier. Such shadow investments help build a robust and balanced portfolio.
air drop
It is 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 early to qualify for an airdrop if they have a token launch.
DeFi projects on Ethereum have used airdrops extensively in the previous cycle. There’s no reason to think that won’t be the case this time. 2023 promises to be a year in which many new projects will be tested.
history rhymes
Many exponential gain patterns have emerged in the previous cycle. Watch for similar themes this cycle. ENS domains have been a big hit in the last cycle. As decentralized naming services become more popular, it might be worth watching projects develop their own.
DeFi has had an excellent run over the last cycle. GameFi and Metaverse tokens also performed well. DeFi and GameFi could become the next big thing in the next few years.
SocialFi has really picked up steam over the past few months, with several promising projects emerging. This could be another ENS-like opportunity for the next cycle.
Memecoins have had some luck in the last cycle, and Dogecoin (DOGE) remains an interesting project with the backing of Elon Musk. However, be careful before investing in memecoins.
Follow the smart money
This rule of thumb doesn’t always work, but with the right amount of care it does. It’s worth keeping an eye on investment opportunities from venture capital funds like a16z, Sequoia Capital, Solana Ventures, Coinbase Ventures, and others.
They don’t always make the right decisions, but their portfolios would be an excellent starting point to refine them into a few good investment candidates. However, investing in new names that are application-level projects is generally wiser after the crypto market has bottomed and recovered in anticipation of the next bull run.
There is no secret ingredient 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.
In addition, the time spent in the market is better than the time of entry. The longer investors stay in the market and stick to the basic rules as often as possible, the higher their returns. Despite market cycles and volatility, crypto and NFTs are generally linear markets and a careful investment strategy should help generate positive returns.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
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