Finding stability amid the volatility of the crypto market

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In a calendar year, the total crypto market cap more than quadrupled from $ 361 billion to over $ 1,000 billion in January, reaching a record high of around $ 2.6 billion. in May. Weeks later, over $ 800 million was wiped out of the total crypto market cap, which is a drop of over 33%.

Volatility of this magnitude in the crypto markets is nothing new, especially for those who have been strained by the market cycles of years past. However, research indicates that the global number of blockchain wallet users has grown by more than 25 million since March 2020, which means this is just the first roller coaster ride for 25 million new entrants.

For newcomers, the volatility can be downright terrifying, but it doesn’t have to be. With well-researched positions and long-term prospects, volatility can instead serve as an opportunity to gain exposure to assets with high upside potential at a discounted price.

Related: VORTECS Report: How Volatility Drove A Crypto Trading Strategy To 280 Times Bitcoin’s Gains

Volatility breeds vulnerability

When the market is green across the board, everyone is a genius – especially lulled into a false sense of invincibility and a Warren Buffet sense of investing.

On the other hand, however, the bleeding markets not only make us doubt our stance against Elon Musk, but they really make us feel vulnerable. Downward trends expose the trader, the level of research and, most importantly, the conviction of the projects in which they invest. When the green candles aren’t there to cloud judgment, projects are stripped of their components and exposed for what they really are. This initiates a moment of introspection for the trader, requiring a reassessment of the overall investment thesis. While a project’s strength and competitive advantage remains evident after a massive sell-off, this volatility should be viewed as a buying opportunity.

Conversely, if the first tendency in the midst of a price correction is to panic sell, the conviction may have been more about the price action than the strengths and innovations of a project.

Project utility and community

Always ask: is the project useful and who is supporting it? Few things are more revealing about a project than its proposed utility and the community behind it.

An interesting example to highlight is everyone’s favorite: Dogecoin (DOGE). A quick throwback to the past reminds us that the controversial currency, which now trades at around 0.26 cents, was worth $ 0.002 in September 2019 when it had no perceived value. The critical word here is “perceived”.

Related: Building a Better Stock Market: Tokenized Stocks Close the Trade Gap on the Blockchain

Although “crypto purists” fall into fits of rage defending the honor of “real” cryptocurrencies with “real” utility, Dogecoin has done something far more innovative than most credit it with. : he used the community as his utility. You read correctly. Those who invested in the currency did so for three main reasons:

Enjoy the speculation A shared community experience Share the joke

While the utility of Dogecoin is simple, don’t confuse it because it has no use. With simplicity comes ease of understanding, which has sparked massive appeal for DOGE – a feat that many cryptocurrency projects still struggle to achieve even with strong utility. There’s a low barrier to entry in terms of understanding and price, and it’s easier to invest in a joke when Elon Musk and Mark Cuban are among those who find it funny.

To that end, every crypto project should be able to simply communicate its value proposition, but most projects cannot. Investing in hype has a lot more to do with price action than the quality or usefulness of the project.

The usefulness of DOGE can be easily understood and simply articulated, and it brings happiness and pleasure to its community. Whatever the investment strategy, these three factors should not be overlooked or underestimated.

Project longevity

The longevity of the project is the key. Projects don’t need to be sustainable at the start, but to survive in the long term, sustainability is essential. When exploring a project, it is worth evaluating the sustainability plan or a revenue mechanism that might be tapped at some point (eg Uniswap).

It is also important to know which projects have plans for sustainable income models or value capture. Not all (or most) of the projects are viable at the start, which is to be expected. At the time of writing, Uniswap is averaging over $ 3.5 million in fees per day, none of that value going to token holders. That will (hopefully) change at some point, and if not, Uniswap governance token holders will be forced to reconsider their investment thesis. MakerDAO is one of the most profitable and sustainable projects in all space, raking in over $ 63 million in profit in the first half of 2021. While it’s hard to find that degree of profitability elsewhere, it’s certainly worth the effort. worth to be taken into account when evaluating investment opportunities.

Evaluate the longevity of a project

When assessing the long-term potential of a project, it is essential to ask the question: does this project really justify a blockchain solution?

Likewise, can this open source project be easily branched off? Could you have a more efficient market for whatever the project solves without a token? Blockchain is a consensus mechanism, but it is also a database. And, contrary to popular belief, it’s one of the most inefficient databases we use on a large scale.

To justify using this massively ineffective solution, you had better solve a really painful problem. Financial problems, for example, deserve this type of ineffective consensus mechanism because of significant issues such as double spending, lost transactions, or the government printing fiat money in perpetuity.

Related: Survival Bias Led To An Imbalance In The Crypto Ecosystem

In reality, there are relatively few use cases outside of finance where blockchain technology is really required. So, once a pain point is identified that is so glaring that it deserves a blockchain solution, make sure that there is a built-in coordination issue so that the consensus mechanism has a value-added impact.

All of this to say that volatility in the crypto markets is here to stay, and objectively evaluating projects in the midst of such volatility is no small feat. Despite these challenges, understanding the utility, necessity, and long-term viability of projects can help inform more effective investments to be held with confidence over the long term.

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

The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Doug Leonard is the CEO of Hifi Finance, a fixed-rate, fixed-term lending protocol built on the Ethereum blockchain. Doug holds a BS in Information Systems and an MS in Management Information Systems, both from Brigham Young University. Prior to being named CEO of Hifi Finance, Doug spent a year as a senior software architect at Mainframe.

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