Ways to Approach Crypto Investing in 2023

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2022 has been brutal 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 crypto investors plan for 2023?

First, this space has critical risks to consider before investing.

Macroeconomic risks

Investors should recognize the macroeconomic and systemic risks affecting the crypto industry as we approach 2023. The war in Ukraine has led to an energy crisis caused by sanctions on Russian energy. The US Federal Reserve’s monetary policy response to inflation continues to trouble markets. Crypto contagion from recent bankruptcies continues to inject volatility into the market, with growing regulatory pressure and miner capitulation likely to continue into the new year.

Ukraine War, 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 biggest sources of energy in the world, especially for Europe, and sanctions against Russian energy have caused a crisis in several European countries, with prices soaring and supplies dwindling .

Economic shutdown policies implemented by governments in response to the COVID-19 pandemic accompanied by massive money supply expansions have led to soaring inflation in the United States, Europe and around the world.

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

The crypto-contagion

The contagion effect caused by the collapse of Terra in May is still haunting the crypto markets. FTX’s failure in November saw Bitcoin hit a new cycle low. The ripples caused by these major events have yet to subside.

Many companies have filed for bankruptcy, and as they seek to repay their creditors, they may liquidate their crypto assets, which could trigger further selling in the crypto market. Investors should be aware of this as they enter the new year.

Regulatory pressures

Crypto regulations have been coming to the United States for quite some time. The dramatic events of 2022 have only increased the likelihood of regulatory progress 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 short-term period of disruption. If a popular stablecoin like Tether (USDT) or USD Coin (USDC) comes under regulatory scrutiny, it could cause market turbulence.

Surrender of miners

If Bitcoin prices continue to fall, the pressure on miners will increase. Bitcoin mining is a capital-intensive business, and falling prices make the operation of these businesses unsustainable. As a result, miners are forced to sell Bitcoin to cover costs, putting downward pressure on the price.

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

Besides these risks, the crypto market never fails to surprise like Terra and FTX. It’s good to keep this in mind when considering investing.

Investing smartly in 2023

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

Cash is king, as some say. This helps keep liquidity reserves in a bear market, as it is difficult to predict a black swan event. These events could be great sniping opportunities to buy discounted cryptocurrencies and NFTs.

Allocate a percentage of your portfolio to top-tier cryptocurrencies

Investing means preserving your capital. Investing in top-notch cryptocurrencies like Bitcoin and Ether (ETH) is a smart move.

Layer 1 and Layer 2 Blockchains

The next step towards investing in riskier assets is to seek out Layer 1 and Layer 2 blockchains, excluding Bitcoin and Ethereum. It might be useful to spread exposure to blockchains that have survived at least one bear market, and then look at newer blockchains that look 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 white papers, evaluate roadmaps, and explore the community.

Investing in Layer 1 or Layer 2 blockchains is generally less risky 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. Indeed, Ethereum has thousands of decentralized applications and its price is resistant to the failure of an application. However, if Uniswap fails, app investors 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 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 previous cycle. These parallel investments will help build a strong and balanced portfolio.

Airdrops

It’s hard to forget the Ethereum Name Service (ENS) and ApeCoin (APE) airdrops over the past cycle and, more recently, the Aptos (APT) airdrop. The Web3 space is full of new, often credible projects. Projects need an army of people to test their products. Investors can get involved in projects early 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 that won’t be the case this time around. 2023 is shaping up to be a year with many new projects being tested.

The story rhymes

Many exponential gain patterns have emerged in the previous cycle. Beware of similar themes in this cycle. ENS domains have been a great success in the last cycle. As decentralized name services become more popular, it might be interesting to watch projects develop their own.

DeFi has had a great run over the past cycle. GameFi and Metaverse tokens also performed well. DeFi and GameFi could become the next big thing in the next few years.

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

Memecoins have been lucky in the last cycle, and Dogecoin (DOGE) remains an interesting project with support from Elon Musks. 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 on the investment choices of venture capital funds like 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 narrow down to a few good investment candidates. However, investing in new names that are app-level projects is usually smarter after the crypto market has bottomed and rallied 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 in market is better than time of market entry. The longer investors stay in the market and follow the basic rules as often as possible, the higher their returns will be. Despite market cycles and volatility, crypto 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 involves risk, and readers should conduct their own research when making a decision.

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