Cryptocurrency - The New King of Investing?
Cryptocurrency in 2021 was nothing short of explosive. The top of the heap, Bitcoin, returned an impressive 60% in 2021, which is actually the smallest annual return the coin has yielded since 2015. The second in command, Ethereum, boat raced Bitcoin with a 530% return for full-year 2021. However, both of those absolutely pale in comparison to some of the returns from smaller coins on the market.
Today, I want to take a look at the landscape of cryptocurrency as an asset class and lay out my strategy for how I'm going to invest in the space moving forward. This is just my unique opinion on the space, and should not be taken as investment advice. Please do your own research and contact an investment professional for your own personal situation. With that out of the way, let's talk about building some wealth in 2022 with crypto!
1. Focusing On the Duopoly of Bitcoin and Ethereum
From the looks of things, it appears as though Bitcoin and Ethereum are here to stay. Gone are the days when these two disappearing was a real threat, and they're both now well respected juggernauts in not only the cryptocurrency space, but also the investment space.
2021 saw dramatic steps in Bitcoin adoption pretty much across the board. Millennials began adopting the currency into their portfolios en masse, and millionaires followed suit. Then came the adoption by companies like Tesla, and more notably, MicroStrategy, who added Bitcoin to their balance sheets throughout the year. 2021 also saw the rise of the "Bitcoin Maximalist," who is essentially a digital carnival barker espousing the benefits of Bitcoin.
Why did these people begin cropping up? Well that's thanks to Jerome Powell and the Federal Reserve who printed money like Jordan Belfort throwing fun coupons, leading to a disillusionment around the idea of printing money and central banks.
Finally, Bitcoin began to see adoption in investment institutions like JP Morgan, as well as sovereign adoption in El Salvador. Bitcoin found footing in 2021 not only as an investment, but also as something used explicitly for transactions, as well as a "hedge" against inflation, acting almost as a new age digital gold.
Speaking of transactions, Ethereum's banner year was on the back of that very transactional nature. Ethereum's use case as an actual currency helped it climb in market cap, as well as the rise of the NFT boom that has frankly been stupid and ridiculous. NFT's, however, have fully clogged up the network and have dramatically increased the gas fees of Ethereum, which is the network fee a user has to pay in order to execute a transaction. Gas fees have become essentially untenable, leading to an even more ferocious appetite for the impending "Ethereum 2.0" upgrade set for summer of 2022, which I wrote about in-depth in my beginner's guide to Ethereum.
With all of this, I'm expecting Bitcoin and Ethereum to maintain their hold on the top two spots, though not necessarily in that order. I think that 2022 will be the year of Ethereum, and the Ethereum 2.0 upgrade could be the catalyst that finally pushes Ethereum higher than Bitcoin in market capitalization. As a result, this is where most of my cryptocurrency dollars will be allocated this year, but there are a few more spaces that I'm extremely interested in, the first of those being "stablecoins."
2. Taking Advantage of Stablecoins
Stablecoins are a fascinating entry into the story of cryptocurrency. For a more detailed write up of what they are and how they work, you can find my piece here from a few months ago. Think of them like the bond market of the cryptocurrency space: they are pegged to fiat currencies (usually the U.S Dollar) and provide a consistent yield. You won't see price appreciation like Bitcoin, but you also won't see price depreciation, giving you, well, stability in your portfolio.
With this, I am in the process of transferring my emergency fund from a traditional high-yield savings account into the much higher yielding stablecoin space. At the moment, my coin of choice is Gemini Coin on the Gemini exchange, for several reasons:
Gemini is, for my money, one of the most stable exchanges on the market based on their liquidity and reputation, and
The yield for Gemini Coin is simply ridiculous at 8% annually.
This 8% annual yield is 16x what I get from my current savings account, which results in hundreds of extra dollars per year in my emergency fund. Now, there is a risk to this space, which is federal regulation.
Billionaire celebrity (I guess?) Mark Cuban predicted back in September that stablecoins will be the first sector of cryptocurrency to get regulated, and I honestly think he's right. While there have been shady cryptocurrencies that spike thousands of percent in a matter of hours and then crash back to nothing as the founders pull all the cash out (looking at you Squid Games Coin), the biggest controversy by far in the market has been the debacle with Tether, the leading stablecoin that has had its ass sued off by New York state and is no longer able to practice business there. I'm not going to dive into everything that Tether has allegedly done, but this excellent piece from The Verge does a great job breaking it down.
3. Look for New (or smaller) Spaces
A few paragraphs ago, I mentioned the chief downside to the Ethereum network: gas fees. Well, many engineers around the world have set out to improve on the technology and ability of the Ethereum network, and have released their own tokens as a result.
These so-called "Ethereum killer" tokens build on more advanced transaction networks to lower fees and increase transaction speeds saw a banner year. Avalanche clocked in at a 2,787% return for the year. Solana did better than that at a 9,374% return and saw entry into the top five cryptocurrencies by market capitalization by the end of the year. The giant in this space, however, was Polygon, which logged a return of over 14,000% just in 2021.
All of these coins I just mentioned still don't stand up to the two most talked about coins from last year, Dogecoin and Shiba Inu.
While Dogecoin's return of a measly 12,000% at its peak doesn't stand up to Polygon's tear, Polygon didn't get Tesla founder Elon Musk tweeting about it and talking about it on Saturday Night Live. And that brings us to Dogecoin's knockoff inbred cousin: Shiba Inu.
Shiba Inu at its 2021 peak returned a historic 49,000,000%. That's right: forty-nine million percent. No asset in the history of the world has returned those kinds of numbers in a single year, and it was also the crux of one of the greatest trades of all time when siblings in New York turned a $7,000 investment into $2.6 billion inside twelve months. Take that Bill Ackman.
So what does that all mean for me? It's the same as traditional stock investing: moonshot-type investments should make up a small percentage of your portfolio. Sure, you may not make the billions of dollars on a coin like Shiba Inu, but you also won't lose it all if it goes to zero overnight, which statistically is more likely.
4. The Metaverse!
You knew we'd get to it. Cryptocurrency as a concept has now given rise to a completely different concept that could potentially be even more grand in scale: the Metaverse.
The Metaverse is really an umbrella term for a digital-first world that includes "in-person" digital meet-ups of all kinds. Technically, we've all been in some very basic version of the Metaverse when we dial into our ninth Zoom call of the day during pandemic-era virtual meetings, but these worlds are rapidly beginning to include things like: virtual Justin Bieber concerts, marketing campaigns and even a hall of NFT's that belong to Snoop Dogg. Where cryptocurrency comes in, however, is in the much more grandiose version of the concept.
Currently, there are a few major applications of the Metaverse that are worth talking about for the purposes of cryptocurrency: real estate and video games. Yes, I said real estate.
So far, there has been over $100 million in digital real estate sales, according to Business Insider. This company is a real estate brokerage...just for the Metaverse. The Motley Fool is writing articles now about undervalued Metaverse real estate. Some poor asshole spent $450,000 on the digital house next to Snoop Dogg's house. All of this is accomplished via cryptocurrency of different varieties that are (usually) purpose-built for this very scenario. For example, Decentraland's main currency is MANA, which is starting to have its own little renaissance.
Outside of fucking stupid real estate, we have video gaming. Companies have long dipped into digital downloads as a new revenue stream. For example, look at Electronic Arts and how much revenue they generate in the FIFA Ultimate Team store, or Fortnite with their digital skins. Well, this concept is starting to spread and grow. The Metaverse environment "The Sandbox" uses SAND as a native currency in order to play games, purchase NFT's and generally exist in the world. Established companies like Square Enix are beginning to plan their own digital environments with their own NFT's and tokens. The space is growing, so you may as well hop on for the ride, which is exactly what I'm going to do.
Metaverse, I predict, will make up a small-but-mighty section of my crypto portfolio. Will I use any of the tokens to buy a cliff-side mansion in the digital equivalent of southern California? God no, but someone else might, which is why I want to get into this digital tokenized world ASAP.
So What's My Strategy?
A cryptocurrency investing strategy really comes down to a few different factors: what to invest in, and where to buy them. There is no shortage of exchanges willing to take your money, but each one functions a little bit differently, so here's how I use them:
Coinbase
Coinbase is my preferred broker because I've been using them for years, but that doesn't necessarily mean they're the best. Their fees are quite high, their app is not very intuitive and they're surprisingly limited on the tokens you can purchase through the platform for being such a big (and public) company. But I do like the speed and reliability of the platform, and they currently offer the highest staking rates I've found so far for Ethereum 2.0. Coinbase is where I hold all of my Ethereum in lockup in order to gain that staked interest.
Gemini
Gemini is a platform I've started using recently. Why? Staking and yield! Gemini offers pretty awesome interest rates on stablecoins including USDC and Gemini Coin that are around the 8% range, so I've started moving my cash savings over there. The best part is that the cash is not locked up to get those rates like on other platforms, so it's easy to liquidate and move if an emergency ever does come up.
I also like the pedigree of the platform. It was founded by the Winklevoss twins (remember them?) and has captured Silicon Valley's attention, as well as dollars. The company is backed to the gills with VC money and they also keep their tokens in cold storage, increasing the security of your assets over other exchanges. So far, I'm pretty happy with what I'm seeing from them.
Crypto.com
OK, this one is weird. So I was like everyone else and jumped on the Crypto.com bandwagon after they took over the naming rights of the Los Angeles arena, as well as producing some bizarre commercials with Matt Damon and astronauts named "Satoshi."
I HATE the user interface in the app, and they have some very funky parameters around how to get the most yield out of the app. It operates in a similar manner to a traditional bank's CD terms where you get a higher yield for a longer lockup period, but they have rewards tiers and lockup periods and all sorts of nonsense that's honestly harder than it should be. Suffice to say you won't see my referral code for them in this section.
My Cryptocurrency Allocation Strategy
2022, for me, will be the year of what I call "establishing a base." As it will be my first year of true, concentrated asset allocation and management in the cryptocurrency space, I want to take a measured approach to it. For that reason, here's how my intended asset allocation will break down:
As I mentioned above, I think 2022 will be a big year for Ethereum with the roll out of the Ethereum 2.0 upgrade. As such, I want the largest percentage of my portfolio to be concentrated there, but I don't think Bitcoin is going away. If I had to predict what the market looks like at the end of this year, I'd say it's Ethereum in the top spot and Bitcoin at a comfortable number two. It doesn't hurt that I'm getting 4.5% yield on my Ethereum either.
Stablecoins are going to be tested this year, but I think they'll be here to stay, even with potential harsh government regulation. Obviously I believe in them if I'm in the process of moving my emergency fund over to USDC/Gemini Coin. I particularly like USDC even if the yield is a little lower as it's audited on a monthly basis by independent firms to ensure that 1 USDC does, in fact, equal 1 USD (unlike some other stablecoins). The fact I can get ~8% on my cash is, frankly, ridiculous.
The rest of the portfolio will be coins I think have potential, starting with the "Ethereum killers" like Solana. I actually did a deep dive into Solana recently and think the network really is something special. It could be a long term winner if it's able to scale as effectively as they think it can.
As far as the Metaverse, I'll be looking at coins with first-mover advantage. Axie Infinity, Decentraland and The Sandbox are the ones I'll be jumping into this year, albeit slowly and not with both feet from the jump.
Finally, we have the moonshot shitcoins. There are no style points in investing. Your dollar isn't worth more than my dollar because you made it in Apple and I made mine in Dogecoin. This is, ironically, the one that will take the most work as it requires combing forums like SatoshiStreetBets to figure out what the coin is, what the project is and if you want to throw some cash its way.
Overall, this is my strategy for 2022, but what do you think? What are you going to do when it comes to investing in cryptocurrency in 2022? Let me know in the comments below, and don't forget to sign up for my email list so you never miss a post!
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