If someone ever tells us that they know which are the best projects to make an investment in cryptocurrencies, it is better not to listen to a single word: the truth is that no one knows. But what we can do is create a diversified investment with Bitcoin, Ethereum and a variety of leading tokens in some key sectors of the cryptocurrency ecosystem. In this way, we will have a better chance of finding opportunities to generate profits.
How do we diversify investment in cryptocurrencies?
Depending on one's risk tolerance, we will want the majority of our portfolio in Bitcoin and the second largest in Ethereum. These have much larger market capitalizations than the rest and tend to be more stable. Therefore, they could form the core of our portfolio, surrounded by smaller positions from these eight sectors:
1. Smart Contracts Blockchains (aside from Ethereum)
In addition to Ethereum, there are many other Smart Contract blockchains to choose from, each with their own advantages and disadvantages. We must maintain a wide enough distribution to ensure that we generate profits and do not fall victim to the next Earth Moon. These are some of the best-known blockchains: Solana (SOL), Cardano (ADA), Polkadot (DOT), Elrond (EGLD), Polygon (Matic), Avalanche (AVAX), Fantom (FTM), Waves (WAVES), Tron (TRX), Algorand (ALGO) and NEAR Protocol (NEAR). It is worth spending some time researching them to find between 5-10 for our assignment in this sector.
Comparison of movements in the last year of the main blockchains. Source: Tradingview
2. Decentralized Finance (DeFi)
By purchasing Smart Contracts blockchains, we will also be exposed to the DeFi sector, since all DeFi projects are based on those blockchains. But we can also buy the tokens from the DeFi platforms themselves. We would distribute our investment in cryptocurrencies to a few different subsectors within DeFi:
- Decentralized exchanges (DEX) such as Curve (CRV), Uniswap (UNI), SushiSwap (SUSHI), and Thorchain (RUNE).
Comparison of movements in the last year of the main DEXs Source: Tradingview
- Lending protocols such as MakerDAO (MKR), Compound (COMP), and Aave (AAVE).
Comparison of movements in the last year of the main lending protocols. Source: Tradingview
- Derivatives protocols such as dydx (DYDX) and Synthetix (SNX).
Comparison of movements in the last year of derivatives protocols. Source: Tradingview
But we have to keep in mind that investing in cryptocurrencies of this type can entail more risks.
3. Oracles里
Blockchain Smart Contracts need reliable real-world data. DeFi smart contracts, for example, need to connect to a centralized exchange price feed. That's where oracle protocols come in: bridging the information gap between blockchains (within them) and the real world (outside them). When it comes to oracle protocols, Chainlink (LINK) is the clear market leader. And its LINK token has performed well in previous bear markets.
4. Centralized Exchange Tokens (CEX)
Centralized exchanges (CEX) remain the main playground for cryptocurrency investment. Some offer a wide variety of cryptocurrencies. But different from Coinbase (COIN), we cannot buy shares in them. The next best option is to make an investment in cryptocurrencies from centralized exchanges. According to the exchange, these cryptocurrencies offer certain incentives when using the platform, such as lower fees when trading tokens and other assets. Binance, FTX, and Huobi exchanges typically generate the highest trading volume. Its cryptocurrencies are Binance Coin (BNB), FTX Token (FTT), Huobi Token (HT) or Crypto.com Coin (CRO).
Comparison of movements of the last year of CEX tokens. Source: Tradingview
5. Games and Metaverse️
Blockchain gaming and the metaverse already process more transactions in smart contracts than any other sector. While the average size of those transactions remains minuscule, the industry could level up as blockchain technology is introduced into the video game industry, leading to the sector's cryptocurrency investment continuing to grow. Let's look at older gaming and metaverse projects like The Sandbox (SAND), Decentraland (MANA), Alien Worlds (TLM), and Splinterlands (SPS). These also have NFTs in the game if you like that type of investments.
Comparison of movements in the last year of the main tokens of the metaverse. Source: Tradingview.
6. Privacy Tokens
Private cryptocurrencies such as Monero (XMR) and Zcash (ZEC) can be sent across their blockchains with complete anonymity. They do this by encrypting transactions so that they cannot be traced, unlike Bitcoin, for example, where each transaction is publicly displayed on a public ledger. And while investing in private cryptocurrencies may sound like a dream come true for criminals, they are gaining more credibility in the mainstream, especially among the wealthiest. Privacy is a form of security, after all.
Comparison of movements in the last year of Monero and ZCash. Source: Tradingview.
7. Supply chain ⛓️
During the pandemic, we saw complex global supply chains come to the brink of collapse. Well, those chains involve a lot of data sharing and are also very compartmentalized. Therefore, putting supply chain data on an open and secure blockchain makes a lot of sense. When it comes to supply chain projects, within cryptocurrency investing, VeChain (VET) has gained the most traction.
8. Decentralized storage projects ☁️
Dropbox, Google Drive and iCloud are apps for storing important information in the cloud. But “in the cloud” just means that your information is stored on multiple data servers owned by those companies. And although those warehouses are backed up and secure, they still have central points with potential failures. In the future, decentralized data storage platforms should become much more widespread. We have Arweave (AR), Siacoin (SC) or Filecoin (FIL) as the best options to make an investment in cryptocurrencies in this sector.
Comparison of movements in the last year of decentralized storage protocols. Source: Tradingview
If you have decided which cryptocurrencies and tokens to start investing in, let's think about how we want to divide our investment portfolios. It is up to each person to decide how much to invest in each of the above areas. And let's not forget to rebalance our portfolios from time to time to make sure they don't stray too far from our target range.