Should You Start Investing in Cryptocurrency in 2022?
2021 represented an enormous year of growth for the cryptocurrency market. Thanks to Elon Musk, Bitcoin became a household name, Dogecoin and Shiba Inu became everyone’s favorite memes, and NFTs went crazy.
Given all this exponential growth, as a new investor, you may be asking yourself essential questions:
Is it too late to start your crypto journey? Or, better yet, should you start investing in cryptocurrency in 2022?
In this blog, we’ll be helping you understand if investing in crypto is right for you.
A Look Back at the Crypto Market in 2021
The crypto market started 2021 at around a $765 billion market cap, reaching an all-time high of $3 trillion in November before finishing at $2.2 trillion.
At this stage, investing in cryptocurrency is still not considered a typical investment and, compared to other asset classes, it is still very new. Nonetheless, this past year several key factors further increased its credibility, such as the below, to mention a few:
- Tesla announced that it had bought $1.5 billion in Bitcoin
- NFTs became mainstream
- El Salvador became the first nation to adopt Bitcoin as legal tender
- The first U.S. Bitcoin futures ETF launched
- The rise of the metaverse, spurred by Facebook’s rebrand to Meta
The top two coins by market cap, Bitcoin and Ethereum, followed the market closely.
Bitcoin started at around $29,000, reached an all-time high of $69,000 in November, and ended at around $46,000. Ethereum began 2021 at $737 peaked at $4,900 in November, before ringing in the New Year at $3,700.
BTC and ETH increased by 58% and over 400% in 2021, which more than doubled the S&P 500’s 26.9%. Overall, 2021 was a year of great success for those who decided to add digital coins to their portfolio.
Is it too Late to Invest in Cryptocurrency in 2022?
Put simply, absolutely not.
Given the growth of the crypto space, the increase in institutional demand, and mainstream adoption, there’s more than enough food at the table for everyone. As a result, there is an abundance of opportunities to make serious money throughout 2022 and beyond.
Whether you’re a retail investor that buys crypto as a long term investment, you’re interested in chasing the highest yields in decentralized finance (DeFi), or want to have a go at crypto trading; there are several suitable ways for you to start investing in cryptocurrency and increase your net worth.
With thousands of crypto projects already flourishing and more launching daily, the opportunities for making a serious return on your money are endless.
Five Cryptocurrencies that have Potential
There are far more cryptocurrencies than there are traditional currencies. But when investing in cryptocurrency for the first time, how can you separate the wheat from the chaff? If you’re looking to build your crypto holdings, check out this list of digital assets to get your investments started.
No list would be complete without Bitcoin, the original cryptocurrency.
For many people, this is the first coin they discovered when initially hearing about crypto. Given inflationary pressures due to governments printing money at record rates throughout the pandemic, more and more institutional investors are looking to Bitcoin (or “digital gold”) as a hedge against inflation.
As institutional investors adopt Bitcoin and countries begin to consider it legal tender, it will likely continue to grow. What’s more, notable billionaires recognize the coin’s value. For example, Ricardo Salinas, Mexico’s third-richest billionaire and head of Grupo Salinas, recommends Bitcoin.
Apart from stablecoins, Bitcoin and its long track record could be the relatively safest play in the industry as a long-term investment.
Despite being the second-largest crypto, Ethereum could see further growth in 2022.
Ethereum is the leading way for crypto investors to access DeFi, where they can trade, stake, and earn yield in various ways on the Ethereum blockchain. In fact, according to market data from DeFi Llama, $144.6 billion is the total value locked in Ethereum’s DeFi protocols.
Note: Total value locked (TVL) is the sum of all assets deposited in DeFi protocols.
A significant network upgrade, ETH 2.0, is scheduled for 2022. This upgrade will change Ethereum from Proof of Work to Proof of Stake.
Note: On a Proof of stake (PoS) network, crypto owners validate block transactions depending on the number of coins a validator stakes. They also receive compensation for doing so. It’s much better for the environment.
The biggest change would be reducing the network’s notorious gas fees. Currently, they can be over $40 per transaction, making it unrealistic for retail investors to use.
However, with ETH 2.0, you will be able to stake ETH to earn other coins, the network will be more environmentally sustainable and support more transactions. The migration will also make the crypto deflationary, allowing it to act as a store of value, like Bitcoin.
While we consider Ethereum an excellent long-term bet for those investing in cryptocurrency, its gas fees are its crutch. As such, the following options are a good hedge.
Binance is the largest centralized exchange (CEX) globally, and for a good reason. It provides a simple, effective way for users worldwide to invest in cryptocurrency in several ways, such as receiving compensation for lending their crypto. Its ease of use is why it’s one of our favorite CEXs.
Binance is often new investors’ first place they buy crypto, especially outside of the United States. Their native Binance Coin (BNB) grew by roughly 1,300% in 2021, comfortably outperforming Bitcoin and Ethereum.
Apart from Binance’s utility as a CEX, the Binance network is a gateway into DeFi, facilitating decentralized exchanges (DEXs) like Pancakeswap. Its total value locked (TVL) is $14.6 billion, which is ~10 times less than its competitor.
However, Binance offers far cheaper fees than Ethereum (usually less than $0.50).
The Terra ecosystem is an open-source PoS blockchain based on two tokens: LUNA, the native network coin, and UST, an algorithmic stablecoin pegged to USD.
Terra supports many solid decentralized applications (dApps), such as the Mirror Protocol and Terra Bridge. However, it’s most famous for the Anchor Protocol, where investors can earn ~20% on their UST, contributing to Terra’s rise in 2021.
As UST demand rises and more dApps continue to develop for Terra, LUNA could continue to see strong growth, especially since it is a low-cost blockchain.
Another Ethereum competitor is the Avalanche network, which offers users the ability to make transactions for a few cents. Avalanche can process 4,500 transactions per second, compared to Ethereum’s 15-45.
Apart from that, existing Ethereum dApps can easily be transferred to the Avalanche network, making it easy for Ethereum developers to build on the blockchain. For example, the lending and borrowing platform AAVE, which started on Ethereum, has already been launched on the Avalanche network. That said, the blockchain also has a native and very popular DEX, Trader Joe XYZ. Apart from offering an exchange, users can also lend, farm, and stake various tokens on the platform.
Like Bitcoin, AVAX has a fixed supply of 720 million tokens, which helps prevent the dilution through inflation from other staking blockchains.
What are the risks of investing in cryptocurrency?
Even though cryptocurrency is likely to be around for the very long term, there are still many risks to consider before taking the plunge. The main ones to consider are the volatility of cryptocurrencies, government regulation, and security.
First, it is well-known that all cryptocurrencies (other than stablecoins) are notoriously volatile. In other words, their price fluctuates and is usually a lot more than the traditional stock or forex markets.
For example, a 10% decrease for the S&P 500 may be considered a crash. However, with digital assets, a 10% drop would generally be within the range of what’s considered an acceptable level of volatility. Before investing in cryptocurrency, it’s essential to understand that it’s possible to lose your investment. It is far from a risk-free investment. As a retail investor, you must learn to accept the volatility to profit from the increased rewards.
Current and future regulation around cryptocurrencies is likely to have an impact on your investments.
First, you may have to pay higher or lower taxes depending on where you live. For instance, digital coins are treated as commodities in Canada, meaning that 50% of your capital gains are taxable. In Portugal, on the other hand, crypto gains are not taxed whatsoever.
Second, as mass adoption increases, so will the regulations for digital coins. These added guidelines may scare investors and increase volatility in the short term. We witnessed this throughout 2021 following the U.S. Securities and Exchange Commission (SEC) and Federal Reserve announcements. Nonetheless, regulation is a huge success in the long term because it paves the way for mainstream adoption.
Another of the main risks of investing in cryptocurrency is security.
If you’re a person who likes complete autonomy or you don’t want to share your data, then a private wallet to store your crypto is likely your best bet.
You must remember to store your private key and seed phrase in a safe, offline location to guarantee the safety of your funds. If you misplace or forget them, you will permanently lose access to your assets. There is also the risk of your wallet getting hacked when you connect it to the internet. If you’d prefer a more hands-off approach, as you would have at a bank, then a CEX will be your go-to. While CEXs can still be vulnerable to hacks, they have robust security measures, including offline cold storage wallets and the ability to reimburse you should you lose your funds.
Have a diversified portfolio
Like with traditional investments, having a diversified portfolio is a sound strategy when investing in cryptocurrency.
Don’t invest what you can’t afford to lose, and try not to gamble on projects you aren’t familiar with. For example, investing in blue chips, such as Bitcoin and Ethereum, is usually safer than choosing more obscure, smaller-cap altcoins.
Stablecoins are also a fantastic way to add stability to your portfolio. Not only is their value pegged to a fiat currency, but you can earn awesome interest rates. For example, at Gemini, you can earn up to 8.05% on GUSD!
Furthermore, having a diversified portfolio means not limiting yourself to solely investing in cryptocurrency. Even stocks can be a great way to have a more robust allocation! According to Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management, his analyst team recommends allocating between 1% to 5% of their portfolio to digital assets. Even Shark Tank celebrity and investor Kevin O’Leary is prepared to allocate 20% of his portfolio to crypto once there are sufficient regulations.
Dollar-cost-average to smooth out the volatility
To navigate volatile markets, apply the golden rule and dollar-cost average (DCA). When you DCA, you buy equal amounts of a particular asset at different intervals regardless of the price. That way, you reduce the overall impact of volatility and avoid the mistake of buying a large amount all at once, which could be potentially costly due to timing. Investing in cryptocurrency and volatility comes hand in hand.
Investing in cryptocurrency requires patience
When investing in cryptocurrency, exercising extreme patience is key.
It is not uncommon to see overnight drops of 10% or more or extended periods with sideways movement on the charts. For example, this is what happened between May and August 2021.
During these times, you must be patient if you believe in the future of cryptocurrency. It is very easy to give in to peer pressure and negative news about the industry, but often this negativity is temporary.
For example, China has outright banned cryptocurrency several times, causing a momentary dip before things return to normal. There will always be critics and negative press about cryptocurrency. The best thing you can do is not overreact when the market does.
Use centralized exchanges
We previously reviewed CEXs and DEXs and argued that centralized exchanges are excellent places to start investing in cryptocurrency.