I’ve been following the crypto space closely for more than 5 years now, and this is the first year where I don’t really feel sure in making any predictions for the coming year.
There are several reasons for this, so in this article, I’ll be working through my thoughts in order to attempt to arrive at some sensible conclusions on how to build a crypto portfolio going forward. I strongly believe that this yearly exercise of trying to predict trends on a yearly basis needs to be done by both new investors and others who have been investing in crypto for a long time.
The idea here is not to see how many of these trends you can guess correctly, but to force you to sit down and do some serious research. This keeps your thinking fresh and helps you to take input from several brilliant minds in the space, as well as learn new things. It’s a tough exercise that takes time, but it will help you immeasurably.
Due to the crypto space being so volatile, it is essential to enter positions with strong conviction, although you should always be ready to admit you were wrong and change your mind about things.
Before we start, some quick tips.
Using Safe Exchanges
Whatever you decide to invest in, make sure to use the very best exchanges:
Read more: The best crypto exchanges and trading apps
Passive Crypto Income is Great
The past two years have seen immense growth in the crypto lending services sector. You can now do much more than buy crypto and wait for the price to go up. I would recommend you check out the following platforms that help you put your crypto to work and obtain some very interesting yields:
Keep Good Records and Pay Your Taxes
Whatever you do, make sure you keep good records of all your crypto transactions by using a crypto portfolio tracking tool that can also double as a tax preparation tool. You can have a look at my review of CoinTracker, my favorite tracking tool.
I’m going to start with some important fundamental points that you should base your crypto investments on and then move on to some thoughts on portfolio components.
Don’t be a Maximalist
The first thing that is becoming increasingly evident to me is that being a maximalist about Bitcoin, Ethereum or some other blockchain doesn’t pay off.
Bitcoin maximalists are the noisiest of the bunch, so let’s talk about those first. I totally understand where these people are coming from. Bitcoin has completely changed my life and way of thinking, and I feel like I owe a lot to this revolutionary project and the incredibly talented people that have worked tirelessly to make Bitcoin a success against all odds. I consider myself to be part of this “Bitcoin army”, but I’ve never seen myself as a Bitcoin maximalist. I do think of myself as a freedom maximalist, and Bitcoin has helped me in so many ways on my path to freedom, but we’re far too early in crypto to pass judgments on alternative projects and niches, let alone take the maximalist position that only Bitcoin will survive in the long run.
Over the past two years, we’ve seen the rise of the Ethereum maximalists, mostly as a reaction to the Bitcoin maximalist crowd. Again, I think very highly of Ethereum and its stakeholders, but there is even less scope for being an Ethereum maximalist than there is for being a Bitcoin one. The main reason is that while Ethereum is a very ambitious project, and there is a significant degree of uncertainty in the near future due to its impending shift to proof-of-stake that should happen later this year or early the next. Also, while Bitcoin has carved out a niche where it stands as a dominant player with no real rivals (apart from Ethereum itself), Ethereum is facing some tough competition from newer blockchains that solve two big pain points with Ethereum in its current form: gas fees and throughput.
I wanted to start off with this piece about maximalism because it really defines the rest of my thoughts. Over the past year or so, I’ve seen tremendous growth in applications, acceptance, and technology related to crypto. The crypto landscape has widened considerably, to the point where I’m questioning whether the term “crypto” really applies anymore. For lack of a better descriptor, I’ll continue to use it, but I think we’ll be speaking about this space differently in a couple of years’ time, rather than lumping everything under the crypto terminology.
Invest in Crypto Infrastructure
While protocol tokens have gotten a lot of attention over the past years, I think investors have not paid enough attention to the technological infrastructure that needs to be in place for crypto to really go mainstream.
Take wallets for example. There is a huge need for better solutions to wallets and recovery. Using seed words isn’t really acceptable if we want mass adoption – it’s too complex and prone to user error/scams/theft and catastrophic loss of funds. Even the idea of a wallet and its purpose is a bit antiquated. In Web3, wallets are not only a way of visualizing your token holdings but become your digital identity.
Then we have mining infrastructure. For Bitcoin, it requires a lot of technical knowledge and substantial investment and management in hardware. For most other blockchains, there is a need for innovative staking solutions.
There are many funds investing in infrastructure. For example, the Ten31 fund specializes in Bitcoin Infrastructure companies.
You can also look at Angellist for more accessible opportunities to invest in crypto infrastructure. I do believe that if you’re immersed in the Web3 space you will also come across opportunities to invest in new startups at a very early stage. The best way to encounter these opportunities is to build relationships with other investors and attend many conferences and talk to as many people as you can.
The bottom line on this is that infrastructure companies present a different risk/reward tradeoff compared to the protocol tokens themselves and can even outperform the tokens of the blockchain they’re catering for.
If you have the ability to build products, then you should most definitely give it a shot. It’s no wonder we’re seeing many developers leave their jobs at Google, Facebook and other big tech companies (cushy jobs) to become entrepreneurs in the Web3 space. Building the future is exciting, and I think it will also be very financially rewarding.
Due to my deep dive into NFTs over the past half a year, I’m pretty familiar with the need for products in this space. The nice thing is that many of the NFT-related tools offer lifetime passes in the form of NFTs to their early users. One easy way to get exposure to the potential upside of crypto software products is to buy up these lifetime passes at mint stage or even on the secondary market.
LooksRare is another platform to keep an eye on. As I write this, you can get upwards of 500% APR on staked LOOKS tokens. This is yet another way to invest in crypto infrastructure. As we’ve seen, there are many ways to do it, and you don’t need to be a venture capital fund to gain access.
Don’t Try to Do It Alone
I’ve made a significant shift in the way I invest over the past few months, and I expect this to be a determining factor in the future for me.
Up till now, I’ve been traveling alone on this journey in crypto investment. I’ve read a ton of books, consumed an ungodly amount of podcasts, and kept updated daily through blogs and newsletters. Sure, I’ve also blogged regularly on this website and hosted an investment podcast, which led to me meeting many interesting people, but on a daily basis, it was still just me analyzing everything and taking important decisions.
I know I’m not the only one, as crypto was such a small niche that it was hard to even find someone that understands what you’re talking about, let alone share the interest at the same level of intensity and dedication.
But things have changed completely now. Web3 is all about community and social investing. I’ve embraced this fact and during the past year, I’ve joined a few small communities focused on investing, especially in the crypto space. I also started my own group for my closest investor friends (reach out to me if this is of interest to you). Some can be a firehose of random opportunities, but the best groups can deliver an incredible amount of curated alpha and be a time saver.
I’ve also started hiring in order to build a team rather than trying to take care of everything myself. Even if investing in crypto is not your full-time job, you should think about building a team of people that can smoothen your journey. For example, having an accountant/tax lawyer familiar with all the aspects of crypto is invaluable. You can outsource all the portfolio tracking and tax preparation to them, saving you worry and time.
Solutions like Syndicate and Party Round make it easy to invest as a group. Investment DAOs are another option. Social investing will become a bigger thing, although we still need to see the legal aspects ironed out first.
Building a Crypto Portfolio
While in previous years, I felt I was able to quite easily narrow down my focus to a few blockchains that I was interested in investing in, this year feels different. I will therefore be pointing out a few niches in crypto and pointing out a few interesting plays within each niche. There is now much more nuance than simply buying Bitcoin, Ethereum and a couple of other project tokens and hodling them.
Every investor needs to think about this specific allocation based on his goals and needs. While crypto investments still sit clearly in the “high-risk” portion of a global investment portfolio that includes other asset classes like real estate and stocks, we can also talk about a risk/reward spectrum that’s quite broad within the crypto niche itself.
Store of Value
The use-case of Bitcoin as a store of value has grown significantly over the last year, in my opinion. The ‘digital gold’ narrative has clearly won out against other narratives such as means of payment. This can be seen by the biggest Bitcoin news items in 2021: El Salvador making Bitcoin legal tender, and MicroStrategy doubling down on making Bitcoin its treasury asset. I think we’ll be seeing more countries following El Salvador, while Bitcoin in company treasuries is already a thing. MicroStrategy might be the biggest buyer of Bitcoin in the corporate world, but they certainly aren’t the only ones playing that game.
What this means is that Bitcoin is seen primarily as a hedge against the significant inflation we are experiencing with fiat currencies. Any individual or company that has material wealth currently stored in fiat currency and gold should be looking at switching (at least in part) to Bitcoin as the superior alternative, due to its fundamental properties. See my list of best Bitcoin books if you want to learn more about that.
Hence, I consider Bitcoin to be the best base currency. Rather than keeping fiat currencies like USD and EUR, one can consider holding Bitcoin instead. This is even truer if your currency is not one of the major pairs, as you will probably be experiencing the negative effects of inflation even more significantly.
While it remains very volatile compared to most other assets, I don’t expect to see huge returns from Bitcoin this year (being very optimistic: 3-4x). On the other hand, for me, it is the easiest crypto asset to allocate to, as I’m very convinced of its fundamental properties and chances of long-term survival.
To wrap up this point, if you have a significant portion of your wealth in crypto, then Bitcoin will be an important allocation for you, as it provides the opportunity for long-term safety, protection against inflation, and the possibility of price appreciation that is still way better than most other risky assets like stocks.
If, on the other hand, you’re just starting out with crypto and see this part of your overall portfolio as a moonshot, you’ll probably want to go after cryptos with more growth potential, and perhaps substitute Bitcoin for Ethereum as the bedrock on your crypto portfolio.
Leaving price, risk and growth potential aside, I still recommend that people learn how Bitcoin works and immerse themselves in that ecosystem (books, podcasts, technical knowledge) before moving on to other projects, because that will give you a very good mental framework for looking at the crypto space in general and what the grand goal is all about (revolutionizing the traditional financial system and the power structures built on top of it).
I feel that an often overlooked opportunity is investing in crypto infrastructure. Grant Gilliam explains why Ten31 is investing in Bitcoin Infrastructure companies. The main argument is threefold. First, for any non-100% BTC portfolio, Bitcoin companies present a different risk/reward tradeoff. Second, some Bitcoin companies can outperform Bitcoin. Third, Bitcoin companies are not as volatile as Bitcoin is. The argument makes a lot of sense from a capital allocator perspective and we’ll see how this thesis works in a world of post-modern investing.
My last note on Bitcoin – ETFs will be a game-changer whenever they get approved in the United States. I don’t expect it to happen this year given the number of recent denials by the SEC, but keep an eye out on things to that respect. Once ETFs are available, there will be a big influx of institutional investment as well as inflows from traditional retail investors that don’t feel comfortable buying Bitcoin directly and taking responsibility for the custody of their coins.
In Europe, you can already invest in Bitcoin through your regular stockbroker, but the biggest impact will be felt when it becomes possible in the United States as well.
A Multi-Chain Present and Future
Bitcoin and Ethereum are the product of the first iteration of blockchain development, born in times were blockchains were a totally new concept. The aim in those early days was to prove that this technology can work and can provide value to the world. Thus, developers approached the challenge from a monolithic, one blockchain rules-all mentality. This mentality is what gives rise to the maximalist subculture, but it is increasingly out of fashion.
There is a popular analogy doing the rounds that I think explains the situation particularly well.
The analogy asks us to think of blockchains as nations and cities. Ethereum can be compared to a city, say New York. It’s where everybody wants to be, but as it gets more popular, problems arise. Moving around takes time as there is congestion, and physical space becomes very expensive. Scaling to cater for more users/citizens/businesses is a challenge. New York scaled upwards through the use of skyscrapers. With Ethereum, the skyscrapers are layer 2 solutions. You still, however, have a problem when you need to move from one building to another in New York, and the same goes for Ethereum. As soon as you need to go from layer 2 to layer 1 you hit the bottleneck once again. However, the idea is that there will be less traffic on layer 1, as most of the lower value activity will happen on layer 2.
This brings us to the second part of the solution: application-specific blockchains. You can think of these as other cities or other nations. They can become specialized in other industries, or in the case of blockchains, applications.
The connections between these cities/nations will be done using smart contract hub protocols like Polkadot and Cosmos.
Ethereum is itself becoming modular, with the race for a leading layer 2 scaling solution already well underway. If you have no idea what these layers mean, here’s a short primer. Layer 1 is the term that’s used to describe the underlying main blockchain architecture. Layer 2, on the other hand, is an overlaying network that lies on top of the underlying blockchain. Bitcoin is layer 1, and the Lightning Network is layer 2. Ethereum is also layer 1, while Polygon, Arbitrum and Optimism are layer 2.
It seems likely to me that modular blockchains are the future, so if you agree with me on that, it would make a lot of sense to dig into layer 2 solutions for Ethereum, and possibly allocate to them. If the thesis holds true, they should see bigger growth than Ethereum itself once they become mainstream.
We also need to consider two other big protocols that have been around for a number of years already and maybe primed for some action: Polkadot and Cosmos. They are both protocols that provide an interface for different state machines to communicate with each other. Both protocols are predicated on the thesis that the future will have multiple blockchains that need to interoperate with each other rather than individual blockchains existing in isolation.
Again, I’m a firm believer that this will be part of our blockchain reality in the near future, so I think we should spend a good amount of time digging into these ecosystems and making some bets there.
There are several projects built on Polkadot and others on Cosmos. Developers have built hundreds of blockchain projects on Cosmos, including Binance Chain (BNB), Terra (LUNA), Crypto.com Coin (CRO), Cosmos Hub (ATOM), and more. On the Polkadot front, you can have a look at Polkaproject.com for an indexed collection of projects.
Finally, we need to keep an eye on layer1 competitors to Ethereum. Although “Ethereum rivals” is the most frequently used term for these blockchains, this is not always necessarily the case. Several of these “competitors” are really trying to deliver value for a specific use-case, while Ethereum is a generic protocol meant to be used for anything.
Some protocols to keep an eye on in the layer 1 segment are Solana, Terra, Avalanche, Near, Harmony, Celo and Fantom.
While I think that Ethereum will maintain a very important position in the years to come, I also think there is a strong possibility that other specialised chains also manage to carve out a very important niche, and that the “connector projects” will thus also become very important.
Web3 – NFTs, DAOs, Social Tokens…
I’ve written extensively about NFTs; they’ve really been one of my favorite deep dives that I’ve done in recent years, and I do have a few favorite NFT projects that I’ve doubled down on. If you know what you’re doing, you can see some incredible returns. Just ask the early holders of Cryptopunks, Bored Apes, Cool Cats and Doodles who held their assets right from the start till the latter part of 2021, when valuations soared.
Timelines in Web3 are incredibly short. A long-term NFT investment can be just a year or even less. The downside is that there is a ton of stuff happening and it’s really hard to invest in NFTs in any structured way unless you’re doing it full-time. If you can only dedicate a few hours a week you’ll probably end up gambling rather than investing.
Here’s where having a group of trusted and competent investor friends can really be useful. If they are specialized in NFTs you can save a ton of time and rely on their recommendations, although you should always have your own NFT evaluation checklist to go through before investing. With dozens of projects launching daily and new NFT use-cases being discovered on a monthly basis, being able to limit the number of projects you look at is very valuable.
Due to my web development background and my love of analytics tools, I’m extremely interested in the myriad NFT trading and analytics tools that can be used to gain an edge. As I mentioned earlier in this article, I think being a builder in this space is very lucrative, and if not, you can always by up the lifetime passes for the leading products that you use.
I think it’s still a bit too early for DAOs and social tokens, but I strongly believe that NFTs will have another great year. They are easy for people to understand and we have only scratched the surface of what they can be used for. Moreover, big brands are making their NFT plays while many famous personalities have also bought NFTs, and we all know that people love to copy the rich and famous.
Gaming NFTs are widely expected to be very popular this year, although I’m not sure about my abilities to make the right picks on that front.
A Sensible Portfolio
To put all the above thoughts into practice, here’s what I would think of as a sensible token portfolio for this year. The usual suspects are in there together with some more speculative bets with potentially more upside.
- Bitcoin (BTC)
- Ethereum (ETH)
- Solana (SOL)
- Polkadot (DOT)
- LooksRare (LOOKS)
- Avalanche (AVAX)
- Fantom (FTM)
- Terra (LUNA)
- Polygon (MATIC)
- Near (NEAR)
- Cosmos (ATOM)
- FTX (FTT)
- Helium (HNT)
- Celo (CELO)
Bitcoin and Ethereum would still be my anchors, although I would lean more into Ethereum this year. It’s not really possible to get any yield on Bitcoin unless you trust centralized lending platforms, while Ethereum offers a 5%+ yield just by staking ETH.
Polygon is a good bet if you think that layer 2 will become more important for Ethereum going forward.
Solana and Polkadot are both quite well-consolidated and offer unique properties in the current market, thus they are a good hold. Cosmos could take off this year if the concern about their tokenomics wears off.
LOOKS are a play on the possibility of LooksRare taking a chunk out of OpenSea’s pie. This might be a short-term play, so I’m monitoring the platform on a daily basis, making sure that the risk/reward ratio still makes sense. If LOOKS can maintain a stable price and a high APR while the platform demonstrates steady user growth, this investment is a no-brainer.
Avalanche has already had a great run in 2021, and if the big promises made by its founder materialize, then it will continue to gain market share. He does seem too bullish to my liking though, so I’m investing with a cautious approach. I look forward to trying out the DApps available on Avalanche, however, and getting a better feel of the tech myself.
Fantom, Near and Celo are other bets on the immediate need for cheaper and faster transactions.
FTX is the token of one of the fastest-growing exchanges.
Terra has a nice chance of becoming a leading decentralized stablecoin ecosystem.
Helium is a bet on alternative wireless internet infrastructure.
As for NFTs and other Web3 projects, you can read about my favorite NFT projects, but there are new projects being released every day, so it is really impossible to make any recommendations as I’m sure we’ll see some blockbusters this year that have not been released yet. You should also keep an eye on metaverse tokens and NFTs. At a very basic level you could hold some Decentraland (MANA) and The Sandbox (SAND) tokens. Overall, I would be quite comfortable having 25-35% of my total crypto portfolio in this niche of NFTs, Web3 and Metaverse plays.
Wrapping Up
While in previous years my thoughts were concentrated heavily on where to allocate my money, with only a few real contenders to choose from, as from this year, the bigger question is where should I allocate my time.
I’m personally fascinated by NFTs and the possibilities being unleashed in that space. DAOs and social tokens are also extremely interesting, although I consider them to be a bit too early. If they manage to maintain a steady rate of growth and the legality of DAOs becomes clearer during this year, I can see myself devoting more time to those two niches next year. This year, mostly due to time constraints, I’ll be limiting my financial exposure to those sectors, unless I get some strong recommendations from my group of investors.
While much of the above has been a personal take on the crypto space and my personal strategies for the coming year, I wanted to end the post with some thoughts that could apply to other investors as well. I’ve been observing many participants in the crypto space, and thinking about how I would approach my involvement in crypto depending on where I’m coming from.
Here are a few thoughts/recommendations:
If you’re just starting off in crypto, want to learn what the hype is all about, and are not in it to get rich quick, I recommend you stick with Bitcoin and dedicate most of your time to learning how Bitcoin works. When you’re done with that, maybe think of Ethereum and continue delving down the rabbit hole (layer 1s, DeFi, NFTs, metaverse) in line with your bandwidth and financial position. If you have little interest in the philosophical underpinnings of Bitcoin or the technical fundamentals of crypto tokens, then I think it would also be a good approach to dive straight into NFTs. After all, many consider them the trojan horse that will onboard many millions into crypto.
If you’re a developer/builder, then Ethereum and other layer 1s should probably be your focus this year, together with NFTs and metaverse. These all intermingle and if you can figure out winning combinations and even build something on top of that you’re going to see big returns.
If you want to quit your current job and move into crypto full-time, I’d suggest you look at DAOs and NFTs. That’s where I see the most diverse range of work opportunities. There’s really something for everyone, and if you have good skills and are not happy with your current job, chances are you’re going to be able to make a big leap in job satisfaction by finding work in this space.
One last thing. There are many projects that are not worth your time and money, and the biggest differentiator between those who succeed and those who fail will be where they focussed their energies. It is ok to make mistakes, but you need to realize as quickly as possible, cut your losses and regroup/refocus.
An example of this for me was Cardano. I dedicated some time to it last year, and also invested in it, but at a certain point, I realized that mostly this project is vaporware and that the biggest contributor to its market price is the messianic visions of founder Charles Hoskinson. I find him to be a likable character and his ideas are captivating, but ultimately there is little substance. The devotees of this blockchain and the amount of developer activity do not give me much hope, so I decided to exit that project and focus elsewhere.
None of the above should be taken as financial advice. I write these kinds of posts mostly to make sense of things and to take a snapshot of my current thoughts so I can look back in the future. I suggest you take the time to read widely and write your own thoughts in a journal; this practice has been one of the most invaluable tools in my investment journey.
Hope you’ve enjoyed this article, and I welcome your thoughts, whether you agree or not with my analysis.