Crypto Assets - Cash-Generative Or Alpha?

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7 months ago

Building A Crypto Portfolio

Many new Crypto investors tend to find themselves in a very similar situation to other new investors, in that their portfolios are rather predictable. For instance, ask someone who has just entered the Crypto space what coins they hold, and you are likely to receive a fairly common response. This often includes Bitcoin, Ethereum, DOGE, SHIB, and perhaps BNB, or Polygon. What then tends to follow is a process of “discovery”.

This is however only something that a serious investor will experience, as it comes as a result of research and a hunger to know and understand more. As knowledge increases, investors are now able to class and identify certain sectors and niches within the Crypto space. This is when many begin to realize that something like SHIB is only really well-known because of the tremendous gains it has already experienced.

This is when the more astute investor realizes that coins in this category are now fluctuating in price along with the rest of the market. They are in line with the benchmark return of the altcoin market and are not exactly producing stellar returns. When it comes to altcoins, if a coin or token is well-known, and especially for producing significant returns, it has already enjoyed its moment in the sun.

In most cases, such a coin will go on to mirror the benchmark performance of the altcoin market. This is when urgency and desperation ignite a desire in a dedicated altcoin investor to seek out alpha. If we take a look at the data from the first quarter of 2023, we are able to ascertain that there were a few altcoins that produced significant returns, especially when compared to the overall market.

Injective Protocol is one of these projects and managed a return of approximately 900% for the first quarter of the new year. Despite the Crypto market experiencing a bullish first quarter, the average return was nowhere near that of INJ. This is where new investors begin to discover and understand how money is made in this market. Sure, something can always happen that causes SHIB or ETH to rally. However, these assets will, for the most part, move in correlation to the altcoin “index”.

Huge Returns Or Steady Income?

This is why I have mentioned that I am not really interested in ETH at this stage of the game. It’s pretty much given “its best” in terms of returns. If you bought ETH during the covid crash, you could have enjoyed a 50X return. That’s never going to happen again within a two-year period. However, there are other projects that will experience 50X returns and more. When you look at the market cap of ETH, you will begin to realize that significant appreciation, at this point, will require time.

Why are guys like Raoul Pal so bullish on ETH then, you may ask? It’s simple, these guys are big players. They understand that though ETH’s future potential returns are a lot lower than many altcoins, there is a level of safety. They position themselves well when it comes to ETH, and then further solidify their positions by praising and endorsing the project, ultimately creating additional strength and support.

This is the fork in the road that every Crypto investor will face: Do I choose a riskier approach for potentially greater gains, or do I choose modest appreciation accompanied by regular income via something like staking rewards? Now, many tend to see this dilemma as a fork in the road. However, I choose to view it entirely differently. In my opinion, why not utilize both approaches?

Appropriate Structuring

Depending on your own personal risk profile, each investor can allocate to each idea as they deem fit. The important thing is to remain comfortable. If your investment decisions are keeping you up at night, and are a constant concern, it’s a sign you have moved beyond your own inherent risk tolerance. Choosing to hold and stake ETH might really appeal to certain investors, as they are likely to experience profitability and additional income, in the form of staking rewards.

In terms of all-time high levels, ETH is a little over 50% off of those levels, while many other altcoins are still 80% to 90% off of those levels. When you consider the additional cash-generative aspect of staking top-tier altcoins, there is a great argument to be made for this particular strategy. However, when you consider the additional risk for a potential 50X or even 100X return, there is also a case to be made.

For this reason, I say marry them, according to your own risk profile. Structure and allocate your investments and capital in such a way that you are able to maintain your peace. Reckless allocation, simply for the hope of enormous gains is seldom a wise move. This is where perhaps those not too inclined towards investments and financial markets are perhaps better off seeking financial advice.

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Final Thoughts

I have found that a healthy “mix’ in regard to this approach is quite beneficial over time, and has a way of causing one’s portfolio to flourish, while simultaneously generating an additional form of income. These are my own personal views and opinions, and not investment advice. At the end of the day, good risk management is always at the heart of “healthy” and effective investment practices. Choose to ignore this fundamental aspect of investing, and you are likely to kick yourself later. Investors really need to spend time structuring and planning a portfolio, as well as giving attention to the strategies being utilized to build a specific portfolio. Anyway, that’s it for this one, catch you next time!

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First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.

This article was first published on Sapphire Crypto.

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7 months ago