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Crypto Market Analysis: How to Make Smarter Investment Decisions

Crypto Market Analysis: How to Make Smarter Investment Decisions

Discover the differences between conventional securities and crypto assets, learn how to navigate these developing markets, and avoid common pitfalls with due diligence best practices.

Whitepapers. Blockchains. Staking-as-a-service. Proof-of-what-now?

The crypto industry can be a confusing place for investors – even for stock market veterans.

While it’s easy to wrap your head around owning a share of a company, staking stablecoins to generate yield by providing liquidity to other individual traders is another thing. And smart contracts might as well be black boxes to those of us without a master’s degree in computer science.

So, what’s the best way to start investing in the crypto market? And how can you analyze different opportunities in the space to make smarter decisions?

Let’s dive in.

Dividing Up the Market

Most investors are familiar with cryptocurrencies like Bitcoin or Ethereum. While Bitcoin accounts for about half of the market and Ethereum roughly a fifth, that still leaves nearly a half trillion dollars’ worth of altcoins, stablecoins, non-fungible tokens, and other assets.

Here’s a breakdown of these digital assets:

  • Bitcoin (BTC) – Bitcoin is often considered a “safe haven” asset as the most well-known cryptocurrency. Most investors purchase BTC as a long-term investment, speculating its value will increase.
  • Ethereum (ETH) – Ethereum’s smart contract functionality supports a wide range of decentralized applications and other cryptocurrencies, making it the second most popular cryptocurrency after Bitcoin.
  • Altcoins – Cryptocurrencies other than Bitcoin are known as “altcoins” and include Litecoin (LTC), Cardano (ADA), and thousands of others. Investing in altcoins can be riskier but offers the potential for higher returns.
  • Non-fungible tokens (NFTs) – NFTs record the ownership of unique digital items on the blockchain, such as art, music, and in-game items. Investing in NFTs is speculative, and the value can fluctuate based on cultural significance.
Dividing Up the Market

In addition to these assets, the crypto market enables anyone to participate in functions typically reserved for institutions in conventional markets. For example, decentralized exchanges (DEXs) compensate anyone interested in providing liquidity, generating income that users typically route toward centralized exchanges in conventional securities markets.

These opportunities fall into two categories:

  • Yield FarmingDecentralized finance (DeFi) protocols enable investors to earn a yield on their crypto holdings by lending or providing liquidity to a liquidity pool. For instance, you can lock your assets into a DEX for liquidity and earn a yield.
  • Staking – Some cryptocurrencies enable you to stake your holdings to support network operations (like transaction validation) in exchange for rewards. So, you can earn interest on those crypto tokens over time.

And finally, you can invest in more conventional securities offering crypto exposure. For example, Bitcoin and Ethereum exchange-traded funds (ETFs) enable anyone to capitalize on the upside potential of these assets without directly holding them.

Analyzing Crypto Tokens

Most investors analyze stocks and bonds by looking at their fundamental merits, such as their intrinsic value or cash flow generation. But, of course, most crypto assets have inherent value or generate cash flow (tokenized assets are an exception).

So, how do you analyze crypto assets?

Bitcoin and other “pure” cryptocurrencies derive value from supply and demand economics. While Bitcoin has no intrinsic value, the price moves higher and lower depending on the number of buyers versus sellers.

On the other hand, altcoins typically offer areal-world value described in a “whitepaper” – a document similar to a prospectus in conventional markets. For example, Chainlink (LINK) enables smart contracts on different blockchains to securely interact with external data feeds, providing critical off-chain information. Or Polkadot transfers messages between blockchains in a trust-free manner.

In addition to looking at the value proposition, investors should also consider liquidity and access. If a crypto token doesn’t trade on popular exchanges and has a low volume, it may be hard to buy and sell at an attractive price.

And finally, technical analysis plays a critical role in crypto markets driven by greed and fear. Investors can determine psychologically important price levels or identify oversold conditions by looking at historical price trends and patterns. These factors can be critical in deciding when to buy or sell.

Analyzing DeFi Platforms

DeFi platforms enable you to generate income from crypto assets, making them essential to any investment strategy.

Most investors first look at the yield when analyzing DeFi opportunities. When assessing yield potential, you should first consider the underlying crypto asset. You might receive a high yield for staking the asset, but if it has a highly volatile price, you could lose much more in absolute terms than you make from the yield.

In addition to the underlying asset, you should consider the reward mechanism. Inflationary token issuance can drive high yields, which could devalue the reward over time. You should also assess the reward token market since an illiquid market could make it difficult to redeem them for real value.

And finally, you should understand the risks associated with the underlying smart contract. Newer or less stable projects may offer higher yields, but there’s a greater risk of smart contract vulnerabilities. The more popular a project becomes, the more prominent the target on it.

Other Considerations

Many crypto investors overlook these nascent assets’ tax and legal risks. Regulators are attempting to apply conventional securities laws to digital assets, resulting in some unexpected tax and legal consequences. And the market remains in limbo.

The IRS treats all crypto assets as “property,” meaning it’s subject to ordinary income or capital gains taxes. While that sounds simple on the surface, some edge cases have legal uncertainty. For instance, if you use a crypto bridge, does that constitute a taxable sale, or is it more like a loan you eventually repay?

Fortunately, ZenLedger addresses many of these challenges by automating these tax decisions. The platform connects to your wallets and exchanges, computes your capital gains or losses, and generates the paperwork you need to file. And then, if the IRS audits you, you can access a consolidated spreadsheet of transactions.

The SEC has also become increasingly aggressive in dealing with crypto assets it deems securities. As a result, there’s a risk that the SEC could shut down some DeFi platforms or altcoins, resulting in potentially significant losses for participants.

The Bottom Line

The crypto markets are the “wild, wild west” of the financial industry. With their complex inner workings and regulatory uncertainty, they can be a difficult place for investors to build a portfolio. But, on the other hand, they potentially represent the future of finance.

With careful due diligence and diversification, you can build a portfolio of crypto assets to capitalize on the potential upside while generating a regular income through yield farming and staking activities while mitigating potential risk factors.

The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Justin Kuepper

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