Since the new year, the collective crypto market cap has increased by about 60% and is at levels not seen since June 2022. With this renewed momentum, crypto is once again on the radar for investors.
Because of this rally, it's likely that some new investors are considering gaining some exposure to crypto. If you're one of them, there are a few things to keep in mind to make sure your portfolio is set up for success.
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1. Simplicity wins
Keeping a simple portfolio is crucial in minimizing risk, because crypto is one of the riskiest asset classes out there. Diversification is also key, but so is not overcomplicating your portfolio. You need to make sure your portfolio has sufficient exposure but isn't overweighted in the most speculative assets.
Remember, it isn't uncommon for obscure cryptocurrencies to become worthless and cease to exist.
2. Volatility is part of the game
Another thing to keep in mind is that the cryptocurrency market is highly volatile -- orders of magnitude more volatile than the stock market. It is not uncommon for the value of cryptocurrencies to fluctuate wildly over the course of a year. Not to mention, these assets can sometimes swing by double-digit percentages one way or the other on a daily basis.
However, volatility should not discourage investors who have the goal of investing in cryptocurrencies for the long term. Therefore, short-term movements should be overlooked as a feature of emerging asset classes.
The best strategy is to be patient and not make any knee-jerk decisions based on short-term price movements. Instead, keep a long-term perspective and trust that over time, like many innovative technologies of the past, cryptocurrencies' value will increase with time as usage grows.
3. Looming regulation
Another important difference is that the cryptocurrency market is less regulated than the stock market -- but that could change very soon.
In response to the catastrophes of 2022 in which multiple crypto companies went bankrupt and some cryptocurrencies imploded, officials in the U.S. are ratcheting up efforts to rein in the cryptocurrency market.
There have already been multiple lawsuits in 2023 targeting some of the most high-profile companies, such as Coinbase and Binance. Based on the current trajectory, it looks as though officials could eventually target cryptocurrencies themselves, and not just the companies offering products that revolve around them.
Making a game plan
So, when considering these three points, what can investors do today to ensure they minimize risk and maximize potential?
Well, it's actually quite simple -- invest in only the most decentralized cryptocurrencies with proven track records.
When using this strategy, two options become most apparent: Bitcoin (BTC -5.23%) and Ethereum (ETH -7.25%). In buying these two, investors cover all three of the points previously mentioned.
Collectively, these two make up more than 60% of all the value in the cryptocurrency market. Simply put, as they go, typically so goes the rest of the market. Investors can keep their portfolios simple by prioritizing Bitcoin and Ethereum.
Furthermore, they also have the largest market capitalizations in crypto. This means that they are inherently less volatile than some of their counterparts. This isn't to say they aren't volatile, but the daily swings tend to be less pronounced and common.
Lastly, as some of the most decentralized cryptocurrencies, Bitcoin and Ethereum are less likely to be candidates for federal regulation. Based on comments by regulators, it seems that cryptocurrencies that are highly centralized and are more or less operating as public companies acting behind the façade of a cryptocurrency will be most targeted. Unlike Bitcoin and Ethereum, most cryptocurrencies probably will avoid regulatory strictures.
