Finding stability amid the volatility of the cryptocurrency market

For newcomers, volatility can be downright terrifying — but it doesn’t have to be. With well-researched positions and a long-term outlook, volatility can instead serve as an opportunity to gain exposure to assets with high upside potential at a discounted price. Volatility of this magnitude in the crypto markets is nothing new, especially for those battle-tested by market cycles of years past. However, research indicates that the global number of blockchain wallet users increased by more than 25 million since March 2020, meaning this is just the first roller coaster ride for 25 million new entrants.

Volatility breeds vulnerability

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When the market is green across the board, everyone is a genius — lulling most into a false sense of invincibility and Warren Buffet-like investing acumen.

On the flipside, however, bleeding markets not only make us doubt where we stack up in relation to Elon Musk, but they really make us feel vulnerable. Downtrends expose the trader, the level of research and, most importantly, the conviction for the projects invested in. When green candles aren’t there to obscure judgement, projects are stripped down to their component parts and exposed for what they truly are. This initiates a moment of introspection for the trader, demanding a reevaluation of the overall investment thesis. If a project’s strength and competitive edge remains clear following a sell-off, this volatility should be viewed as a buying opportunity.

Conversely, if the first inclination amid a price correction is to panic-sell then, perhaps, conviction was tied more to price action than a project’s strengths and innovations.

Project utility and community

One interesting example to highlight is everyone’s favorite: Dogecoin (DOGE). A quick stroll down memory lane reminds us that the controversial currency, which now trades at roughly $0.26 cents, was worth $0.002 in September 2019 despite having no perceived value. The critical word here is “perceived.”

Always ask: Is the project useful, and who supports it? Few things are more telling about a project than its proposed utility and the community behind it.

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Although “crypto purists” fall into fits of rage defending the honor of “real” cryptocurrencies with “real” utility, Dogecoin did something far more innovative than most give it credit for: It leveraged the community as its utility. You read that right. Those who have invested in the currency did so for three primary reasons:

To profit out of speculation.A shared community experience.To share in the joke.

Although the utility of Dogecoin is simple, don’t confuse it for having no utility. With simplicity comes ease of understanding, which has garnered DOGE massive mainstream appeal — a feat that many cryptocurrency projects still struggle to achieve even with strong utility. There’s a low barrier to entry in terms of understanding and price, and it’s easier to invest in a joke when Elon Musk and Mark Cuban are among those that find it funny.

To that end, every crypto project should be able to simply communicate its value proposition, yet most projects cannot. Investing in hype is far more tied to price action than project quality or utility.

DOGE’s utility can be easily understood and simply articulated, and it brings happiness and fun to its community. Regardless of investment strategy, those aforementioned three factors are not to be overlooked or underestimated.

Project longevity is key. Projects don’t need to be sustainable at first but, to survive for the long haul, sustainability is critical. When exploring a project, it is worth evaluating the plan for sustainability, or a revenue mechanism that could be leveraged at some point (e.g., Uniswap).

Project longevity

Assessing project longevity

It is equally important to be aware of which projects demonstrate plans for sustainable revenue models or value capture. All (or most) projects aren’t sustainable early on, which is to be expected. At the time of writing, Uniswap is averaging over $3.5 million in fees per day, with none of this value accruing to token holders. This will (hopefully) change at some point, and if not, Uniswap governance token holders will be forced to reconsider their investment thesis. MakerDAO is one of the most profitable and sustainable projects in the entire space, raking in over $63 million in profits in the first half of 2021. While it’s difficult to find this degree of profitability elsewhere, it is certainly worth considering when evaluating investment opportunities.

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