Crypto Asset Allocation: 2022 Investment Guide

There are two ways to think about investing in digital currencies. The first is that you can not reduce the risk in cryptocurrencies, as they are considered one of the most volatile asset classes , no matter what coin or symbol you invest in. The second states that you can diversify your portfolio by looking at what is fundamental to cryptocurrency. This is an area where you need to think more about the basics than the chart. Here's what you need to know about the distribution of crypto assets in 2022.

A financial advisor can help you create a financial plan for your crypto investment needs և purposes.

Do not miss any news that may affect your finances. Get the latest news և tips to make smarter financial decisions with SmartAsset bi-weekly email It is 100% free և you can unsubscribe at any time. Sign up today .

Four main types of encryption

Before investing, you should know that there are four main types of cryptocurrencies. Here is a detail.

pure coin. This is the so-called pure cryptocurrency, sometimes called a "coin". This includes assets such as bitcoin, which are intended as a store of money and value. The main software does nothing but record: execute transactions. This made coins very popular as investment assets because they did not have the function of counterfeiting their commercial value.

Despite the huge value of cryptocurrencies (with a market value of $ 1.7 trillion as of May 2022) , no economy has been able to adopt cryptocurrencies as a cost-effective way to make money. No economy is likely to do as planned. One of the reasons for this is the high cost of energy.

Currently, the bitcoin network alone consumes about 93 TWh per year to process about 102.2 million transactions worldwide. To add to that, the bitcoin network would need to consume 3,670,000 TWh of electricity to replace $ 39.6 billion a year in credit card transactions in the United States alone. This is almost nine times more than the amount produced and consumed in the whole country (4116 TWz per year).

stable coins. Stablecoins are cryptocurrencies that claim to be pure currency but are also regulated by the underlying company or project to maintain a fixed price. Many, if not most, stablecoins keep their price at $ 1 per mark. The tallest project in this field is Tether.

The idea of ​​Stablecoin is that it provides cryptocurrency users with a reliable store of value. Net foreign exchange investments tend to fluctuate widely. This may make them a good speculative investment, but it also makes them almost worthless for spending purposes. Stablecoins offer a relatively low probability of being priced by definition, but they offer a way to transfer your funds to cryptocurrencies without fluctuations. This is usually a popular way to save money on cryptocurrencies until you decide to buy another potentially lucrative asset.

This is especially useful for tax purposes, as you can sell other cryptocurrency assets without earning or losing dollars.

The problem with Stablecoins is that they require large amounts of liquidity to maintain these price stability, and recent research has shown that even the biggest names in this area may not have the assets they need. In addition, the administration involved in regulating stablecoin prices is often on the verge of market manipulation, which has begun to attract the attention of regulators of the US Treasury's Securities and Exchange Commission. Values:

Security Codes Tokens are assets created using a blockchain database, like pure cryptocurrencies. In that sense, they are the same main assets. However, unlike cash cryptocurrencies, often referred to as "coins", tokens are created for a purpose other than spending.

There are two main types of signs on the market. The first type are safety signs. These are securities issued by companies such as fixed assets, except that instead of getting physically active, you get a digital ownership certificate.

The company typically issues security tokens, known as Initial Coin Offering (ICO), to raise capital for its project. Many security signs derive their value from the fact that they give you some access to the core corporate project that is intertwined with the signs (see footnote). For most security signs, this entry increases the value of the asset. The more successful a company project is, the more people will want to use it. This increases the value of the tokens that provide access to this project that investors can use.

However, two things can be understood about the security sign market. First of all, this is an asset class where fraud is predominant. In recent years, some industry analysts have estimated that almost 80% of all security sign proposals are fraudulent. Second, the legal status of security signs is not yet fully defined. The SEC continues to investigate this area, while cryptocurrencies also offer their tokens as investment assets, claiming that their tokens are software, not securities.

utility codes. Gadget tokens are tokens in which the underlying software has a function or purpose other than property registration. The two most common ways utility tokens work are by encrypting a blockchain database to execute basic commands and by providing tokens for people to access other applications.

For example, the popular Ethereum software platform uses its own tokens to execute so-called "smart contracts". This means that you can program the underlying contracts directly in the database. You can create a shipping software platform where, for example, the software automatically transfers payment from someone else's bank account when packages are checked.

On the other hand, many blockchain enthusiasts have come up with the idea of ​​"distributed computing". With this model, you can use tokens to access a server or storage area. Anyone can buy tokens and then spend them using your server's processing power. In either case, the purpose of the mark is to access certain functions.

There is a significant overlap between 'safety signs' and security signs, as at the time of writing, all utility companies have issued those signs as active. At the same time, no company has released commercially available trademark-based products or other blockchain-based software .

Usage codes may not exist at all. The SEC says that any token issued to investors issued for the purpose of raising capital is a financial guarantee. As this is the core business model of all blockchain-based companies, the market needs to change dramatically to establish utility tokens as a functional asset.

How to use these asset classes

As with all portfolios, diversification is the best way to invest in cryptocurrencies . If you have all your money in one asset, you can make a lot of money from the heights. But you will also experience all the decline. Since the cryptocurrency market is dominated by one asset, this means that you should try to invest in something other than bitcoin.

In general, there are three good assets to diversify your portfolio .

• Ethereum. If there's one crypto project that has real value, it's Ethereum. This is open source software ամեն the most common platform for building other blockchain projects.

• Ripple - The Ripple symbol is XRP. This is a financial services program. The goal is to create a cryptocurrency that can facilitate transactions between banks' "other financial service providers", a project that has a more obvious value than many other crypto space projects.

• Litecoin - This is a cryptocurrency, so it is supposed to be a cash project. It has much less energy than bitcoin, which makes it more useful to spend. It is also less volatile or it is a relative statement in this market.

In addition to these three assets, you need to base your cryptocurrency distribution on a combination of risk management: basics . Here are three additional assets that meet these criteria:

• Currencies - Cryptocurrencies tend to be the most volatile assets in the area. If you are looking for the most risky investment with the highest risk, consider increasing your portfolio of pure currencies.

• Stablecoins - Stablecoins are a good place to place your money in a troubled market. If you are facing difficulties or are not sure what to invest in right now, stablecoin is often a great way to eliminate volatility without leaving the market.

• Signs - Security / utility tokens tend to be the most predictable assets in the cryptocurrency space, or we know we use the term weakly. You can analyze the security sign based on the underlying design, allowing you to understand the risks beyond market stress. If you want to reduce the risks, this is your step.

the minimum

The best way to understand the distribution of assets in your crypto portfolio is to learn the basics of crypto assets. If you want to get high risk, invest in clean currency projects. If you want to reduce the risks, look at the basics of safety signs. If you want to wait for the market to enter, look at stablecoins.

Investment Tips for Beginners

• A financial advisor can help you create a financial plan for your cryptocurrency investments. The smart tool SmartAsset brings together up to three financial advisors working in your field և you can give free interviews to your own advisors to decide which one is right for you. If you're ready to find a mentor to help you reach your financial goals, start now .

• If you are thinking of adding cryptocurrencies to your portfolio, consider the following for a long-term investment :

Photo courtesy: © iStock.com/Credit : sittipong phokawattana, © iStock.com/ipopba, © iStock.com/oatawa

Crypto Asset Allocation. The 2022 Investment Guide post first appeared on the SmartAsset blog .