Table of Contents:
- Which Cryptos Will Survive a Bear Market?
- Contagion in the Crypto Market
- Why Choose Cryptos That Will Survive the Bear Market?
- How to Pick a Balanced Crypto Portfolio
- Which Cryptos Should You Pick?
- How to Identify the Best Cryptos
- How to Conduct Due Diligence on Cryptos
- Crypto White Paper Analysis
- The Project and the Competing Blockchains
- The Team and the Community
- The Hash Rate
- Transaction Value and Fees
- The Bottom Line
Important: The information herein does not constitute investment advice. Remember that the value of your investments and any income from them can fall as well as rise, and you could get back less than you invest or completely lose your funds. If you are unsure about the suitability of investments please seek advice.
Which Cryptos Will Survive a Bear Market?
Just like the economy, the crypto market is cyclical and it’s no secret that it is prone to severe, unexpected and often unprecedented volatility. For traders, this volatility is welcomed, even sought after. For those HODLing cryptos, this is a headache that most wish they could avoid as which cryptos will survive a bear market becomes harder to tell.
The bad news is that there’s no avoiding the volatility in the crypto market, but the good news is that you can structure your crypto portfolio by aiming to select cryptos that can survive the bear market.
This doesn’t mean these cryptoassets won’t drop during a bear market; it means that they will, on average, recover when the trend turns bullish.
In this article, we will go through how to analyze and pick the best cryptos for your portfolio.
Contagion in the Crypto Market
In a market driven almost entirely by sentiment, no crypto is immune to contagion and most of it is tied to BTC. Where bitcoin goes, others tend to follow. In the crypto market, bitcoin is king, and, in most cases, its fluctuation drags the entire market down. This correlation isn’t of 100%.
At some point, some cryptos will recover quicker than others and go on to newer highs, while some may crash and never recover. How hard a cryptoasset crashes often comes down to its fundamentals.
Why Choose Cryptos That Will Survive the Bear Market?
Well, the answer here is pretty straightforward – capital preservation. The primary goal of any investment is to make profits. This makes selecting most resilient cryptos extremely important. It’s even more crucial to select cryptocurrencies that can survive bear market conditions and preserve their value. Let’s see how you can accomplish this.
Cryptoasset returns have, over the last decade, been well above those of equities markets, with Bitcoin greatly outperforming both gold and the S&P 500 over the past 10 years. Risk can be reduced with a balanced portfolio, but resilience is crucial in the cryptocurrency space as every market downturn takes its toll.
Nearly 1,700 cryptocurrencies have completely lost their value over the last decade, while some have simply lost most of theirs over time. Looking at the top cryptocurrencies and their price performance may make it look like investing in cryptoassets is easy, but in reality a lot of research is required.
How to Pick a Balanced Crypto Portfolio
The first step to surviving a bear market is, according to most experts, choosing a balanced portfolio. As the saying goes, never put all of your eggs in one basket. This is where diversification comes in.
By diversifying one’s investments, you effectively guarantee that any negative volatility experienced in one crypto won’t significantly dampen your returns from the market.
Portfolios invested in various crypto asset classes mitigate strategic risk more successfully. Various cryptocurrencies underpin different crypto projects. This means that you can diversify your crypto portfolio based on the crypto project or the type of cryptocurrency.
Which Cryptos Should You Pick?
Understandably, it may be impossible to conduct thorough due diligence on all these cryptos. That is why investing only in blue-chip coins with proven track records may be an optimal strategy for more risk-averse investors.
Considering the tokens associated with new crypto projects is also a possibility, although it’s worth pointing out that it’s entirely possible to lose all the money you invest in these for a number of reasons that include potential scams, projects failing to achieve their goals, and security risks. Note that the crypto community is on a mission to continually address scalability, absolute privacy, and interoperability problems.
Gauging which cryptocurrency has utility and which one doesn’t is critical. Investing in cryptocurrencies with utility ensures that you do not tie your money up in Ponzi schemes.
When selecting cryptocurrencies that will survive a bear market, it’s better to consider picking cryptos from a few asset classes and their financial metrics such as market capitalization, liquidity, circulating supply, and the traded volume. This type of data is accessible at CryptoCompare.
When selecting cryptos for your portfolio, most experts advise a strong allocation to BTC. The altcoins included could be from various segments of the market – exchange tokens, DeFi tokens, security tokens, utility tokens, Metaverse cryptos, Web3 tokens, and governance tokens.
How to Identify Which Cryptos Will Survive Market Crashes
No one can safely identify which cryptos will survive market crashes. Bitcoin has so far managed to stay afloat every bear market and quickly recovered when things turned bullish and is seen as a de-facto safe haven without the space if we count out stablecoins.
Even betting on stablecoins is seen as a risky endeavor to some investors, as the backing behind some of the largest ones in circulation isn’t completely transparent. Similarly, gold-backed cryptocurrencies often have a trusted central entity behind them, creating a single point of failure.
There is only one solution to maximize your chances of making good investments – thorough analysis. In cryptocurrency, two different types of analysis are often used:
- Fundamental analysis to determine the intrinsic value (the “real value”) of a token and its potential.
- Technical analysis to forecast possible future price fluctuation.
Fundamental analysis will tell you where to invest, and technical analysis will tell you when to invest. If you neglect fundamental analysis, you risk placing your money on projects with no real value; you probably risk investing in poorer quality coins.
If you neglect technical analysis, you risk entering at the wrong time and staying in the red for weeks or months, simply losing the opportunity to have been able to acquire many more tokens for the same price.
While there are hundreds of strategies for technical analysis, picking the best crypto that can survive the bear market requires thorough fundamental analysis, which we will focus on next.
How to Conduct Due Diligence on Cryptos
The fundamental analysis of a cryptocurrency is similar to that of a start-up. Yes, blockchain or decentralized applications (dApp) projects are very similar to start-ups – they seek to create value by innovating.
Once we have evaluated all fundamental aspects of any crypto, we will be in a much better position to evaluate whether or not it can survive a bear market. Note that the blockchain metrics of any crypto, such as the hash rate, the number of active addresses, and the transaction values and fees, can be accessed from various websites while also being available on CryptoCompare’s advanced charts.
Below are some of the steps investors should consider when conducting due diligence on the cryptoassets that they are considering investing in. Their research should not be limited to these steps nor should it be dependent on anything written in this guide.
Crypto White Paper Analysis
For any crypto investor, the white paper provides a treasure trove of technical information outlining the details of the project.
When conducting fundamental analysis, it’s important to consider the crypto whitepaper as your gateway into the details of the project. The whitepaper also details the project’s roadmap, outlining the planned rollout of new features to the blockchain. Here are the critical questions that the white paper addresses:
- What does the project do?
- What problem does it aim to solve?
- How does this project solve the problem?
- Token economics
As we mentioned earlier, the crypto community continually addresses scalability, absolute privacy, and interoperability problems. These issues can be used as a yardstick to measure the usefulness of an altcoin.
Take Ethereum, for example. Its massive success can be attributed to its contribution to the kick-starting and further development of decentralized finance. Ethereum gave crypto developers globally a platform to build their decentralized applications.
The key here is to identify and invest in cryptos that aim to solve real-life problems, like how XRP aims to revolutionize the real-time gross settlement system in global finance. Note that it is not always easy to determine the market of a blockchain. In this case, study the use cases for the token.
The Project and Competing Blockchains
By establishing the competing blockchain, you can assess the viability of specific crypto over the other. The objective here is to assess the relevance of a crypto project. Will it be able to capture market share? Could it become the market leader?
- Which blockchains are in direct competition?
- Do the competing blockchains have a better infrastructure?
- What are the evolutions in the use of the project so far? Is it solving a specific problem in the crypto space?
Most crypto users have heard of the Solana blockchain being referred to as the “Ethereum killer.” In this case, the Solana blockchain is Ethereum’s direct competitor.
Ethereum has the first-mover’s advantage over Solana, but comparing the two side by side, Solana has a significant fundamental advantage over Ethereum. The biggest is that the Solana network can handle several transactions per second compared to Ethereum while keeping transaction costs low.
It’s estimated that Solana can handle more than 60,000 transactions per second at an average of $0.0015 per transaction, while Ethereum only processes 17,000 at an average cost of $5.80. As DeFi continues to gain mainstream popularity, Solana is one of the few public blockchains that can comfortably reach a scale of millions of transactions per second.
On the other hand, Solana relies on a central entity to develop node software, the Solana Foundation, while several develop node software for Ethereum. The difference here may mean a higher degree of centralization for the so-called “Ethereum killer.”
The Team and the Community
The team’s credibility behind a crypto project is as important as the project itself.
- Who are the founders and what are their academic and professional backgrounds?
- Which companies back the project and what’s the ownership and governance structure?
- How many people are working on this project? Three people in a garage? Or a diverse team of engineers across the globe?
- How big is their community? How many active blockchain addresses are there?
It’s worth noting that developers specializing in blockchains and dApps are scarce in the crypto world, and the marketing/sales team is not to be neglected either. An explosive trading strategy helps to attract attention to the crypto project, effectively growing the community and attracting more talent to the developers’ team.
The Hash Rate
For Proof of Work blockchains, the hash rate is the processing power available on the network for mining. For most investors, the hash rate is considered a measure of how secure a blockchain is – this means the higher the hash rate, the more secure the blockchain. It plays a crucial role in preventing 51% attacks and double-spending.
- What is the current hash rate compared to other cryptos?
- Is the hash rate increasing or decreasing?
Typically, hashrate is measured in hash per second (h/s).
Hash rate denominations
- 1 kH/s is 1,000 (one thousand) hashes per second
- 1 MH/s is 1,000,000 (one million) hashes per second.
- 1 GH/s is 1,000,000,000 (one billion) hashes per second.
- 1 TH/s is 1,000,000,000,000 (one trillion) hashes per second.
- 1 PH/s is 1,000,000,000,000,000 (one quadrillion) hashes per second.
- 1 EH/s is 1,000,000,000,000,000,000 (one quintillion) hashes per second.
Transaction Value and Fees
The values of transactions and the fees paid per transaction help determine the demand for the crypto.
- How has the transaction value changed over time?
- Are the number of transactions increasing or decreasing, and how much fees are paid per transaction?
Naturally, when the transaction values are consistently high, it means the crypto is in steady circulation, which corresponds to high liquidity, implying that price discovery is efficient. On the other hand, the fees paid show the crypto demand. When you analyze the fees paid over time, it’s easy to deduce how secure the blockchain is.
Tokenomics essentially deals with how the tokens are supplied and their utility. When analyzing tokenomics, you should have the following questions in mind:
- What is the token used for? Does it have any use in the project? Is this utility artificial, or does it correspond to a real need?
- Is there a max supply of tokens (maximum number)? Is the token deflationary?
- If not, how quickly will the new tokens be created? To whom will they be distributed? Estimate current inflation: Will demand for the token rise faster than inflation? How will token creation be handled in the future? Who will govern these decisions?
- Can you use your tokens to grow your stack (staking, yield farming, etc.)?
- How many tokens are currently in circulation compared to the max cap (if there is one)?
- What ratio do the team and early investors have? How are tokens distributed?
The Bottom Line
When choosing cryptos that will survive the bear market, the key is to invest in cryptocurrencies with real projects and communities behind them. Most people treat cryptos as speculative assets but don’t realize that these coins are tied to real projects – blockchain projects meant to solve a real-world problem. Take XRP and Stellar (XLM), for example.
They aim to facilitate fast, cheap, and transparent global money transfers. Ethereum and EOS, on the other hand, are designed to facilitate the growth of decentralized finance by creating platforms where smart contracts can be used to convert any tangible asset into crypto and streamline the functions of centralized finance into DeFi.
Featured image via Unsplash.