The overall crypto market capitalisation is more than fourfold in a calendar year, from $361 billion in January to more than $1 trillion in February. In May, it hit an all-time high of about $2.6 trillion. Only a few weeks later, the overall crypto market value had plummeted by more than $800 million, a drop of more than 33%.
The volatility of this scale in the cryptocurrency markets is nothing new, especially for those who have been through previous market cycles. According to data, the worldwide number of blockchain wallet users has climbed by more than 25 million since March 2020, implying that this is only the beginning of 25 million new recruits.
Volatility might be intimidating for novices, but it doesn’t have to be. Volatility may alternatively be used to get exposure to assets with strong upside potential at a reduced price if you have well-researched holdings and a long-term vision.
Vulnerability fosters volatility
When the market is trending upwards, everyone appears to be a genius, lulling many into a false feeling of invincibility and Warren Buffet-like financial prowess.
On the other hand, bleeding markets make us feel vulnerable, not simply in comparison to Elon Musk. Downtrends reveal the trader, the extent of their study, and, most significantly, their belief in the projects they are investing in. Projects are broken down into their component elements and shown for what they actually are when green candles aren’t there to cloud judgement. This forces the trader to reflect on his or her whole investing theory, necessitating a reevaluation. If a project’s strength and competitive advantage are still visible after a sell-off, this volatility should be considered as a purchasing opportunity.
If, on the other hand, panic-selling is the initial reaction after a price decline, then possibly conviction was based on price action rather than a project’s strengths and innovations.
Project utility and community
Always keep in mind: Is the initiative worthwhile, and who is behind it? Few aspects of a product are more informative than its intended utility and the community that supports it.
Everyone’s favourite, Dogecoin (DOGE), is an interesting example to highlight. A brief trip down memory lane reveals that the contentious currency, which presently trades for around $0.26 cents, was worth $0.002 in September 2019, despite having no apparent value. The term “perceived” is crucial here.
Dogecoin achieved something considerably more inventive than most give it credit for, despite “crypto purists” preserving the dignity of “genuine” coins with “real” use. It made use of the community as a resource. Yes, you read that correctly. Those who have put money into the currency have done so for three reasons:
To make money via speculating.
A communal experience.
To participate in the prank.
Dogecoin’s utility is basic, but that does not mean it is without value. With simplicity comes clarity, which has helped DOGE gain tremendous broad appeal. Something that many cryptocurrency projects, even those with high usefulness, still fail to achieve. In terms of knowledge and cost, there’s a low barrier to entry. And it’s simpler to invest in a joke when Elon Musk and Mark Cuban think it’s hilarious.
To that end, every cryptocurrency project should be able to clearly convey its value proposition, yet the majority of them are unable to do so. Investing in the hype is far more dependent on price action than on the quality or utility of the project.
DOGE’s usefulness is simple to comprehend and describe, and it offers joy and happiness to its society. Those three criteria should not be neglected or undervalued, regardless of investing style.
Project long-term viability
The ability of a project to last is crucial. Projects do not have to be sustainable initially. But they must be if they are to be successful in the long run. When considering a project, it’s important to consider the strategy for long-term viability. As well as an income stream that might be usable at some time (e.g., Uniswap).
It’s also crucial to know which initiatives have plans for long-term income or value capture methods. It’s probable that all (or most) ventures would fail early on. Uniswap is averaging over $3.5M in fees each day, with none of this money going to token holders. This will (hopefully) change at some time. And Uniswap governance token holders will have to reevaluate their investment thesis if it does not. MakerDAO is one of the most successful and long-term ventures in the industry. With earnings of more than $63M in the first half of 2021. While this kind of profitability is rare to get by elsewhere, it is certainly something to think about when weighing investment options.
Determining the project’s long-term viability
When assessing a project’s long-term viability, it’s crucial to ask: Does this project truly require a blockchain solution?
Is it also possible to quickly fork this open-source project? Is it possible to create a more efficient marketplace without a token for whatever problem the project is solving? The blockchain is a database as well as a consensus mechanism. And, contrary to common opinion, it’s one of our most inefficient large-scale databases.
You’d best be addressing a very vexing problem to justify relying on this extremely inefficient technique. Due to substantial issues like double-spends, missing transactions, or the government creating fiat currency in perpetuity, financial concerns. For example, justify this sort of inefficient consensus process.
In truth, outside of banking, there are just a handful of application cases where blockchain technology is genuinely essential. So, whenever a problem found that is severe enough to warrant a blockchain solution, make sure there is a coordination issue present. So that the consensus method may provide value.
All of this is to indicate that crypto market volatility is here to stay. And honestly appraising projects in the face of such volatility is no simple task. Despite these obstacles, knowing the utility, need, and long-term viability of projects may assist inform more successful investments. That can be held with confidence throughout time.