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Which categories of cryptocurrencies to invest in

Which categories of cryptocurrencies to invest in

According to Coinmarketcap, there are currently more than 17,000 different cryptocurrencies in this market. With such a vast number of projects, it might be really difficult to decide where to invest your money, especially if you are not a cryptocurrency expert.

Therefore, we have decided to split the cryptocurrencies into a few main categories, show you some pros and cons, and talk about the types of investors that these specific categories of cryptocurrencies can be suitable.

1. Bitcoin

The first category needs to be, without any doubt, Bitcoin itself. Bitcoin is the biggest, best-known, and most established cryptocurrency of all. In fact, many Bitcoin maximalists, people who do not invest or use altcoins, believe that Bitcoin has decoupled from other cryptocurrencies. Instead of talking about Bitcoin as a cryptocurrency, they prefer to talk about it as a technology, invention, or new asset class.

While this might seem a bit far fetched, the fact is that Bitcoin is so unique and special that it needs a category of its own in almost any cryptocurrency metric or data point. That is why it also has its own class here as well, since the investment characteristics of Bitcoin are unlike any other cryptocurrency.

Bitcoin is not only the most prominent cryptocurrency by market capitalization but has also been around the longest. Aside from Tether (USDT), which is the biggest stablecoin, Bitcoin is the most traded cryptocurrency with the highest volumes and number of trades. There are countless other statistics in which Bitcoin would take the first place. However, what is more important is its investment profile.

As the biggest cryptocurrency, Bitcoin has become a flagship of this sector. With a market capitalization oscillating around one trillion dollars, Bitcoin is also the most recognized cryptocurrency by investment experts, financial advisors, politicians, regulators, or asset managers. Bitcoin has also become the first choice for many of them when it comes to investing in cryptocurrencies. It has the longest proven track record out of all the cryptocurrencies (since it’s the oldest). With 21 million bitcoins set as the total supply that will be mined by the year 2140, Bitcoin also has monetary specifics that are unlike any other cryptocurrency.

All of these, and many more, are essential facts that make Bitcoin stand out from all the other cryptocurrencies. And by standing out, we do not mean that Bitcoin is “the best” cryptocurrency. However, we believe that Bitcoin is so unique, and its investment profile is so distinctive that it needs to have its own category.

2. High-cap cryptocurrencies

The second category of cryptocurrencies that investors need to take into account is the category of “high cap cryptocurrencies.” Any cryptocurrency with a market capitalization of over 10 billion dollars is considered a high cap cryptocurrency, which means that at the time of writing this article, there are about 20 different high cap altcoins.

These include newer cryptocurrencies such as Crypto.com (CRO), Shiba Inu (SHIB), Polygon (MATIC), Avalanche (AVAX), but also more traditional ones like Cardano (ADA) or Ethereum (ETH). This list also includes five different stablecoins, which are Dai (DAI), TerraUSD (UST), Binance USD (BUSD), USD Coin (USDC), and the biggest of all, Tether (USDT). And while putting capital in stablecoins can not be thought of as an investment, it can yield some profits if you use them for staking (holding crypto coins or tokens to process transactions to receive yield rewards in return), which is one of the popular options for earning passive income on these coins.

Generally speaking, high-cap cryptocurrencies are the safest bet right after Bitcoin. While they do carry a bit of a risk, since they are not Bitcoin, they also tend to perform better in the bull market. For instance, only last year, the value of Ethereum has increased by 400%, Cardano around 615% and Binance Coin by 1,320%. Additionally, Solana made an impressive run in 2021 of over 42,000%. Meanwhile, Bitcoin has increased year-over-year to about 60%, which is still far more than any other asset class but compared to most high cap altcoins, Bitcoin did not do that good.

It, however, needs to be pointed out that except for stablecoins, which are a particular type of cryptocurrencies, all high-cap cryptos are more volatile than Bitcoin. For instance, the second-biggest cryptocurrency, Ethereum, has the latest 30-day estimated volatility of around 5,26%, with a 60-day estimate of about 4.35%. When looking at Bitcoin, the 30-day estimate is around 3.05%, while the 60-day estimate is 3.18%. This, therefore, means that while high-caps can offer higher returns, investors need to be a bit more cautious about their investments since the volatility of these coins tends to be higher.

3. Mid-cap cryptocurrencies

While some might say that the category of mid-cap cryptocurrencies should include cryptocurrencies with a market capitalization of 500 million dollars and higher, we believe that there are currently so many projects that would fit into this category that it needs to be a bit narrower. That is why, according to us, the mid-cap cryptocurrencies should be considered to be the ones fitting in the range of 1 billion dollars to 10 billion dollars.

That would currently mean that about 50 different cryptocurrencies fit this characteristic. However, only 10 have higher market capitalization than 5 billion dollars, with almost 30 being in the range of 1 billion dollars to 2 billion dollars.

The mid-cap cryptocurrency category usually contains a combination of well-established cryptocurrencies, which have been around for quite some time, like Litecoin (LTC), Stellar (XLM), Zcash (ZEC), EOS (EOS), or Monero (XMR), as well as relatively new projects that were able to catch the eye of investors just like Internet Computer (ICP), NEAR Protocol (NEAR), Harmony (ONE) or Kusama (KSM). Many of these tokens and coins provided a great investment potential in 2021.

Moreover, this sector also contains a wide range of different subsectors of cryptocurrencies such as DeFi platforms (Aave (AAVE), CurveDAO Token (CRV)), Metaverse tokens (Theta Network (THETA), The Sandbox (SAND), Decentraland (MANA)), exchange tokens (FTX Token (FTT), Huobi Token (HT), KuCoin Shares (KCS)) privacy coins (Monero (XMR), Dash (DASH), Zcash (ZEC)) and many others.

Mid-caps then offer a somewhat variable pool of cryptocurrencies to diversify investors’ portfolios. However, investors need to consider the volatility that often comes hand-in-hand with these projects and thus decide which mid-cap cryptocurrencies they want to invest in 2022.

4. Low-cap cryptocurrencies

Unsurprisingly, the last category of cryptocurrencies is the low-cap cryptocurrencies. These are usually considered cryptocurrencies with their market capitalization below 500 million dollars. However, in that category, there are literally thousands of projects. Thus, we believe that a better division would be to think of low-caps as cryptocurrencies with market capitalization between 500 million dollars and 1 billion dollars.

According to Coinmarketcap, this would still categorize around 40 different cryptocurrency projects into this category, which is more than enough. However, here the investors need to be cautious since the smaller the valuation of the project, the higher the risk.

That does not mean that high-cap cryptocurrencies are all good investments and low-cap cryptos are not. But the risks connected to seeing a 15 billion dollar project crash and a 500 million dollar project crash are incomparable. Thus, the investors need to do much better research and due diligence regarding low-cap cryptocurrencies.

How to ideally diversify?

Obviously, there is no single right and wrong answer that would apply to all the investors. Some might like to be more explorative and engage with more low-cap cryptocurrencies, while Bitcoin maximalists will go all-in on the most significant cryptocurrency.

A reasonable choice might be to split the portfolio into equal categories, with 25 % representing each segment. However, it would be recommended not to include many coins since it can get overwhelmingly challenging to track a portfolio of 30 coins or more. While each investor is different, having a portfolio split into 10-15 cryptocurrencies might do the trick.

If you are not sure how to set up your portfolio and which cryptocurrencies to choose to include in it, feel free to contact us. We will help you create a portfolio that matches your needs, risk appetite, return expectations, and investment horizon.

Published: 25. March 2022
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