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Motley Fool Issues Rare “All In” Buy Alert
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Whether you bought in early or got in recently, the crypto market has been an extremely volatile area for investors. Values can rise or fall 95% or more in a matter of days, and there seems to be no warning as to when big moves are coming.
Does this volatility mean cryptocurrency doesn’t belong in millennials’ portfolios? I think there is a place, but if you have a clear investment thesis with diversified assets cryptocurrency can be a good investment for young investors.
The first question to answer is why you are investing in cryptocurrencies at all. Some investors think cryptocurrencies like Bitcoin (BTC 4.17%) are digital gold, while others think crypto is a digital currency or utility for developments like smart contracts, the metaverse, or digital goods. Understanding your investment thesis will guide where your focus should be.
Like buying a stock, understanding your investment thesis can make or break a crypto investment. If the thesis is simply that a token will go up, based on technical analysis alone with no fundamental reason, the thesis will quickly fall apart — much like a stock with a weak underlying company.
Millennials with a long-term time horizon should look for investment opportunities where disruptive technology is being built — just like the internet was a disruptive technology in the 1990s, despite the fact that the idea of building an internet business seemed crazy at the time. I think of many cryptocurrency projects as an ecosystem and their cryptocurrencies as the “currency” of that ecosystem.
Blockchain technology allows for new innovations in technology. That’s why I’ve kept my focus on Ethereum (ETH 7.02%) and Solana (SOL 6.49%), and I’ve placed most of my crypto exposure with NFTs.
These utility blockchains with smart contracts (led by Ethereum and Solana) allow information to be stored on the blockchain and then developers can build tools and businesses around that data. It could be a metaverse project where a digital asset notes ownership of land or an NFT that gives membership to a club (like Bored Ape Yacht Club).
These tokens are often called utility tokens and there are dozens that serve different purposes in Web3. Having exposure to cryptocurrencies that are building a larger ecosystem with real-world or digital world businesses is where real value will be found.
If you’ve been following crypto markets over the last few months you know that volatility is commonplace. It’s not uncommon for values to rise or fall 10% or more in a day and some cryptocurrencies can go to zero overnight.
Diversification will take some risk from your portfolio, but doing due diligence on how cryptocurrencies are run and where there’s risk is critical. Not all cryptocurrencies will survive the next few years and acknowledging that risk is important as an investor.
It may sound counterintuitive, but I think the same Foolish mindset that works in stocks will work in cryptocurrencies. Investing in projects you believe in and founders that have a long-term vision of how to build value is where money will be made.
And like the stock market, a level of diversification is needed because we never know when unanticipated risks will cause a cryptocurrency to drop to zero.
It’s likely to be a bumpy ride, but given the disruption potential from crypto and the blockchain, I think millennial investors with a multi-decade time horizon should have at least some crypto exposure. If that exposure is diversified and in projects that are growing and attracting users, the upside is still very high.
Travis Hoium has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
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