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Understanding Crypto Niche Investing
July 20, 2023
Blockchain Basics
Cryptocurrency is more than just digital tokens; it’s a broad asset class, and crypto niche investing is a popular way to gain exposure to the different nooks and crannies of the market. If you want to diversify your crypto investing strategies, here are a few different areas to consider.
Crypto niche investing can be a multi-pronged strategy. Some investors dive deep into the crypto universe and own multiple types of assets, while others prefer to hold a few digital tokens as a store of value. If you’re more like the latter investor, you’re probably looking for a diversified cryptocurrency portfolio with large and small-cap tokens.
What are large-cap and small-cap cryptos? Each cryptocurrency has a market capitalization— the asset's price multiplied by the number of coins in circulation. The market cap represents the asset's current total value. Naturally, some coins have larger market caps than others. For example, Bitcoin is the largest cryptocurrency, with a current market cap near $400 billion. Compare this to Filecoin, a much smaller token with a market cap under $2 billion.
Large-cap tokens are more liquid and less volatile than small-cap ones but offer less upside. Many crypto investing strategies involve mixing small and large-cap tokens based on risk tolerance and available capital.
Non-fungible tokens were one category of cryptocurrency that saw extraordinary growth in 2021. NFTs are tokens to verify ownership of a distinct piece of digital property. rt is a big part of this crypto niche. Artists will create a digital work and allow collectors to claim ownership of a specific iteration of it through an NFT. The NFT isn’t a copy of the work but a direct link to the digital asset verified with a unique serial number.
NFTs allow creators to offer perks to their most prominent collectors, whether through special releases, access to private events (i.e., basketball game tickets through NBA TopShot), or simply first dibs on the next NFT release. However, NFTs can be highly volatile and have been the target platform of many scammers.
One of cryptocurrency’s appeals is the removal of centralized third parties for transaction security and processing. Decentralized Finance, or Defi, operates an entire system without needing a centralized processor through Smart Contract crypto (DApps), lending programs, and decentralized exchanges.
DApps allow participants to earn a yield on their cryptocurrency by supplying liquidity to protocols like Aave. Decentralized exchanges allow users to make transactions in different cryptocurrencies without mediators. Defi is a broad crypto niche, so be sure to carefully research each program before investing.
Stablecoins are a unique category of cryptocurrency because most don’t promise significant returns or exclusive access. Instead, these tokens seek to maintain a peg to another currency or asset like the US dollar. For example, two of the largest cryptocurrencies by market cap are Tether and USD Coin, which attempt to maintain a 1:1 relationship with the US dollar.
Stablecoins are ideally backed by actual US dollars in separate institutional accounts, but recent blowups have shown this isn’t always the case. Stablecoins can accrue interest depending on where they’re held and how much is invested, often at yields far exceeding those offered by traditional savings and money market accounts.
The metaverse isn’t a type of cryptocurrency - it’s a virtual world where cryptocurrency can be used. The idea of virtual worlds is far from new (ask any gamer), but introducing digital tokens is a way for users to earn yield, create their own games, or see their virtual property appreciate.
Decentraland is a popular Metaverse concept that claims to be the first ever virtual world owned by its users. Participants can buy and sell digital property, create games and challenges, or simply shop in the virtual marketplace. The community is run by a DAO (Decentralized Autonomous Organization) that allows all users to vote on changes to the virtual world’s structure