One of the trickier elements of crypto portfolio construction is knowing when to diversify and when to double down on elements that are working. In order to be successful, you have to do both.
For the past 12 months, we’ve focused mostly on diversification. We needed to add exposure to decentralized finance (DeFi), interoperability protocols, decentralized exchanges (DEXs), and more.
Last month, we doubled down when we added GMX as our second DEX position. This month, we’re doubling down again on two portfolio elements that are performing well: DEXs and Cosmos.
For the past few years, Cosmos (ATOM) has been one of the most successful projects in crypto (and one of the best performers in our portfolio). Cosmos focuses on two key items: interoperability and making blockchain easier to build and use through modularity.
As the Cosmos ecosystem has grown, so has the need for a Cosmos-based DEX. That’s why I believe adding Osmosis (OSMO) to the portfolio makes sense.
Osmosis is a DEX for the Cosmos ecosystem. Osmosis can also bridge into the Ethereum and Polkadot networks. As the FTX saga and questions swirling around Binance have shown, centralized exchanges have a host of problems. Investors need (and sometimes prefer) good DEXs as an alternative. We’ve seen this play out so far with two portfolio projects, GMX and PancakeSwap.
In terms of DEX technology, Osmosis is extremely sophisticated. Liquidity pools are the engine that makes DEXs and DeFi run. They allow instant trading to happen. Many liquidity pools are severely restricted, though. They can only be built using an equal ratio of two different tokens (like 50% ETH/50% BTC). Osmosis can handle more than two tokens AND unequal ratios in liquidity pools. That’s a major step forward.
Osmosis’ larger goal is to build a true cross-platform DEX that includes all chains. Cosmos interoperability protocols can make this dream a reality. It will take a few years, but if Osmosis can build out a DEX that works across chains — including bitcoin and Ethereum — it will become a dominant player in crypto.
While I’m bullish on Osmosis’ future, I’m also impressed with how OSMO is performing in the midst of a bear market.
OSMO is up about 32% over the last 30 days. That’s a little better than ETH (up 31%) over the same period, but not as good as BTC (up 38%).
It’s hard to tell exactly where the crypto markets are headed in the near term. They’ve been heating up recently. But I don’t believe the bear market is over yet. So dollar cost averaging into this position (buying a small, fixed amount each week until you’ve bought as much as you want to) makes the most amount of sense right now. As does investing in areas of the market that are performing well right now. Osmosis fits that bill.
Rules of the Road
Investing in a bear market is tricky. It is likely that the market will go down further from here. But it’s important to be opportunistic. So if you have capital to invest — and you’re psychologically and emotionally willing to enter what promises to be a highly volatile market — here are some guidelines to follow.
- Do not invest money you can’t afford to lose. The markets are in for a rough ride. If you can’t afford to lose the money, don’t risk it.
- Focus on projects with strong use cases.
- Look for teams or communities that are active and committed to their projects.
- Always enter a position using dollar cost averaging. That means buying a small amount each week rather than buying your entire position at once. That way, if prices continue to fall, you lower your overall acquisition cost.
- Don’t try to time the market perfectly. Nobody can. And I believe this bear market will be around for several months. So if you want to wait, that’s perfectly okay. But when you do invest, make sure you utilize dollar cost averaging to buy into the market.
- Diversify your crypto portfolio. From a percentage standpoint, bitcoin and ethereum should be the biggest investments in your crypto portfolio. But you need exposure to a much broader and more diverse set of coins to take advantage of the full upside of the crypto markets. Bear markets are a good time to diversify your portfolio and increase exposure to different crypto sectors.
Remember, investing in crypto is risky. Investing in a crypto bear market carries even more risk. Less than 5% of your overall portfolio should be invested in crypto. That said, I believe OSMO provides an attractive risk-reward ratio.
OSMO can be acquired on Binance or KuCoin.