It’s easy to think about crypto as a series of prices that go up and down. It’s even easier to think about crypto as a series of prices that go up when bitcoin goes up and go down when bitcoin goes down. But the reality is far more complicated than that.
In crypto, fundamentals matter. And three of the most important fundamentals are use case, adoption, and developers. If you have all three, there’s a good chance that you’re looking at a good investment opportunity.
I particularly like leaning into use case and adoption when the market is headed for a particularly uncertain or volatile stretch. Useful projects are more likely than disruptive plays to stick around in bear markets and grow during bull markets. And they significantly de-risk your crypto portfolio. You might not get as much upside as you would if you took a chance on a more speculative play. But disruptive plays in a volatile market can drop so quickly that you might not be able to recover the original investment. And I fully expect the crypto market to be fairly unpredictable and volatile over the next few months.
Crypto is off to a strong start this year. Bitcoin gained 72% in the first quarter of this year. Ethereum jumped 50% over the same time period. The S&P 500, by comparison, went up just 7% in the first quarter. But crypto’s strong start to 2023 doesn’t mean crypto winter is over just yet.
SEC actions against Coinbase and the rest of the crypto industry could undermine the crypto recovery. So could a possible recession. And if the Fed struggles to get inflation under control — a distinct possibility that I wrote about last week — crypto prices will likely suffer again.
So this month, we’re going to diversify and de-risk the First Stage Investor portfolio by adding a crypto project with a proven product and use case.
In many ways, blockchain technology is just an extremely expensive database. Information gets written to the blockchain. And the blockchain keeps that information incredibly secure. But most blockchains can store only small amounts of data. And accessing that data and transmitting it is slow and inefficient compared to centralized databases.
The InterPlanetary File System (IPFS) was created to address this problem. In its 2014 white paper, IPFS outlined its vision for a “distributed, uncensorable, and permissionless file system.”
IPFS provides the protocol to share and transmit files quickly and securely on a distributed network. Filecoin — which is the crypto you would be investing in — provides the storage. Files are stored on nodes. So they need lots of people running Filecoin nodes. These files get pinned to the nodes. And the more Filecoin a user pays, the more “available” that file is for a quick and easy transmission.
Filecoin launched in 2020 and is growing quickly. In 2021, it had 1 million storage deals. Last year, it had 16.7 million storage deals. That’s a 1,570% increase in storage deals. Even more impressive is the rapidly growing amount of data being stored on Filecoin. In 2021, Filecoin stored more than 24 million gigabytes of data. Last year, Filecoin stored more than 461 million gigabytes of data. That’s an increase of 1,821%.
Filecoin has plenty of room to grow as well because the need for blockchain “cloud storage” is rapidly increasing. NFTs have driven much of the growth. And that will continue into the future. But Web3 content — along with the move to store things like music, social media, medical records, property deeds, and all sorts of other files on the blockchain — will push the need for file storage to new heights. And if Filecoin keeps growing like this, it will become the dominant player in this space.
Filecoin is also working on adding new features to its network. It recently enabled building smart contracts in the Filecoin ecosystem. By combining smart contracts with file storage, Filecoin is building a rich ecosystem that can be used in many different ways.
Filecoin is up about 30% this year. But it’s down 1% over the last 30 days, so its immediate future is a bit unclear. But I’m not worried about its immediate future. I like Filecoin as a long-term play. As the blockchain space matures, so will Filecoin’s importance and usage. And that should drive the price of the coin up.
I also believe that Filecoin is the type of crypto project that will be among the first to break away from the gravitational pull of bitcoin and ethereum. This is a unique project that can and should be measured by the fundamentals of its performance and growth. And as long as it keeps growing the way it is right now, Filecoin should be in good shape.
Rules of the Road
Investing in an uncertain market is tricky. There’s a good chance the market could tumble significantly. 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. 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 fall, you lower your overall acquisition cost.
- Don’t try to time the market perfectly. Nobody can. 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 both limit your risk and take advantage of the full upside of the crypto markets.
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 Filecoin provides an attractive risk-reward ratio.
Filecoin can be acquired on Coinbase.