Here's how smart investors evaluate their cryptocurrency investments

USA Today

01-04-2025

Here's how smart investors evaluate their cryptocurrency investments
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Investing in cryptocurrencies is a distinct but related discipline to investing in stocks and other financial instruments. Though it's fully possible to apply most of the same principles you use for thinking about your stocks to your cryptos — like, for example, comparing your coin's performance to the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or an index — the best crypto investors have a slightly different approach.
So let's explore what they're doing to evaluate how effective their various investments are, because it will be a good tool to have in your investing toolbox. You'll find that it's quick and easy enough to do it the same way.
Be sure to compare performance against the right assets
When you invest, it's key to appreciate whether the assets you select are outperforming something that would take less effort to do, like just investing in an index fund with holdings that mirror the entire market.
If you invest in Bitcoin (CRYPTO: BTC) and have no desire to invest in other cryptocurrencies, that's perfectly fine. But once you have a diversified crypto portfolio containing coins like Ethereum (CRYPTO: ETH) and Solana (CRYPTO: SOL), not to mention tokens hosted on those or other chains, comparing against the stock market doesn't really make as much sense because it's a collection of a very different set of assets that don't perform in the same way.
Take a look at this chart showing the performance of these coins against the market over the last three years:
Notice anything about the shapes that the lines form? The cryptocurrencies have price action that appears to be similar to one another, yet quite distinct from the stock market's significantly less volatile performance.
That's because the cryptocurrencies are highly correlated with one another, and specifically, they're highly correlated with the price action of Bitcoin.
The reasons for those correlations are numerous, but the main point is that once money is somewhere on a blockchain, it's usually cheaper to move that money between blockchains than it is to move it back into fiat currency.
And, since Bitcoin is by far the largest cryptocurrency, when its price moves upward, it generates a wealth effect that, on average, causes more liquidity to flow into altcoins like Ethereum and Solana, among many others. That makes their prices go up.
Of course, there is a weaker relationship of the same type between the stock market and the crypto sector. But when you're trying to figure out how your investments are doing relative to the benchmark, it makes far more sense to compare your coins to the performance of Bitcoin, because it's the easiest investment in the crypto sector to make by default.
Plus, it's easy to overthink and invest in something riskier than Bitcoin, only to underperform it, much like how it's easy to select poor individual stocks and underperform the market.
Use the same principles to evaluate tokens
There's another idea that's worth understanding, and it pertains to evaluating tokens hosted on a chain.
If you're buying a token and you want to benchmark its performance, comparing it to Bitcoin can work — at least you'll be comparing apples to apples in terms of the asset's general volatility.
But the better move is to compare tokens to the main coin of the chain they're on. If your token isn't performing better than the chain where it lives, it might be worthy of cutting, since whatever investment thesis you have developed for it probably isn't working.
So, for example, if you buy a decentralized finance (DeFi) token on Ethereum or Solana, you should be examining whether it outperforms just holding Ethereum or Solana, which would be the lower-hanging fruit in terms of the effort you would need to put into finding and analyzing the investment.
At the end of the day, benchmarking in this way is just the easiest approach to evaluating how your crypto investments are doing. It doesn't have to be the only way. Just keep in mind that overcomplicating your research process is often a way to find the conclusions that you want to find rather than the most financially relevant facts.
Alex Carchidi has positions in Bitcoin, Ethereum and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum and Solana. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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