Within the depths of the cryptoverse, the winds blow with faint whispers of "what token should I buy?"
With so many verticals (e.g. DeFi, gaming, culture), a slew of promising projects and too many token symbols to name, making decisions can be intimidating. The feeling of being in the dark, fear of scams and information overload can make it hard to act. A potential approach to overcoming such impasse may be the thought of seeking market returns.
Before discussing such approach, we must first agree on our premise for the future of the crypto ecosystem. If at the current market capitalization of $2.5 trillion (i.e. the value of all crypto tokens), we consider the system to be mature, looking for outsized winners may sound like an appealing endeavor. However, if we take the view that crypto perhaps has another 20-50x in growth potential, it's a different story. For anyone focused on a day job, 20-50x returns look quite healthy. For reference the global stock market is worth ~$120 trillion.
Some people like the idea of picking winners. In traditional financial markets, we call these people stockpickers. This group is interested in finding and selecting the best performing companies and betting on their stocks. At the professional level, they're known as active managers operating mutual funds and hedge funds. That's one approach to making investments.
For a host of reasons, another group of people are interested in getting market returns - the topic at hand. This group has exponentially grown in the last decade and the term "passive investing" has become a household term. Instead of paying active managers or trying to pick winners themselves, people buy exchange-traded-funds (ETFs) that aggregate a whole market of stocks. They're not looking for shiny trophies but instead are focused on capturing average returns. So the question becomes, how does one get market returns in crypto?
While there are a number of crypto ETFs in Canada and other fund types in the US, most of these funds are single asset vehicles (e.g. it only holds Bitcoin) or they hold just a small number of tokens. These vehicles add value by increasing accessibility and allowing certain investors to participate in the market, but they're likely not the best place to earn market returns at the moment. They're not the S&P 500 index of crypto.
Conceptually, the easiest way for broad market exposure would likely be a diversified basket of Layer 1 tokens. Layer 1 is the term for the base layer of a blockchain. In general, Layer 1 is typically used when referencing "platform" blockchains such as Ethereum that are for the purpose of having people build applications on top of it.
As an example, there are thousands of projects (and associated tokens) built on top of Ethereum. We could become full-fledged tokenpickers and invest in individual projects built on the platform that we believe will outperform the market. Similar to the non-crypto market, some will win, some will lose.
However, even if thousands of projects inside of Ethereum fail, as long as a sufficient number of them are successful, Ethereum could still win. The platform doesn't care about any individual project surviving. It just needs winners that create outsized volume of transactions and demand.
Each Layer 1 such as Ethereum, Solana and Avalanche have numerous projects within it. One could argue that a basket of such Layer 1 token types may be the most efficient way for us to get broad exposure in crypto.
Back to the original question of "what token should I buy", this is probably the wrong question depending on the overall goal.
The first question to answer is most likely "what type of returns am I looking for".
If "web 3", "blockchain" or "crypto" - pick your term - is the future, casting a wide net via Layer 1 tokens is an option to consider if the answer is market returns.
For the tokenpickers seeking outsized returns, the rabbit holes inside Discord servers, Telegram chats and Reddit message boards await you.
If you enjoyed this piece, consider sharing it with two people you love. All opinions are my own. This is not investment advice.
List of largest Layer 1 blockchains by market capitalization via Coinmarketcap:
Ethereum (ETH)
Solana (SOL)
Cardano (ADA)
Polkadot (DOT)
Avalanche (AVA)
Terra (LUNA)
Algorand (ALGO)