2021 is a good year for crypto. The total market cap grew from $1 Trillion to $2.4 Trillion in one year. Will 2022 be another stellar year? Are we prepared for what is coming? Do you have a strategy for the year? Here is what I have been thinking about:

1. Risk Management will be more important in 2022.

While 2020 and 2021 make every investor feel like a genius, thanks to Fed and central banks printing money, 2022 might have a different macro outlook. Tapering and rate hikes will drain liquidity from risky asset including high-valuation stocks and crypto. High inflation will also eat into family income, shrinking their savings which can be put towards investment. Some people may have to sell their assets to pay for bills. In addition to macro-economic risks, crypto may face tighter regulation. China has already banned crypto and SEC is scrutinizing stable coins and other tokens potentially falling into category of securities. As crypto becomes larger, the regulators also become more sensitive to its impact on a country’s financial system. Due to these two major factors, 2022 is likely to be more challenging for most investors, especially newbies. The gambling mindset, high-leverage getting-rich-quick scheme, FOMO and meme chasing habits may be penalized by the market.

Additionally, it is vitally important to have some form of hedge such as some cash/stale coins (or gold or even treasury bonds), or you can have options or inverse ETFs to help counteract the risks of your long positions in crypto. We may not need too much hedge, as crypto in general still has very robust fundamentals (WEB 3.0/Deflationary Aspects/Accelerating Adoption Cycle etc.), however, we will need to set aside enough dry powder to maintain our standards of living and capitalize on dips in the market.

2. Invest in network effects.

As money supply gets tight, and the market in general sits near all-time-highs, it is way harder to have 10x or 100x returns in 2022 than the past two years. At the same time, we are seeing numerous new projects/protocols being launched and competing for users and money. Smaller altcoins may have a challenging year ahead. Even some large ones may struggle to keep up the momentum. In an environment of stiff competition for limited money supply, we will probably see more consolidation (merger and acquisition or partnerships) as many projects won’t make it on their own. The projects with stronger teams/talent acquisition, better reputation, and abundant capital/robust cashflow are likely to attract more partners and strengthen their alliances. These alliances will shape up large ecosystems that serve as moat for their members. So instead of having a million new projects all growing exponentially, we may end up having dozens of large ecosystems growing by network effects. The bigger ones will get even bigger. Small fish will have to affiliate with the bigger players and new projects will need to build on top of them, not to compete directly with them, to survive.

3. Be a user and a contributor.

Nothing is more lucrative than free money, but airdrops will be more scarce and more based on consistent engagement with the protocol rather than a one-time trial. Make sure you stick to the projects you like and make contributions to the community. You can participate in play-to-earn games, NFTs, DEFI, social tokens, DAOs, and running nodes for networks. You will earn tokens and NFTs as rewards. These can be good income source for many. Being directly involved in the project and its community also gives you the in-depth knowledge of the prospects of the project, which helps you make better investment decisions.

4. Watch Ethereum Layer 2s closely.

In 2021, we witnessed the rise of the alternative layer 1 blockchains such as Solana, Avalanche, Binance Smart Chain and Luna due to Ethereum’s low throughput and high transaction costs. However, 2022 will be a big year for Ethereum as it is transitioning from POW to POS which will speed up the network and at the same time dramatically decrease the supply of the ETH token. There are multiple layer 2 solutions (rollups) available now but they are not mature yet. Optimistic rollups such as Arbitrum and Optimism are gaining traction but lag behind the alternative Layer 1 blockchains. The more exciting and scalable ZK(Zero-Knowledge) rollups are under massive development and gradually rolling features in stages. Both ZKSync and StarkNet are planning to release their decentralized Layer 2 networks with smart contract functionality and composability in 2022. Many exchanges, wallets, cash on-ramp providers and well-known DEFI projects are fully committed to these Layer 2s, so are many users of their existing limited versions. Therefore, these are expected to have explosive growth once they release their mainnet.

5. Gaming tokens and assets.

Since Metaverse becomes a hot topic, and play to earn becomes viral, blockchain gaming sector has been on a tear. While there are so many individual games one can play, how these games will interact with each other and form a prototype of metaverse is still largely unknown. It may be a good idea to bet on the games that can be easily integrated with other games and existing NFTs.

The gaming assets such as virtual real estates are also attracting many investors. Almost every game launches and sells virtual land. However, the virtual land are not like the real-world physical land that has a limited supply on planet earth. The virtual lands can be created by any game in any quantities. Even though each game has limited land supply in its own game, it does not mean the overall virtual land is scarce. In short, there is relative scarcity within a game but no absolute scarcity in reality. So the value of the in-game assets really depend on the success of the game. You can think of a game as a city, whether it is a metropolitan like NYC or a rural place with few people and modest economic activity speaks to its real estate value.

6. Follow the seasoned crypto VCs.

As twitter co-founder Jack Dorsey pointed out: “Web3.0 is owned by VCs”. Although many people argue against it, it does have some truth in it. You cannot blame the crypto natives for this, as they uphold a noble ideology of democratizing power and wealth and attempting to solve the inequality problems of the world. The ones to blame are the governments or regulators such as SEC who does not allow most US citizens to participate in ICOs. Therefore, most projects have to be funded by VCs instead of retail investors because the regulators want to “protect” them. Unfortunately, they protect them from the downside (limited) but also the astronomical upside.

Nevertheless, due to Web3.0’s economic model and emphasis on community building, average Joe can still take a ride with the VCs and share a portion of the pie. This is much better than Web 2.0 indeed where retail are completely cut off from any early stage capitalization opportunity. To identify good projects, you can check out what VCs are backing and it is important to follow VCs with a good track record in crypto such as a16z, Paradigm, DelphiLabs, Coinbase Ventures and so on. Tracking these big players with both capital and knowledge will give you enough alpha. Additionally, you can also invest in VC DAOs funding early stage projects like Gitcoin.

Overall, these are my prospects and plans about 2022. What about you?

Wish you all a happy new year!

2021 is a good year for crypto. The total market cap grew from $1 Trillion to $2.4 Trillion in one year. Will 2022 be another stellar year? Are we prepared for what is coming? Do you have a strategy for the year? Here is what I have been thinking about:

1. Risk Management will be more important in 2022.

While 2020 and 2021 make every investor feel like a genius, thanks to Fed and central banks printing money, 2022 might have a different macro outlook. Tapering and rate hikes will drain liquidity from risky asset including high-valuation stocks and crypto. High inflation will also eat into family income, shrinking their savings which can be put towards investment. Some people may have to sell their assets to pay for bills. In addition to macro-economic risks, crypto may face tighter regulation. China has already banned crypto and SEC is scrutinizing stable coins and other tokens potentially falling into category of securities. As crypto becomes larger, the regulators also become more sensitive to its impact on a country’s financial system. Due to these two major factors, 2022 is likely to be more challenging for most investors, especially newbies. The gambling mindset, high-leverage getting-rich-quick scheme, FOMO and meme chasing habits may be penalized by the market.

Additionally, it is vitally important to have some form of hedge such as some cash/stale coins (or gold or even treasury bonds), or you can have options or inverse ETFs to help counteract the risks of your long positions in crypto. We may not need too much hedge, as crypto in general still has very robust fundamentals (WEB 3.0/Deflationary Aspects/Accelerating Adoption Cycle etc.), however, we will need to set aside enough dry powder to maintain our standards of living and capitalize on dips in the market.

2. Invest in network effects.

As money supply gets tight, and the market in general sits near all-time-highs, it is way harder to have 10x or 100x returns in 2022 than the past two years. At the same time, we are seeing numerous new projects/protocols being launched and competing for users and money. Smaller altcoins may have a challenging year ahead. Even some large ones may struggle to keep up the momentum. In an environment of stiff competition for limited money supply, we will probably see more consolidation (merger and acquisition or partnerships) as many projects won’t make it on their own. The projects with stronger teams/talent acquisition, better reputation, and abundant capital/robust cashflow are likely to attract more partners and strengthen their alliances. These alliances will shape up large ecosystems that serve as moat for their members. So instead of having a million new projects all growing exponentially, we may end up having dozens of large ecosystems growing by network effects. The bigger ones will get even bigger. Small fish will have to affiliate with the bigger players and new projects will need to build on top of them, not to compete directly with them, to survive.

3. Be a user and a contributor.

Nothing is more lucrative than free money, but airdrops will be more scarce and more based on consistent engagement with the protocol rather than a one-time trial. Make sure you stick to the projects you like and make contributions to the community. You can participate in play-to-earn games, NFTs, DEFI, social tokens, DAOs, and running nodes for networks. You will earn tokens and NFTs as rewards. These can be good income source for many. Being directly involved in the project and its community also gives you the in-depth knowledge of the prospects of the project, which helps you make better investment decisions.

4. Watch Ethereum Layer 2s closely.

In 2021, we witnessed the rise of the alternative layer 1 blockchains such as Solana, Avalanche, Binance Smart Chain and Luna due to Ethereum’s low throughput and high transaction costs. However, 2022 will be a big year for Ethereum as it is transitioning from POW to POS which will speed up the network and at the same time dramatically decrease the supply of the ETH token. There are multiple layer 2 solutions (rollups) available now but they are not mature yet. Optimistic rollups such as Arbitrum and Optimism are gaining traction but lag behind the alternative Layer 1 blockchains. The more exciting and scalable ZK(Zero-Knowledge) rollups are under massive development and gradually rolling features in stages. Both ZKSync and StarkNet are planning to release their decentralized Layer 2 networks with smart contract functionality and composability in 2022. Many exchanges, wallets, cash on-ramp providers and well-known DEFI projects are fully committed to these Layer 2s, so are many users of their existing limited versions. Therefore, these are expected to have explosive growth once they release their mainnet.

5. Gaming tokens and assets.

Since Metaverse becomes a hot topic, and play to earn becomes viral, blockchain gaming sector has been on a tear. While there are so many individual games one can play, how these games will interact with each other and form a prototype of metaverse is still largely unknown. It may be a good idea to bet on the games that can be easily integrated with other games and existing NFTs.

The gaming assets such as virtual real estates are also attracting many investors. Almost every game launches and sells virtual land. However, the virtual land are not like the real-world physical land that has a limited supply on planet earth. The virtual lands can be created by any game in any quantities. Even though each game has limited land supply in its own game, it does not mean the overall virtual land is scarce. In short, there is relative scarcity within a game but no absolute scarcity in reality. So the value of the in-game assets really depend on the success of the game. You can think of a game as a city, whether it is a metropolitan like NYC or a rural place with few people and modest economic activity speaks to its real estate value.

6. Follow the seasoned crypto VCs.

As twitter co-founder Jack Dorsey pointed out: “Web3.0 is owned by VCs”. Although many people argue against it, it does have some truth in it. You cannot blame the crypto natives for this, as they uphold a noble ideology of democratizing power and wealth and attempting to solve the inequality problems of the world. The ones to blame are the governments or regulators such as SEC who does not allow most US citizens to participate in ICOs. Therefore, most projects have to be funded by VCs instead of retail investors because the regulators want to “protect” them. Unfortunately, they protect them from the downside (limited) but also the astronomical upside.

Nevertheless, due to Web3.0’s economic model and emphasis on community building, average Joe can still take a ride with the VCs and share a portion of the pie. This is much better than Web 2.0 indeed where retail are completely cut off from any early stage capitalization opportunity. To identify good projects, you can check out what VCs are backing and it is important to follow VCs with a good track record in crypto such as a16z, Paradigm, DelphiLabs, Coinbase Ventures and so on. Tracking these big players with both capital and knowledge will give you enough alpha. Additionally, you can also invest in VC DAOs funding early stage projects like Gitcoin.

Overall, these are my prospects and plans about 2022. What about you?

Wish you all a happy new year!