The issue that many investors are asking themselves is if cryptocurrencies are a viable investment given the billions of dollars spent, the hype surrounding cryptocurrencies, and the daily launch of new cryptocurrency ventures.
Is it still a good idea to invest in cryptocurrencies despite the fact that most, if not all, investors lost money in frauds like the Squid Game token, TerraUSD stable coin, and other altcoins? Would a wise investor still consider investing in the industry despite the extreme volatility shown so far and reports of cryptocurrency millionaires making or losing millions over night?
Summary:
Although cryptocurrency may provide astronomically huge gains overnight, there is also a major drawback.
Investors should assess if their liquidity needs, time horizon, and risk tolerance match their investment profile.
Investors must complete their research, allocate a suitable portion of their investment, and acquire the necessary investing skills.
What Should You Think About First?
You should consider asset allocation prior to making any financial decisions. In order to deliver diversified returns over the long term, asset allocation simply refers to distributing your assets over a variety of products. The same is true for cryptocurrencies; to determine how much of your investment portfolio may be devoted to cryptocurrencies, you need consider your risk tolerance, financial objectives, and timescale.
When contemplating a cryptocurrency or other digital asset, you should do your homework. It is not advisable to acquire digital assets based only on a friend’s hot tip or out of FOMO (Fear of Missing Out). It would be smart to study the whitepaper before to making any crypto-asset investments in order to have a better understanding of the cryptocurrency’s goal, technology, and use case.
Knowing the team helps you get a feel of the track record of those in charge. Ultimately, you want to avoid the danger of trading a crypto asset that crashes due to fraud given the absence of regulation and control in digital assets.
Once you have identified a crypto asset you feel confident investing in, you must choose how to do it. Do you purchase cryptocurrencies directly? If so, would you keep your investment personally or will you utilize your account at the cryptocurrency exchange or broker to do so? If so, have you set up a digital wallet? Or are you planning to use a hedge fund, mutual fund, or exchange-traded fund as your asset manager?
Do you opt to purchase shares of cryptocurrency exchanges and invest via proxy? or invest in shares of other publicly traded businesses that use blockchain technology or provide supplies to the industry, including GPU makers? The wise investor would consider all of the available possibilities since each of these investments has advantages and disadvantages.
Is Bitcoin a Smart Investment for You?
The largest difference between investing and trading is the time horizon, therefore first we must draw that distinction. The time horizon for trading in any asset is often short-term and more speculative in nature. To profit from intra-day price swings, dealers sometimes conduct dozens of deals every day.
Investing vs. Trading
Trading requires a disciplined approach since skilled traders manage their exposures properly. However, investing is a disciplined strategy that achieves specified financial objectives over a longer time frame, often five years or more. Investors may develop a plan to save for a child’s education, to buy a home, or to prepare for retirement.
The next step is to assess your risk tolerance. The level of risk you can tolerate will determine if cryptocurrencies are a viable investment because of their volatility. Higher volatility investments may not be the right choice for you if even little price fluctuations keep you up at night.
Cryptocurrency assets are hazardous investments since their price volatility is comparable to that of other asset types like growth stocks or high-yield bonds. You must be ready to deal with potentially devastating price fluctuations.
Limitations on liquidity
The liquidity restrictions that certain crypto assets encounter are an additional factor to be taken into account. Liquidity is simply how easily or difficult it is to purchase or sell a certain item at any time without having a substantial impact on the price.
For instance, if you want to purchase a rare car, there are a lot of them available, and if you can locate one, the amount you will pay is essentially what the seller demands. The market is particularly illiquid because if you purchase it, the subsequent seller would undoubtedly demand a greater price from the subsequent buyer.
The price you pay for the yen, however, will be wherever the market is if you are wanting to purchase something more general, like some Japanese yen in return for your U.S. dollars, since there is plenty of liquidity. As there is a lot of liquidity among sellers of JPY who will take UD as payment, the next buyer of the yen will probably also buy the yen at a price that is similar to or around the one you transacted.
Because certain cryptocurrencies are more liquid than others, investing in them requires you to be ready to cope with illiquidity both during the buying and maybe throughout the selling process. The worst-case scenario is that you are unable to liquidate your cryptocurrency investment when you need to because there isn’t enough market activity in that specific coin.
Benefits of Cryptocurrency Investment
We’ve so far covered some of the key factors that investors need to be wary of, but there are also strong reasons in favor of investing in cryptocurrencies.
1. A new class of assets
As cryptocurrencies grow and evolve, as we’ve seen with Bitcoin and Ethereum, a new asset class for these types of assets is also emerging. Certain significant professional fund managers have established specialized investment funds that only invest in Bitcoin and other cryptocurrencies, like Cathy Wood from Ark Investment Management.
2. Diversification
By holding a variety of assets that respond differently under the same economic circumstances, the aforementioned institutional investors also seek to diversify their risks. Some contend that the diversification benefits of cryptocurrencies are advantageous, particularly in the face of growing inflation.
In addition, we’ve witnessed the emergence of new investment vehicles that profit from the rise of certain cryptocurrencies, such as options and futures on Bitcoin and Ethereum, as well as particular investment vehicles that handle cryptocurrencies expertly on behalf of investors.
3. Possibility of gain
Last but not least, the industry is still relatively young, so there may be even more developments in the future that will increase the appeal of investing in cryptocurrencies. Examples include stable coins, which are digital currencies backed by assets and tied to the value of a fiat currency.
More stricter laws, such as those governing Initial Coin Offerings, may be implemented to safeguard investors if fraud is a concern. Futures on cryptocurrencies were stated, and if the market changes, futures on additional cryptocurrencies that are traded on reliable exchanges may become available. Additionally, futures enable bitcoin bearish to short sell the asset, increasing total liquidity.