With trillions of dollars invested in cryptocurrencies and new crypto projects being launched on a daily basis, many investors are wondering whether cryptocurrencies are a viable investment. Check out how bitcoin exchanges allow you to buy bitcoin.
What Should You Think About First?
You should think about asset allocation before making any investment. Simply put, asset allocation is the process of distributing your investments across multiple instruments in order to generate diverse long-term returns.
The same is true for cryptocurrencies: depending on your asset allocation, financial goals, and timescale, you should dedicate a percentage of your equity investment to cryptocurrencies.
You should undertake research and due diligence on any cryptocurrency or digital asset you are considering purchasing.
It is not advisable to just follow a friend’s hot tip or buy digital assets out of fear of missing out (FOMO). Reading the whitepaper before investing in any crypto-asset is prudent to better understand the cryptocurrency’s purpose, technology, and use case.
Understanding the team also provides insight into the track record of those in charge. Finally, because of the lack of regulation and control of digital assets, you want to avoid trading a crypto asset that fails due to fraud.
Is cryptocurrency a good investment for you?
First, we must distinguish between investment and trading, with the most significant difference being the time horizon. Trading in any asset has a limited time horizon and is frequently more speculative. It is not uncommon for traders to conduct dozens of deals per day to capitalize on intraday price movements.
Investing vs. Trading
Trading requires discipline since the most effective traders meticulously control their exposures. On the other hand, investing is a disciplined plan that accomplishes particular financial goals over a longer period, usually five years or more. Investors may devise a strategy to save for education, buy a home, or plan for retirement.
The next step is to assess your risk tolerance. Because cryptocurrencies are volatile, whether they are a suitable investment depends on how much risk you are willing to take.
Higher volatility investments may not be ideal for you if even minor market swings keep you up at night.
Crypto assets are dangerous because their price volatility is similar to that of other asset classes, such as growth stocks or high-yield bonds. You must be prepared to face fairly large price swings or probable losses.
Constraints on liquidity
Another factor to consider is the liquidity limits that many crypto assets experience. Liquidity is simply the ease or difficulty with which one can purchase or sell a specific item when they wish to without significantly affecting the price.
If you wish to buy something more generic, say some Chinese Yuan in exchange for US dollars, there is plenty of liquidity, so the price you pay for the Yuan will be determined by the market.
The Advantages of Investing in Cryptocurrency
So far, we’ve explored some of the primary concerns that investors should be aware of, but there are also compelling arguments for why cryptocurrencies are a good investment.
1. Creation of a new asset class
As cryptocurrencies mature and expand, as we’ve seen with Bitcoin and Ethereum, such assets emerge as a new asset class. Significantly, professional fund managers, such as Cathy Wood of Ark Investment Management, have created dedicated investment funds that only invest in Bitcoin and other cryptocurrencies.
2. Experimentation
The previously mentioned institutional investors strive to diversify their risks by owning various assets that perform significantly under the same economic circumstances. Some argue that cryptocurrencies have beneficial diversification effects, especially in the face of rising inflation.
3. Possibility of growth
Finally, because the market is relatively new, there are likely to be many more changes in the future that will make investing in cryptocurrencies even more appealing. Stablecoins, which are cryptocurrencies anchored to real world assets like Dollars, Euros, gold, oil and others. These don’t fluctuate much, and hence are a safe option.
For individuals concerned about fraud, tighter laws, like those governing Initial Coin Offerings, may be enacted to protect investors. Futures also allow cryptocurrency bearish to sell the asset short, enhancing overall liquidity.
