Many investors are wondering whether cryptocurrencies are a smart investment given the trillions of dollars spent, the hype surrounding cryptocurrencies, and the constant release of new cryptocurrency projects. Is it still advisable to invest in cryptocurrencies despite losing the majority, if not all, of your money in scams? Would a wise investor still consider investing in the industry despite the extreme volatility seen thus far and stories of cryptocurrency millionaires making or losing millions overnight?
First things to take into account
Consider the asset allocation before making any investing decisions. Simply defined, asset allocation is distributing your investments among a variety of financial products to provide diversified long-term returns. In the same way, you should select how much of your investment portfolio may be assigned to cryptocurrencies by taking into account your risk tolerance, financial objectives, and timescale. The cryptocurrency or digital asset you are thinking about should be the subject of inquiry and due diligence.
To better understand the function, technology, and use case of a cryptocurrency before making an investment, it is advisable to read the whitepaper. You can get a sense of the track record of the individuals in charge by understanding the team. The danger of trading a crypto asset that crashes due to fraud should be avoided given the absence of regulation and monitoring in digital assets. Decide how to invest in a crypto asset once you’ve found one you feel confident in.
Do you directly purchase the crypto asset? If so, will you keep your investment in your own account at the cryptocurrency exchange or broker, or both? If so, do you already have a bitcoin wallet? Do you choose to invest via proxy and purchase shares of cryptocurrency exchanges? or purchase stock in other publicly listed companies that make use of blockchain technology or offer products to the sector, such as GPU manufacturers? The wise investor would consider all of the available possibilities because each of these investments has advantages and disadvantages.
Is investing in cryptocurrency right for you
First, we must distinguish between trading and investing; the main difference is the time horizon. Any asset trading involves a short-term time horizon that is frequently more speculative in nature. For the purpose of profiting from intraday price swings, dealers sometimes carry out hundreds of deals each day.
Trading versus investing
The most successful traders carefully control their exposures, thus trading requires a disciplined strategy. Investing, on the other hand, is a disciplined approach that also achieves financial goals over a longer time frame, typically five years or more. Investors can develop a plan to put money aside for retirement, a house, or college. Next, you should assess your risk tolerance.
Considering the volatility of cryptocurrencies, your ability to tolerate risk will determine if cryptocurrencies are a smart investment.
Investments with higher volatility might not be the best choice for you if even little price fluctuations keep you awake 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.
Liquidity restrictions
Liquidity restrictions on some crypto assets are another factor to take into account. The ability to acquire or sell a certain item at any time without having the price drastically change is known as liquidity. For instance, if you’re wanting to purchase a rare car, you may likely locate one for sale, and the amount you’ll pay is essentially what the seller demands. The market is particularly unliquid because if you buy it, the subsequent seller would undoubtedly demand a greater price from the subsequent buyer.
However, there is plenty of liquidity if you want to purchase something more general, like some Japanese yen in return for your dollars; as a result, the price you pay for the yen will be wherever the market is. Due to the high liquidity among sellers of JPY who will take UD as payment, the next buyer of the yen will probably also buy the currency at the same price as you did. There are some cryptocurrencies that are more liquid than others, so if you want to invest in them, you must be ready to cope with illiquidity both when you purchase and, maybe, when you sell.
Benefits of investing in cryptocurrency
We’ve already covered some of the key factors that investors should be wary of, but there are also some convincing arguments in favor of investing in cryptocurrencies.
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. Undoubtedly, we’ve seen significant professional fund managers establish specific investment funds that just invest in Bitcoin and other cryptocurrencies.
Diversification- The aforementioned institutional investors seek to spread out their risk by holding a variety of investments that respond differently to the same economic conditions. Some contend that cryptocurrencies have beneficial diversification benefits, particularly in the face of growing inflation.
We’ve also witnessed the creation of new investment vehicles that profit from the rise of certain cryptocurrencies, including options and futures on Bitcoin and Ethereum, as well as specialized investment firms that handle cryptocurrencies expertly on behalf of investors.
Possibility of success- Last but not least, the industry is still very young, so there may be even more developments that will make investing in cryptocurrencies even more appealing. Examples include stablecoins, which are digital currencies backed by assets and tied to the value of a fiat currency as examples.
There may be stricter restrictions to assist safeguard investors for individuals who are concerned about fraud. We suggested futures on cryptocurrencies, and when the market changes, there may be futures on additional cryptocurrencies that are traded on reliable exchanges. Futures also enable bitcoin bearish to sell the asset short, enhancing total liquidity.
