This post will explain Is Cryptocurrency a Good Investment. The question that multiple investors are asking themselves is if cryptocurrencies are a good investment given the trillions of dollars spent, the hype surrounding cryptocurrencies, and the daily launch of new cryptocurrency ventures.
Is it still intelligent to invest in cryptocurrencies despite the fact that most, if not all, investors lost money in frauds like the Squid Game token, TerraUSD stablecoin, and other altcoins? Would a wise investor still consider investing in the industry despite the extreme volatility shown thus far and reports of cryptocurrency millionaires making or losing millions over night?
Is Cryptocurrency a Good Investment?
Cryptocurrency can be a fantastic investment that yields astronomically huge returns overnight, but it also has a sizable disadvantage.
Investors should assess whether their liquidity needs, time horizon, and risk tolerance match their investor profile.
Investors must complete their research, allocate a suitable portion of their investment, and acquire the necessary investing skills.
What to Consider First?
You should consider asset allocation prior to making any investment decisions. In order to deliver diversified returns over the long term, asset allocation simply refers to distributing your investments 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 goals, and timescale.
When considering a cryptocurrency or other digital asset, you should do your homework. It is not advisable to buy digital assets based solely on a friend’s hot tip or out of FOMO (Fear of Missing Out). It would be smart to study the whitepaper prior to making any crypto-asset investments in order to gain 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 risk of trading a crypto asset that crashes due to fraud given the lack 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 hold your investment yourself or will you use 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, such as GPU makers? The wise investor would consider all of the available possibilities because each of these investments has advantages and disadvantages.
Is Cryptocurrency a Good 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. The execution of dozens of deals each day by traders to profit from intraday price swings is not unusual.
Trading vs. Investing
Trading requires a disciplined approach since skilled traders manage their exposures properly. However, investing is a disciplined plan that achieves specified financial objectives over a longer time frame, typically 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 good investment because of their volatility. Higher volatility investments might not be the right choice for you if even minor price fluctuations keep you up at night.
Cryptocurrency assets are risky 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 swings.
Liquidity constraints
The liquidity restrictions that some crypto assets encounter is a further factor to take into account. Liquidity is simply how easily or difficult it is to purchase or sell a specific 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 find one, the amount you will pay is essentially what the seller demands. The market is particularly illiquid because if you buy it, the subsequent seller will undoubtedly demand a higher price from the subsequent buyer.
The price you pay for the yen, however, will be wherever the market is if you are wanting to buy something more generic, like some Japanese yen in exchange for your U.S. dollars, as there is plenty of liquidity. As there is a lot of liquidity among sellers of JPY who will accept 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 some cryptocurrencies are more liquid than others, investing in them requires you to be ready to deal with illiquidity both during the buying and maybe during 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 particular cryptocurrency.
Benefits of Investment in Cryptocurrency
So far, we’ve covered some of the key factors that investors need to be wary of, but there are also clearly reasons in favor of whether cryptocurrency is a good investment.
1. New asset class
As cryptocurrencies grow and develop, as we’ve seen with Bitcoin SV and Ethereum, a new asset class for these types of assets is also emerging. Certain significant professional fund managers have established dedicated investment funds that only invest in Bitcoin and other cryptocurrencies, like Cathy Wood from Ark Investment Management.
2. Diversification
By holding a variety of investments that respond differently under the same economic conditions, the aforementioned institutional investors also seek to diversify their risks. Some contend that the diversification effects 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 particular 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. Upside potential
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 stablecoins, which are digital currencies backed by assets and linked 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 other cryptocurrencies that are traded on reliable exchanges may become available. Additionally, futures enable cryptocurrency bears to short sell the asset, increasing total liquidity.
