The question that many 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 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 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?
What Should You Think About First?
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.
Is Bitcoin/Cryptocurrency 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 frequently conduct dozens of trades per day.
Investing vs. Trading
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.
Limitations on liquidity
The liquidity restrictions that some crypto assets encounter are a further factor to be taken into account. Simply said, liquidity is how easily or difficult it is to purchase or sell a particular asset at a given time.
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.
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 Cryptocurrency Investment
We’ve so far covered some of the key factors that investors need to be wary of, but there are also strong arguments in favour of investing in cryptocurrencies.
A new class of assets
As cryptocurrencies grow and develop, 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 dedicated investment funds that only invest in Bitcoin and other cryptocurrencies, like Cathy Wood from Ark Investment Management.
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 diversification through cryptocurrencies is advantageous.
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.
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 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 bitcoin bears to short sell the asset, increasing total liquidity.