- About Cryptocurrency
- Is Cryptocurrency a Good Investment for you?
- KEY POINTS
- What to Prioritize First?
- Is Cryptocurrency a Good Investment ?
- Benefits
Are you also thinking that “Is Cryptocurrency a Good Investment”. Cryptocurrency is a digital or virtual currency that is secured by cryptography, making it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on a decentralized network using blockchain technology – a distributed ledger enforced by a separate network of computers.
A distinctive feature of cryptocurrencies is that they are generally not issued by any central authority, making them theoretically free from government interference or manipulation.
About Cryptocurrency
Cryptocurrencies are digital or virtual currencies that are backed by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. “Crypto” refers to the various encryption algorithms and cryptographic techniques that protect these entries, such as elliptic curve encryption, public-private key pairs, and hashing functions.
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name suggests, the blockchain is essentially a set of linked blocks of information on an online ledger. Each block contains a set of transactions that have been independently verified by each validator on the network.
Each new block generated must be verified before it can be confirmed, making it nearly impossible to forge transaction history. The contents of the online ledger must be agreed upon by the network of individual nodes, or computers that maintain the ledger.
Experts say blockchain technology can serve many industries, supply chains, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are using blockchain technology to reduce transaction costs by streamlining payment processing.
Now you will better know about “Is Cryptocurrency a Good Investment” for you.
Is Cryptocurrency a Good Investment for you?
With trillions of dollars invested in cryptocurrencies and the hype surrounding new crypto projects being launched every day, many investors are asking themselves whether “Is Cryptocurrency a Good Investment”.
Despite investors losing most of their investments in scams such as the Squid Game token, TerraUSD stablecoin and other altcoins, is it still wise to invest in cryptocurrencies? Despite the incredible volatility experienced so far and stories of people making or losing millions of dollars from crypto overnight, would any prudent investor still consider putting their money in the market?
KEY POINTS
- Cryptocurrency can be a great investment that generates huge returns overnight; however, it also has its drawbacks.
- Investors should analyze whether their time horizon, risk tolerance, and liquidity needs fit their investor profile.
- Investors need to do their homework, allocate the appropriate amount of their investment, and actually learn how to invest.
What to Prioritize First?
Before deciding that Is Cryptocurrency a Good Investment, you must consider asset allocation. In simple terms, asset allocation means spreading your investments across different instruments to provide diversified returns in the long run. The same applies to cryptocurrencies – you must consider your risk tolerance, financial goals, and time horizon to decide how much of your investment portfolio can be invested in cryptocurrencies.
Before deciding that Is Cryptocurrency a Good Investment, you should research and perform due diligence on any cryptocurrency or digital asset you are considering. Listening to a friend’s advice or buying a digital asset out of fear-of-missing-out (FOMO) is not recommended. For any crypto-asset investment, it would be wise to read the whitepaper to better understand the purpose, technology, and use case of the cryptocurrency.
Understanding the team also gives you an idea of the track record of those responsible. After all, given the lack of regulation and oversight in digital assets, you want to avoid the risk of trading a crypto asset that collapses due to fraud.
Once you find a crypto asset you are comfortable investing in, you will need to decide how to invest in it. Do you buy the crypto asset directly? If yes, will you use your account with a crypto exchange or broker to hold your investment, or will you hold it yourself? If yes, do you have a digital wallet set up? Or will you choose to invest through an exchange traded fund or an asset manager, such as a hedge fund or mutual fund?
Do you decide you want to invest by proxy and buy shares of crypto exchanges? Or buy shares of other publicly listed companies that are involved in blockchain technology or supply this sector, like GPU manufacturers? Each of these investments comes with its own advantages and disadvantages, and the prudent investor will consider all the options given.
Is Cryptocurrency a Good Investment ?
First, we need to distinguish between investing and trading – the biggest difference is the time horizon. As with trading in any asset, the time horizon is short-term and often more speculative in nature. It is not uncommon for traders to execute dozens of trades a day to take advantage of intra-day price fluctuations.
Difference between Trading & Investment:-
Trading is done with discipline, as those who are most successful manage their risks carefully. Investing, on the other hand, is also a disciplined plan that accomplishes specific financial goals over a long period of time, usually five years or more. Investors can employ strategies to save for college, buy a home, or plan for retirement.
Before deciding that Is Cryptocurrency a Good Investment. Next, you need to check your risk tolerance. Since cryptocurrencies fluctuate, whether crypto is a good investment or not depends on how much risk you can take. If even minor price fluctuations keep you up at night, high volatility investments may not be the right investment for you.
The level of price volatility in crypto assets is not much different from that experienced by other asset classes such as growth stocks or high-yield bonds, so they are risky assets. You should be prepared to face quite significant price fluctuations or potential losses.
Liquidity constraints
Another point to consider Before deciding that Is Cryptocurrency a Good Investment is the liquidity constraints faced by some crypto assets. Liquidity is the relative ease or difficulty with which someone can buy or sell a certain asset when they want without a significant change in the price.
For example, if you want to buy a rare car, there are plenty of such cars available around and even if you find one, the price you will have to pay will be the price set by the seller. If you buy it, the next seller will definitely charge a higher price to the next buyer – so there is not much liquidity in the market.
However, if you want to buy something normal in exchange for your US dollars, such as some Japanese Yen, there is ample liquidity, so the price you pay for the Yen will vary depending on market conditions. The next buyer of Yen will also likely buy Yen at or near the same price you struck the deal at, since there is abundant liquidity with sellers of JPY who will accept UD in exchange.
Some cryptocurrencies are more liquid than others, which means that to invest in such cryptocurrencies, you must be prepared to deal with liquidity when buying and potentially selling. The worst-case scenario would be if you are unable to sell your crypto investment when needed due to the lack of liquidity in that particular cryptocurrency.
Benefits
So far we have discussed some of the main things that investors need to be cautious about, but there are certainly positive arguments about whether “Is Cryptocurrency a Good Investment”.
- As cryptocurrencies mature and evolve, as we have seen with Bitcoin and Ethereum, we also see such assets emerging as a new asset class. Certainly, we have seen large professional fund managers such as Cathie Wood from Ark Investment Management create dedicated investment funds to invest in Bitcoin and other cryptos.
- The aforementioned institutional investors try to diversify their risks by holding different investments that behave differently under the same economic conditions. Some argue that cryptocurrencies offer a positive diversification effect, especially against rising inflation. In addition, we have seen the development of more investment instruments that not only capture the gains of specific cryptocurrencies, such as options and futures on Bitcoin and Ethereum, but also specific investment funds that professionally manage cryptocurrencies on behalf of investors.
- Finally, another positive is that the sector is quite new, and as such, there could potentially be many more changes that will make investing in cryptocurrencies even more attractive. For example, stablecoins, which are cryptocurrencies that are pegged to a fiat currency and the value of the assets to support the digital currency.
- For those who are concerned about fraud, there may be more strict rules dealing with Initial Coin Offerings to help protect investors. We have mentioned futures on cryptocurrencies and as the market develops, there may be futures on other cryptocurrencies that trade on a reputable exchange. Futures also allow cryptocurrency bears to sell the asset at a lower price, improving liquidity overall.
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