Cryptocurrencies have been the talk of the town for the last few years. There are crypto investors, who became overnight billionaires. No, cryptocurrencies are not a get-rich-quick scheme. They are a new asset class, which offer substantial profits. However, the volatility in the crypto market scares many investors, especially the ones, who are set in their ways with traditional assets. High returns, on the other hand, attract them. So, are they worth the investment? Here’s what you need to know:
How are cryptocurrencies different?
Cryptocurrencies are digital currencies, underpinned by distributed ledger technology -- the most secure technology existence. While they can serve as a medium of exchange, they are an investment class for people to trade and gain profits.
Unlike traditional currencies, cryptocurrency’s supply is limited and they aren’t regulated by any central authorities. Their value is determined by people who trade them, rather than any institution.
Bitcoin was the first cryptocurrency, created during the 2008 financial crisis and since then its performance has attracted investors from all over the world. While many other cryptocurrencies such as Ripple, Ethereum, Litecoin, Libra (recently proposed by Facebook), etc. emerged over the years, Bitcoin still dominates the market. Based on CoinMarketCap data, the value of Bitcoins alone in the world was $160.4 billion as of March 4, 2020.
Why are they volatile?
As stated earlier, they are not controlled by any central authorities. It’s up to speculators to drive prices upward or downward. While cryptocurrencies are slowly making a leap towards the mainstream, they are newer than any other assets. Historically, the common asset classes of today such as gold and real estate were also volatile in their early days. It took them years to stabilize around the world and the same is true for Bitcoin and other cryptocurrencies.
Is it a good idea to invest in cryptocurrencies now?
The number of visitors and traders on cryptocurrency exchange platforms is growing by the day. In India, since the Supreme Court lifted the ban on the trade of cryptocurrency, the market is seeing higher crypto demand and trade volumes than usual.
It’s not hard to see why shrewd investors are allocating a portion of their portfolio to cryptocurrencies. No investment is a safe bet. While risk associated with cryptocurrency indeed exceeds that of any other investment class, so do their returns. It has shown a growth of over 1000% over the last decade. According to Finder.com, Bitcoins will thrive in 2020 and are expected to reach highs of $15,499 per unit by the year-end.
Besides high returns, Bitcoin and other cryptocurrencies offer ease and a greater degree of independence to investors. Both entry and participation in the crypto market are easy. Unlike markets for several other assets, the cryptocurrency market doesn’t have a very high entry threshold, i.e., investors don't need to have a significant amount of money at their disposal to enter the market. Also, there is no need to visit banks and sign a ton of papers. Investors can just create an account, get a wallet, and easily track their assets.
Also, their value can’t be manipulated. Governments can print an unlimited amount of fiat money and they do so to boost the economy. When there is excessive money in the economy, inflation occurs, reducing the value of the money in your pocket and other correlated assets.
However, cryptocurrency’s supply is limited, making them anti-inflationary assets. They have performed extremely well in countries facing rampant hyperinflation. For instance, countries such as Venezuela or Argentina, where inflation rates are absurdly high, have benefitted from the use of cryptocurrency.
While there are many crypto billionaires, some people lost a fortune because they simply weren’t wise investors. According to experts, the wisest thing to do is to risk as much money as you can afford to lose.
While allocating a portion of your investment portfolio to cryptos, it's important you do your research thoroughly, follow the right strategy, and create a well-balanced portfolio. If you use a legitimate crypto exchange platform, your money is safe and can be accessed at all times.
Bitcoins and other cryptocurrencies, decentralised in nature, are not directly impacted by ongoing social, geopolitical, and economic issues. This explains why they have outperformed every other asset class in times of crisis. Now seems like a good time to include some in your portfolio.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)