June 4, 2023

How Good is Cryptocurrency as an investment?

By Zahcahverse on Jan 7, 2023

Has investing in Crypto ever crossed your mind?

The question that many investors are asking themselves is whether cryptocurrencies are a good investment given the trillions of dollars invested, the hype surrounding cryptocurrencies, and the daily launch of new cryptocurrency projects.
Is it still a good idea to invest in cryptocurrencies despite the fact that most, if not all, investors lost money in projects that end up as frauds and the lack of security that led of several smart contract exploits?
Despite the market's extreme volatility to date and reports of cryptocurrency millionaires making or losing millions over night, would a wise investor still consider investing in it?
Although cryptocurrency can yield astronomically high returns overnight, there is also a sizable drawback.
Investors should determine whether their investment goals are compatible with their liquidity needs, time horizon, and risk tolerance.
Investors need to research thoroughly, allocate a suitable proportion of their investment, and learn how to invest properly.

First Things to Take into Account.
When making investment decisions, you should consider how your assets are allocated. This will help you make the best decision for your overall financial picture.

You can capture different types of return over the long term by diversifying your investments across a variety of instruments, which can help smooth out any hiccups along the way.
Cryptocurrencies should only be allocated a portion of your investment portfolio that you're comfortable with losing based on your risk tolerance. Consider your financial goals and how long you're willing to wait to see returns when determining how much to invest.

When considering a cryptocurrency or other digital asset, you should do your homework. You should not purchase digital assets based only on a friend's suggestion or because you fear missing out. Before making an investment in a cryptocurrency, it is a good idea to read the whitepaper in order to better understand the asset's goals, technology, and use case.

It is also extremely important to perform due diligence on the team and the projects that they have worked on in the past. The best way to protect yourself from fraudulent activity in the digital asset space is to trade only well-established and reputable crypto assets. This way, you can avoid the risk of losing your investment if the asset suddenly crashes due to fraudulent activity.

When you have found a cryptocurrency that you are ready to invest in, you need to determine the best way to invest in it. What is your process for acquiring crypto assets? If you have a crypto exchange or broker account, will you use it to hold your investment, or will you self-manage your investment? 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 decide to purchase shares of cryptocurrency exchanges and invest by proxy? Or invest in shares of other publicly traded businesses that use blockchain technology or provide supplies to the industry, like GPU makers? The wise investor would weigh all of the available options because each of these investments has advantages and disadvantages.

Is Investing in Cryptocurrency Right for You?

The biggest difference between investing and trading is the timeframe, so first we must draw that distinction. The time horizon for trading in any asset is typically short-term and more speculative in nature. For the purpose of profiting from intraday price fluctuations, traders frequently carry out dozens of trades each day.


The Difference between Trading and Investing

Trading requires a disciplined approach because successful traders manage their risk carefully. However, investing is a disciplined plan that achieves specific financial objectives over a longer time frame ( we are talking about years or even decades). Investors may develop a plan to save for a child's education, to buy a home, or to prepare for retirement.
After that, you should take a look at your risk tolerance. The volatility of cryptocurrencies means that whether or not they are a good investment depends on your tolerance for risk. If sudden changes in prices make you anxious, investing in companies with more volatile stock may not be right for you.
Crypto assets are subject to high levels of price volatility, which is similar to other asset classes such as growth stocks or high-yield bonds. As such, these assets are considered to be risky. You should be aware that prices may fluctuate significantly or that you may eventually lose money.

Limitations in Liquidity

Another consideration is the liquidity constraints that certain crypto assets face. Liquidity refers to how easy or difficult it is to buy or sell an asset without significantly affecting the price. For instance, there are only a few rare cars available for purchase, and the price you will pay will depend on the seller's asking price. If you purchase it, the subsequent seller will undoubtedly demand a higher price from the subsequent buyer, making the market very illiquid.

However, there is plenty of liquidity if you want to buy something more commoditized, like Singapore Dollars in exchange for your dollars; as a result, the price you pay for the Singapore Dollar will be wherever the market is. As there is a lot of liquidity among sellers of SGD who will accept USD as payment, the next buyer of the SGD will probably also buy the SGD 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 possibly during the selling process. If the worst case scenario occurs and you are unable to sell your cryptocurrency investment when needed, it may be due to a lack of liquidity in that particular cryptocurrency.


The 5 Upsides to investing in Crypto

Even though we've only covered a few of the key factors that investors should be wary of, there are also some convincing arguments in favor of investing in cryptocurrencies.
  1. Alternative investment.

We observe the emergence of such assets as a new asset class as cryptocurrencies grow and develop, as we have seen with Bitcoin and Ethereum. Undoubtedly, we have observed prominent professional fund managers, like Cathy Wood from Ark Investment Management, establish specialized investment funds that only invest in Bitcoin and other cryptocurrencies.
  1. Diversifying

Institutional investors also try to spread out their risk by holding a variety of investments that have different operating characteristics in the same economic environment. Some contend that the diversification effects of cryptocurrencies are advantageous, particularly in the face of rising inflation. We've also seen the creation of more investment vehicles that profit from the rise of particular cryptocurrencies, including options and futures on Bitcoin and Ethereum, as well as specialized investment funds that manage cryptocurrencies expertly on behalf of investors.
  1. Positive Likelihood of Upside

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. Stablecoins are an example of a cryptocurrency that is backed by assets and is linked to the value of a fiat currency.