Just like any other investor, if you too are wondering should you invest in cryptocurrencies should be the first question in your mind, here is the answer.
To put it in simple words, you should invest in crypto but cautiously.
You can gain a lot since crypto coins such as Bitcoin have not shown any price correlation historically with the stock market.
However, you should have a clear projection and an investment thesis in place if you want to invest in a particular crypto coin that will stand the test of time.
Is Crypto Investment Good for the Future?
Typically, it makes sense to invest in crypto coins in order to diversify your investment portfolio.
Yes, you can get rich by investing in crypto but at the same time you can also lose all your money in an instant if you are not knowledgeable or careful with your investment.
There are several factors that make it unsafe but there are an equal number of factors that make it immensely profitable since it is poised to become mainstream and ever more prevalent over time.
Buying and selling crypto coins is very simple but it is primarily important to store them safely, and this is the most difficult part of crypto investment.
The best way to keep your crypto investment safe is to store your assets in an offline wallet or ‘cold storage.’
It can be a hardware wallet or a paper wallet.
However, here again you should be very careful as well because these storage options come with their own set of challenges.
One of the biggest risks is losing your private key.
In such situations you will have no access to your crypto assets and there will be very little or no chance of recovery.
Moreover, no one can guarantee that the particular crypto project you have invested in will be successful because there is fierce competition in the crypto market since there are tens of thousands blockchain projects out there.
It is only a small number of them that are able to flourish in the long run.
In spite of the inherent risks, the cryptocurrencies and blockchain industry is growing at a rapid pace.
Investors can access crypto tokens easily and enjoy custody service of the industrial grade.
Both individual and professional investors now can use several different tools to manage their crypto assets and safeguard them.
With a well-developed infrastructure, the crypto market is slowly establishing itself and several companies are also now gaining direct exposure to this particular sector.
They find it to be quite safe to invest large amounts of money here, thereby facilitating crypto adoption.
There is a notable amount of inflow of attention from the investors which has helped the market to grow even further.
A lot of companies and retailers are accepting payments in crypto coins as well which indicates that there is a significant change coming up in this landscape very soon.
This will result in more use cases by the everyday users which will, in turn, have a major impact on the prices of crypto coins.
Though nothing is guaranteed, the demand and value of crypto coins will rise in the future with such fast-paced adoption and due the long-term store of value of cryptocurrencies.
Long Term and Short Term Investment
Most crypto investors consider it to be a long-term investment, and there are even some investors who claim that they will never sell their holdings because they think that it has the potential to replace both fiat currency and gold.
On the other hand, a few crypto investors consider it as a short-term investment.
These investors invest their money in crypto coins that do not have any real value because they believe that the price will rise pretty quickly knowing the fact that the crypto market is extremely volatile.
While Bitcoin is viewed as the future alternative to gold due to its store of value, Ethereum, which is the 2nd largest crypto coin by market cap, is viewed as the internet of the future.
Also, Ethereum allows people to make more complicated financial transactions including insurance, loans, and derivatives.
However, if you consider crypto as your short-term investment, you will not need to care for its utility as much as you will need to be concerned about the price history of the particular crypto coin you wish to invest in.
This will allow you to make quick profits provided you invest in a coin, DOGE for example, which has high volatility and buying it during price surges.
However, you may make money this way but if you want to be better off, you should buy and hold your crypto coins for the long term.
Safety and Risks
To be honest, more than the traditional stock exchanges, the crypto exchanges are vulnerable to cyberattacks and hacks.
Moreover, they are the soft target for several criminal activities including funding terrorism.
Most importantly, a lot of crypto projects in the past have proved to be scams and therefore there is a high chance that a large number of all projects existing out there are scams as well, and it is hard to tell beforehand which one of them will turn out to be a scam.
Also, the regulators cause some hindrances in the smooth operation of the crypto market, though their intentions are good, which is to protect the investors from being conned.
Add to that, the governments consider cryptocurrencies as a strong threat to the economy.
Several governments have banned cryptocurrencies in their countries and no one knows when your country will also be included in that list.
Finally, the crypto market operates on an innovative and cutting-edge technology, but with that comes few other specific risks.
Since a major part of it is still in the developing stage, you as an investor may not get some extensively proven results in the real-world setting.
Having said that, a lot of people go for crypto investments which prove it is not all that bad.
Looking at the brighter side of it, it is the innovative blockchain technology that crypto runs on makes it considerably safe.
Ideally, blockchain is a DLT or Distributed Ledger Technology. It is powered by the crypto miners having a lot of processing power.
It is even estimated to be 10 to 20 times more than the processing power of the servers of Google!
This technology makes it quite safe because no single person has the control or power to manipulate any transaction.
To hack a blockchain, one will need to gain control of 51% of the miners participating on the network, which is quite difficult making it virtually impossible for any security breaches in it.
Still, crypto exchanges are vulnerable to hacking and that is why you need to store your crypto coins in a hardware wallet to keep them totally safe from the malicious actors.
Now look at the volatility aspect. It is true that the crypto market is extremely volatile with the price of Bitcoin dropping by 90% in a bear market being a common scenario.
Still, with that said, the volatility is likely to come down as more and more long term investors and institutional players enter the crypto market.
As far as losing your money is concerned, which is the case in any type of investment, you can minimize such losses by buying some insurance options offered by several crypto exchanges nowadays.
The insurance may cover even loss of private keys apart from theft of funds.
In order to prevent losing your money, you should not put all your hopes into one coin.
Instead, diversify your crypto portfolio and invest only that much money which you can afford to lose.
Regulations and Crypto ETF Approval
Regarding crypto regulations, there are continued conversations among governments, lawmakers, and regulating bodies all over the world.
They have come up with some well-thought guidelines to make crypto investment safer and prevent the investors from being duped.
These regulations are less appealing to bad actors and are welcome by the crypto investors.
It involves the Security and Exchange Commission and the Commodity Futures Trading Commission in the US for designing such strict regulatory measures.
Add to that, the IRS has also designed a few regulations to make sure people mention their crypto earnings while filing their taxes.
However, there are some hurdles in it, especially when it comes to the jurisdiction of overseeing matters, which, quite naturally differs from one state to the other.
Nevertheless, these regulations make it easier for the Internal Revenue Service or IRS to track crypto related activities in the US.
On the flip side, for the investors, these regulations will make it easier for them to report crypto transactions properly because they will now need to keep a proper track and record any capital gains or losses in crypto.
Several crypto experts also believe that these regulations are good in a way for the crypto market.
This is because it will affect the price of the crypto tokens.
It will eventually give more confidence to the people in crypto resulting in more investments.
This ensures a more traditional way to invest in crypto just as it is done in equity and bond markets.
However, there is one point of concern in it.
Typically, in an ETF, the fund is linked to the coin but that does not mean the investor holds the crypto directly.
Instead, the fund holds the futures contracts which mean that it may not be able to track the price of the coin directly.
As of now, there are not too many crypto ETFs or Exchange Traded Funds available.
When more of these are accessible as conventional investment products, this will significantly influence the crypto market on the whole.
Different Ways to Invest
There are different ways in which you can invest in crypto coins.
You can make the best use of the centralized crypto exchanges if you are new to this field.
For this you can choose any option supported by the exchange such as bank transfer, debit card, or any other crypto coin.
This is a low-risk option but you will need to have full faith in the crypto exchange that you choose and believe that it will stay active, hold your coins safely, and continue to support the crypto coin you invested in.
These apps carry out decentralized financial transactions.
The good thing in this is that you will not need to trust blindly as you would need to do in case you use a centralized crypto exchange.
However, the downside is the cost involved in interacting directly with the blockchain to make your transactions.
The cost may vary depending on how busy the network is at that particular point of time.
However, this will come down when Ethereum blockchain operates under a PoS or Proof of Stake mechanism instead of its customary PoW or Proof of Work system.
If you want to invest in Bitcoin in particular, there are also several ways in which you can do that, apart from buying the coins directly, such as:
- You can buy shares in crypto exchanges and companies that accept Bitcoin as payment
- You can buy Bitcoin Exchange Traded Funds if you do not want to trade Bitcoin itself actually
- You can invest in a blockchain network or companies that use this technology
- You can buy Bitcoin funds from several investment companies to sell your investment and get your money back easily and
- You can invest in Bitcoin options to take a speculative up or down position and buy or sell Bitcoin at the predetermined price called the strike price.
Ideally, you can buy a call option if you think that the market price will rise.
But, if it is wrong, you can allow the options contract to expire.
In that case, you will lose only the premium amount that you paid while opening your trade.
Things to Consider
First of all, to invest in cryptocurrencies it is very important to know the risks involved. It is also necessary to know what you are investing in.
After that, you should build a crypto investment strategy.
In order to do that, first you have to know the answers to a few questions that commonly come to the minds of investors. These are:
- Are you sure that you are not investing simply due to the FOMO or Fear of Missing Out?
- Do you know what you are investing in?
- Do you know how crypto assets and crypto markets work?
- Are you ready to invest an amount you can afford to lose?
- Are you comfortable with the level of risk involved in it?
- Is the price of the particular coin you want to invest in higher than what it was before? If so, why are you still interested in buying it?
- Is there any indication that the price of the coin will rise even further in future?
- Do you intend to sell the coin sooner or later? If so, who will be interested in buying from you and at what price?
- If you consider a particular crypto coin to be a great asset then why did you not buy it before when it was cheaper?
If you do not have answers to any or most of these questions, you are not ready to invest in crypto. Period.
If you do, then here are a few things to consider henceforth:
- Do not invest all your money in one coin, but diversify
- Start small
- Sell at the right time and do not fall prey to panic selling and
- Consider all pros and cons.
Also, consider the fees that you have to pay. Depending on the type of crypto exchange you choose to use, it may include one or all of these:
- Deposit fees
- Withdrawal fees
- Transaction fees
- Escrow fees and
- Trading fees.
The amount of these fees is usually a fraction of the whole transaction value.
Though the future of the crypto market is hard to predict in the long term, a reasonably clear picture can be drawn in order to get a sense of it based on the institutional adoption, regulation, and themes followed by experts.
If it is Bitcoin, the future looks bright due to its store of value and largest market cap.
Ideally, the entire crypto market, as of now, seems to follow Bitcoin trends. A lot of crypto experts believe that it is only a matter of time until the Bitcoin price reaches $100,000.
This means that crypto investors have a good reason to play a long game in crypto investing steadily.
Whatever limitations the crypto market faces as of now will be dealt with pretty soon given the fact that technology is advancing at a rapid pace.
This includes hacking of the virtual vault or a system failure.
However, with more regulations imposed by the governments the basic premise of its existence may erode.
This is one basic paradox that holds back the institutional investors and the merchants at large to embrace cryptocurrencies.
It first needs to have a widespread acceptance all over the world among consumers, which, once again is limited because this is a field that is thought by many as one for those who are technically adept.
Therefore, to raise the trust and confidence among the users, it needs to be:
- Mathematically complex to deter hacker attacks and frauds but easy for the users to understand
- Decentralized but offer enough protection to the users and safeguard their funds
- Anonymous but not a conduit for evading taxes and
- Free from money laundering and other immoral activities.
However, with whatever it is today, the future and fortune of all other cryptocurrencies depends largely on the success of Bitcoin in the years ahead, or its lack thereof.
Some of the advantages of investing in crypto coins are:
- Its upside potential
- Its store of value and
- It is easily accessible all around the clock.
The significant downsides of crypto investments, on the other hand, are:
- There are lots of risks involved
- The crypto market is extremely volatile
- It is unregulated and
- It is based on complex technology.
And, if you are more concerned about the environment then supporting crypto investment will be a bit hard for you.
This is because it consumes a lot of energy which includes both electricity and fossil fuels, and leaves a significant carbon footprint.
Historically, crypto investment is a great option but is riskier than other types of investment.
However, the growth potential of it is much higher than other investments and someday crypto may also replace fiat currency and even gold.