Long-Term Crypto Investment: Smart Or Risky Move?

Cryptocurrency is a digital currency that is not managed by a central system like a government but is based on blockchain technology. The most popular cryptocurrency is Bitcoin, which has a fixed supply cap of 21 million BTC. Cryptocurrencies are extremely volatile and risky investments due to their high volatility and the potential for significant losses from security breaches. However, they offer impressive value propositions as small investments can yield substantial profits. For long-term investments, it is advisable to stick to the top coins by market capitalization, such as Bitcoin, Ethereum, and Cardano, which have shown greater stability and widespread adoption.

Bitcoin's fixed supply cap

Bitcoin has a fixed supply cap of 21 million BTC, which is rewarded to miners for securing the network. This hard cap, also known as the supply limit, can theoretically be changed, but it is very unlikely. There are incentive and governance models in the bitcoin protocol that protect the hard cap.

The Bitcoin hard cap is the maximum number of bitcoin that can ever be created, and it is a key feature of Bitcoin’s monetary policy. It is designed to create scarcity and prevent inflation. The hard cap is reached through the process of halving, where the reward for mining new blocks is cut in half approximately every four years, gradually reducing the rate at which new bitcoins are created until the hard cap or limit is reached. It is estimated that the last bitcoin will be mined around 2140, bringing the supply to a total of 21 million.

Bitcoin’s hard cap is central to its value proposition, both as a currency and an investment. Like gold and real estate, Bitcoin is a successful store of value because it is difficult to increase its supply. Thanks to the halving process, bitcoin becomes more difficult to produce about every four years, and eventually, it will become impossible to create new bitcoins. This scarcity is one of the reasons why many investors value Bitcoin highly.

The decision to cap Bitcoin’s supply at 21 million was an “educated guess” by Satoshi Nakamoto, the creator of Bitcoin. The rationale behind this decision was to make prices denominated in Bitcoin comparable to existing currencies. Bitcoin offers a high degree of divisibility, allowing for flexibility in pricing. Each bitcoin can be divided into 100 million units called satoshis. This high level of divisibility allows for flexibility in payments, accommodating a wide range of values. Even if the value of one bitcoin becomes very high, transactions of very small amounts are still possible, making Bitcoin practical for everyday use and ensuring its utility across various economic scales.

The hard cap on Bitcoin is critical to its value proposition as a currency and an investment tool. Bitcoin, like gold and real estate, is a successful store of value because its quantity is difficult to expand. Every four years, due to halving, producing Bitcoin becomes more complex and finally impossible.

Altcoin investments

Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC). However, some people consider altcoins to be all cryptocurrencies other than Bitcoin and Ethereum (ETH) because most cryptocurrencies are forked from one of the two.

Altcoins come in several types based on what they were designed for. Here are some of the most common types:

• Payment tokens: Designed to be used as currency to exchange value between parties. Bitcoin is the prime example of a payment token.
• Stablecoins: Aim to reduce volatility by pegging value to another asset, such as gold or the US dollar. Examples include Tether (USDT) and USD Coin (USDC).
• Security tokens: Represent ownership in an asset or fundraising efforts. They are regulated by the Securities and Exchange Commission (SEC) as they are designed to act as securities.
• Utility tokens: Used to provide services within a network, such as purchasing services or paying network fees. Filecoin is an example of a utility token.
• Meme coins: Inspired by a joke or a silly take on other well-known cryptocurrencies. Dogecoin (DOGE) and Shiba Inu (SHIB) are popular examples.
• Governance tokens: Allow holders certain rights within a blockchain, such as voting for changes to protocols.

When considering investing in altcoins, it is important to keep in mind that they are generally more volatile and speculative than Bitcoin. They may also have lower liquidity and struggle to gain widespread adoption. However, altcoins offer opportunities for high returns and innovation, with many aiming to address perceived weaknesses in Bitcoin's design.

• Conduct thorough research on the project, including its use cases, road map, team, and technology used.
• Do a risk assessment considering factors such as market volatility and regulatory challenges.
• Diversify your investments across different altcoins to minimize risk.
• Choose a reliable cryptocurrency exchange with strong security measures and a user-friendly interface.
• Stay informed and conduct due diligence to keep up with the fast-paced nature of the crypto market.

Crypto market unpredictability

The crypto market is notoriously unpredictable and volatile, presenting both incredible gains and devastating losses. The market's unpredictability is underscored by its sharp declines and rapid growth periods, making it challenging for investors to navigate. This unpredictability is driven by several factors, including:

Investor Sentiment

Positive or negative news, as well as adoption stories, can rapidly shift market dynamics and investor sentiment, leading to price swings. The fear of missing out (FOMO) can also fuel market growth as more investors join, attracted by rising prices.

Market Adoption

The increased use of cryptocurrencies by businesses and consumers enhances their credibility and value, potentially boosting market cycles. On the other hand, slow adoption can stagnate prices and impact the market negatively.

Regulatory Changes

Announcements about crypto regulations or government stances can have a significant impact on the market. Favourable regulations can validate the legitimacy of cryptocurrencies and spur growth, while uncertainty and negative regulatory changes can contract the market.

Technological Advancements

Blockchain technology advancements and the introduction of new crypto platforms or tokens can significantly influence market cycles by enhancing utility and attracting investors.

Macroeconomic Factors

Global economic health, inflation, and interest rate changes also play a role in shaping crypto market cycles. During economic instability, investors may turn to cryptocurrencies as a hedge, impacting the demand and value.

Strategies for Navigating Unpredictability

To effectively navigate the unpredictable crypto market, investors should adopt a strategic mindset, acknowledging that the market can defy traditional forecasting methods. Diversifying portfolios, practising risk management, and adopting a long-term perspective are crucial. Additionally, investors can benefit from understanding market cycles and their phases, such as accumulation, uptrend, distribution, and downtrend, allowing for more informed investment decisions.

Centralized vs. decentralized exchanges

As a cryptocurrency trader or investor, you have the choice between centralized and decentralized exchanges. Here are some of the key differences between the two:

Centralized Exchanges (CEX)

• Run by a third party that monitors, facilitates transactions and secures assets
• Regulated by financial authorities and operate under KYC and AML regulations
• Faster and easier to use with a slick user experience and clean interfaces
• Trades are settled near-instantly
• Retain custody of the assets, meaning the user relies on the exchange to honour its commitment and process transfers of their cryptocurrency
• Frequently the target of hacker attacks
• Offer fiat/crypto trading pairs
• More liquidity, allowing for larger trades

Decentralized Exchanges (DEX)

• Run on a system of smart contracts without centralized oversight, making them permissionless
• Clunkier, slower and require more experience to navigate
• Trades are matched by an automated market maker, a system that provides liquidity for trading pairs of cryptocurrencies
• The user retains custody of their private key and thus their cryptocurrency
• Generally considered safer, although there have been DEX hacks
• Offer a wide variety of crypto-to-crypto trading pairs
• May be cheaper for individual trades but can be more expensive overall due to gas fees
• Not regulated due to processing all trades on public blockchains

In summary, CEXs are more user-friendly and regulated, but come with higher risks of hacking and fraud. DEXs offer more control and potentially lower fees, but are less liquid and require more knowledge to use.

Crypto as a long-term investment strategy

Investing in cryptocurrencies is risky due to the potential for high losses from security breaches and fraud. However, it can also be lucrative, with some investors making huge profits. Crypto is a highly volatile asset class, and investors need to be prepared for significant price swings.

Bitcoin as a long-term investment

Bitcoin is the world's largest cryptocurrency and is often referred to as "digital gold". It benefits from the network effect, with more people wanting to own it because it is the most widely held crypto. Bitcoin has a fixed supply cap of 21 million coins, and its supply rate is halved every four years or so, making it increasingly scarce over time. This scarcity, combined with its decentralised nature and the fact that its supply is not controlled by central bankers, means many investors believe it will gain value over the long term.

Ethereum as a long-term investment

Ethereum is a decentralised blockchain platform that enables the creation and execution of smart contracts. It is the second-largest cryptocurrency by market cap and is far ahead of its competitors in terms of unique technology. Its native coin, ether, has gained widespread acceptance, with many companies coming on board.

Other cryptos for long-term investment

Other cryptocurrencies that have been mentioned as good long-term investments include Cardano, Binance Coin, Polkadot, and Tether.

Diversification

Most cryptocurrency investors minimise risk by diversifying their portfolios across multiple assets.

Final thoughts

Cryptocurrency is a risky but potentially rewarding long-term investment. It is important to do your research and only invest what you can afford to lose.

Frequently asked questions