Crypto Investment Strategies: A Beginner's Guide To Crypto Investing

Investing in cryptocurrency is a hot topic. Crypto has been growing in popularity, with many people treating it as an investment opportunity. There are several ways to invest in cryptocurrency, from buying it directly to investing in crypto funds, companies and exchange-traded funds. Cryptocurrency is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. It is powered by blockchain technology, which maintains a record of transactions and keeps track of who owns what. The main appeal of crypto for many buyers is as a form of investment in an innovative digital asset. Crypto supporters also stress the benefits that the technology offers consumers, such as the ability to send crypto money online to anyone in the world. However, it's important to remember that investing in crypto is risky, and investors should be prepared to lose all their money.

Crypto as a stable store of value

Bitcoin is a scarce asset with a fixed supply, making it the scarcest asset in the world. Its value increases over time, and it is simple to verify and store. Bitcoin has also proven to be a spectacular way to grow wealth over time, with an annualized return of 230% over the last decade, performing ten times better than the Nasdaq 100.

However, Bitcoin has suffered from high volatility, with significant drops in value in 2014, 2018, and 2021-2022. Due to its volatility and unstable market price, some argue that Bitcoin does not fit the definition of a store of value.

Overall, while Bitcoin has characteristics that make it a potentially stable store of value, its high volatility and regulatory uncertainties are factors that investors should carefully consider.

Crypto as a transformational technology

Cryptocurrency, or crypto, is a digital currency that can be used to buy goods and services or traded for a profit. It is designed to work as a medium of exchange through a computer network that does not rely on any central authority, such as a government or bank, to uphold or maintain it. Crypto is powered by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what.

The blockchain technology underlying Bitcoin and other cryptocurrencies has been hailed as a potential game-changer for a large number of industries, from shipping and supply chains to banking and healthcare. By removing intermediaries and trusted actors from computer networks, distributed ledgers can facilitate new types of economic activity that were not possible before. This makes crypto an attractive investment for those who believe in the future of digital currencies and want to support the development of this technology.

Additionally, because cryptocurrencies cannot be printed or seized, they may provide a stable store of value and protect against inflation. The cryptographic nature of cryptocurrencies also makes it impossible for a government body to tax or confiscate tokens without the owner's cooperation. These features make crypto an appealing option for those concerned about hyperinflation, bank failures, or other disaster scenarios, further contributing to its potential as a transformational technology.

However, it is important to note that cryptocurrencies remain highly speculative, and there is no guarantee that they will achieve mainstream usage. The crypto market is subject to extreme volatility and is influenced by various factors, including regulatory changes, security breaches, and market speculation. Despite these challenges, the advancements in blockchain technology and the growing interest in decentralized finance highlight the potential for crypto to bring about transformational changes in the financial landscape.

Crypto as a high-risk investment

Cryptocurrency is a high-risk investment, and investors should be aware of the potential for substantial gains or losses. Crypto is not regulated like stocks, nor is it insured like money in banks. It is a purely digital asset, purchased with real money, and traded on blockchain technology.

Volatility and Uncertainty

The price of crypto is extremely volatile, with frequent and rapid fluctuations. Investor sentiment largely drives these price changes, and it could shift at any moment. Regulatory uncertainties also play a role in price volatility, as government policies on crypto are still evolving and vary across the globe.

Security and Scams

The decentralised nature of crypto means that investors are solely responsible for safeguarding their assets. The lack of central intermediaries means that users must securely store their cryptographic keys. This has led to numerous thefts, with hackers stealing billions of dollars' worth of tokens from exchanges, wallets, and individuals. Scams are also prevalent, including doubling scams, social engineering, market manipulation, and fake ICOs.

Speculative Nature

The cryptocurrency market is currently dominated by speculative trading, with exchange trades being the most prevalent use for cryptocurrencies. This speculative behaviour can lead to market bubbles, as seen with other assets such as tech stocks and precious metals.

Investor Psychology

The excitement around crypto, especially among younger investors, can be attributed to the potential for life-changing gains and the fear of missing out. Social media also plays a significant role in influencing investment decisions, with online discussions often leading to more risk-seeking behaviour.

Lack of Regulation and Protection

Crypto is not protected or regulated like traditional currencies. There is no insurance or government protection for lost or stolen cryptocurrencies. The lack of regulation also means that crypto is more susceptible to market manipulation.

High-Risk, High-Return Potential

While crypto has yielded high returns in the past, it is crucial to understand that past performance does not guarantee future results. Crypto is a highly volatile asset class, and investors need to be comfortable with the risks before investing.

In conclusion, crypto is a high-risk investment due to its volatility, regulatory uncertainty, security concerns, speculative nature, and lack of regulation and protection. Investors considering crypto should carefully weigh these risks and only invest what they can afford to lose.

Crypto as a form of diversification

Diversifying your cryptocurrency portfolio is a crucial step in reducing the risk associated with investing in this emerging asset class. Crypto assets tend to exhibit low to moderate correlations, and their returns can vary significantly. By diversifying across different types of crypto assets, investors can reduce their exposure to specific investments or asset classes and benefit from the industry's growth while potentially experiencing less price volatility.

• Diversify by coins and tokens: Payment tokens like Bitcoin and Ethereum, security tokens backed by real estate, utility tokens with specific use cases, governance tokens that enable user participation, basic attention tokens that pay users for their attention, gaming tokens with in-game value, and non-fungible tokens (NFTs) that signify ownership of specific assets.
• Diversify by industry focus: Invest in cryptocurrency projects focused on different sectors such as healthcare, supply chain, transportation, entertainment, climate change, and real estate.
• Diversify by asset class: Explore other major asset classes such as stocks of crypto-focused companies, blockchain-based or crypto bonds, and blockchain-based real estate tokens.
• Diversify by investment vehicle: Use digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralized financial products like staking platforms and decentralized savings accounts.

It's important to note that diversifying a crypto portfolio requires research and understanding of the different crypto assets and their unique characteristics. Additionally, diversification may lead to potentially lower absolute investment returns compared to investing in a single speculative project.

Crypto as a hedge against inflation

Bitcoin has a fixed supply of 21 million coins, which is in contrast to fiat currencies, where central banks can print more money, leading to inflation. This finite supply means that greater demand will likely push prices up, making it a good store of value. Additionally, people using a blockchain with proof-of-stake protocols can access their funds at any time while continuously earning staking rewards, further increasing its value.

However, the counterargument is that cryptocurrencies are not effective hedges against inflation, especially during times of high volatility and market uncertainty. The crypto market is highly speculative, and its value is largely based on investor sentiment. For example, during the COVID-19 pandemic, institutional investors turned to Bitcoin as a hedge against inflation due to fears of increased government spending. However, as inflation soared in 2022, Bitcoin's price did not follow suit, leading to confusion among investors.

Another factor to consider is the influence of interest rates. Despite Bitcoin's fixed supply, changes to interest rates appear to correlate with its stability. When inflation is high, central banks typically raise interest rates, which can cause a decline in the price of risky assets like cryptocurrencies.

While crypto has the potential to act as a hedge against inflation, it has not yet established itself as a reliable store of value. Mass adoption and integration are necessary for crypto to become a bulwark against inflation. Additionally, the crypto economy needs applications that can take full advantage of decentralization without sacrificing quality and user experience, especially for widespread adoption.

Frequently asked questions