Cryptocurrency Investment: Making An Informed Decision

Cryptocurrency is a decentralised virtual currency, secured by blockchain technology. It is not issued, backed or regulated by a central authority like a government. Cryptocurrency is a highly speculative asset class and is considered a risky investment due to its price volatility. However, it can add diversity to an investment portfolio and has the potential for good returns.

There are several ways to invest in cryptocurrency, from buying it directly to investing in crypto funds and companies. It can be purchased through crypto exchanges or apps, or via certain broker-dealers.

Before investing, it is important to conduct thorough research and be aware of the risks involved, including the potential for scams and fraud. It is recommended that investors only consider cryptocurrency if they believe in its long-term prospects and are willing to accept large price swings.

Volatility and risk

The speculative nature of cryptocurrency means that its value is not very grounded, and its price is incredibly sensitive to even slight changes in investors' expectations or perceptions. This makes it a high-risk and high-return investment asset class. The high volatility of cryptocurrency is further driven by the fact that it is still a relatively new technology, and its usage and acceptance are evolving.

The volatility of cryptocurrency is also influenced by the fact that it is a decentralised system. Cryptocurrencies are generally not issued by any central authority, which makes them theoretically immune to government interference or manipulation. However, this also means that there are few protections against deceptive or unethical management practices, and the lack of coherent regulations can make it challenging to sell cryptocurrencies or cause market-wide price drops.

The complex technical nature of using and storing crypto assets also poses risks. The technical complexity can make it difficult for new users to safely navigate the process of buying, storing, and selling cryptocurrencies. Additionally, there is no way to reverse or cancel a cryptocurrency transaction after it has been sent, and it is estimated that about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.

The volatile nature of cryptocurrency means that it is a risky investment, and it is important for investors to carefully consider their risk tolerance before deciding to invest. It is recommended that investors only invest an amount of money that they can afford to lose.

Diversification within crypto

Diversification is a key strategy for any investor, and the crypto market is no exception. Diversification within the crypto market is important for investors to broaden their exposure to this emerging asset class.

The crypto market is not a monolith. It is a multi-sector ecosystem with many industry classifications, including smart contract networks, decentralised finance (DeFi), oracles, file sharing and storage infrastructure, Web3 communities, gaming, and decentralised social media. These sectors vary in terms of their stage of adoption and are subject to distinct competitive forces.

• Diversify by coins and tokens: There are many types of crypto coins, including payment tokens (e.g. Bitcoin, Ethereum), security tokens (e.g. HoneyBricks security tokens), utility tokens (e.g. Filecoin), governance tokens (e.g. Uniswap, Compound), basic attention tokens (e.g. Brave browser network), gaming tokens (e.g. Decentraland’s MANA), and non-fungible tokens (NFTs).
• Diversify by industry focus: Invest in cryptocurrency projects that focus on different industries. For example, blockchain technology is being applied to the healthcare, supply chain, transportation, entertainment, and climate change sectors.
• Diversify by asset class: Crypto investors can also diversify across other asset classes, such as stocks, bonds, and real estate. For example, investors can buy stocks of companies focused on the crypto sector or with large cryptocurrency holdings, blockchain-based bonds, or blockchain-based real estate tokens.
• Diversify by investment vehicle: Crypto holdings can be diversified across various investment vehicles and account types, including digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralised financial products.

By diversifying within the crypto market, investors can reduce the potential negative impact of a single investment performing poorly. Additionally, by investing in a variety of cryptocurrencies, investors can potentially take advantage of different market trends and movements, maximising returns and ensuring more stable long-term gains.

However, it is important to note that diversification does not eliminate risk entirely. It is also not a one-size-fits-all strategy, and investors should conduct their own research to determine the best diversification strategy for their individual goals and risk tolerance.

Pros and cons of crypto investing

Pros

• Cryptocurrencies are supported by secure, decentralised blockchain technology, independent of traditional banking systems.
• They operate 24/7, and market volatility can mean a chance of greater returns.
• Cryptocurrencies are accessible and versatile.
• They offer independence from a central authority and are not regulated by governments.
• Cryptocurrencies could help investors beat inflation.
• They have the potential to provide financial services to the unbanked and underbanked populations around the world.

Cons

• Cryptocurrencies often see extreme price fluctuations and can be a very volatile investment.
• There is a steep learning curve, and it can be tough to scale widely.
• It is still uncertain whether cryptocurrencies will be viable in the long term.
• There are security vulnerabilities that may pose significant risks, especially to new investors.
• The rules and regulations around cryptocurrencies are still evolving, which can be challenging for investors.
• It can be difficult to recover your money if something goes wrong, as there is no central authority to turn to.
• The mining process for Bitcoin requires a significant amount of energy, leading to environmental concerns.
• Cryptocurrencies are not yet widely accepted as a form of payment.

How to buy and store crypto

Buying Crypto

To buy crypto, you'll need to:

• Choose a crypto-trading service or venue, such as a cryptocurrency exchange or a traditional stockbroker.
• Connect your chosen exchange to a payment option, such as your bank account, debit card, or credit card.
• Place an order.

Storing Crypto

When storing crypto, you can use either a hot wallet or a cold wallet.

Hot Wallets

Hot wallets are connected to the internet and are typically apps on devices such as computers, phones, or tablets. They are best for small amounts of cryptocurrency or cryptocurrency that is actively trading on an exchange. Examples of hot wallets include desktop wallets, mobile wallets, and web-based wallets.

Cold Wallets

Cold wallets are not connected to the internet and are considered more secure than hot wallets. Examples of cold wallets include hardware wallets and paper wallets.

When storing your crypto, it is recommended to use a combination of hot and cold wallets. Keep the bulk of your crypto in a cold wallet and use a hot wallet for smaller amounts that you want available for trading.

Crypto as a long-term investment

Investing in cryptocurrencies is a risky business, but it can also be lucrative. Crypto is a good investment if you want direct exposure to the demand for digital currency.

The most important rule when investing in crypto is never to invest more than you can afford to lose. The crypto market is extremely volatile, and values can rise or fall significantly in a single day.

If you're investing in crypto, it's a good idea to take a long-term view. This helps to reduce the impact of short-term volatility and maximise the earning potential of high-quality cryptocurrencies.

Bitcoin

Bitcoin is the oldest and most well-known cryptocurrency. It was the first decentralised cryptocurrency, introduced in 2009 by the anonymous Satoshi Nakamoto. Bitcoin has a finite supply cap of 21 million coins, and its decentralised nature means it's not controlled by any central authority. It's often seen as a hedge against traditional financial systems and potential inflation.

Ethereum

Ethereum is the second-largest cryptocurrency by market capitalisation. It's a blockchain platform that enables developers to create their own cryptocurrency and deploy smart contracts. It's unique in that it introduced the concept of smart contracts, which are self-executing contracts with predefined rules and conditions.

Cardano

Cardano is a blockchain platform that provides a secure and scalable infrastructure for the development of decentralised applications and smart contracts. It has a strong technological foundation, with a unique, research-driven approach that emphasises peer-reviewed academic research. Cardano also has a strong focus on governance and regulatory compliance and has gained significant attention in the crypto community.

Chainlink

Chainlink is a decentralised oracle network built on the Ethereum blockchain. It aims to bridge the gap between smart contracts and real-world data by providing reliable and tamper-proof data feeds. Chainlink has established itself as a leading provider of decentralised oracles, and its technology is being used in various sectors, including finance and insurance.

Polkadot

Polkadot is a cryptocurrency that solves the scalability issue faced by many blockchain networks. It uses a unique sharding mechanism called "parachains", which enables high transaction throughput and increased scalability. Polkadot also implements an on-chain governance model, allowing token holders to participate in decision-making processes.

Other Considerations

When investing in crypto, it's important to do your research and understand the underlying technology. Assess the development team, the level of adoption, and the real-world use cases for the cryptocurrency. It's also crucial to remember that investing in crypto carries risks, including price volatility and regulatory uncertainty.

Benefits of Long-Term Crypto Investments

Long-term crypto investments can offer the potential for high returns, diversification, technological innovation, accessibility, liquidity, and passive income opportunities. They can also act as a hedge against inflation.

Frequently asked questions