Cryptocurrency Investment: Profits And Potential

Investing in cryptocurrency can be profitable, but it is a risky endeavour. Cryptocurrency is a decentralised digital currency, which means it is not regulated by any central government authorities. This can be seen as a positive or a negative, depending on your perspective. Cryptocurrency can provide high returns overnight, but it is also possible to lose all your money.

The cryptocurrency market is extremely volatile, and it can be tricky to know when to enter and exit the market to maximise profits and minimise losses. However, the market has grown immensely over the past decade, and the limited history of price activity means that cryptocurrencies appear unrelated to other markets like stocks or bonds, making them a good source of portfolio diversification.

There are other risks to consider when investing in cryptocurrency, such as the security of exchanges and storage options, the potential for scams, and the possibility of regulatory crackdowns. However, the global interest in cryptocurrencies continues to surge, and the technology is constantly evolving, so investing in or creating a crypto exchange can be a lucrative opportunity for those who are willing to take on the risk.

Diversification of investment portfolios

There are several ways to diversify a cryptocurrency portfolio:

• Diversify by coins and tokens: Cryptocurrencies can be divided into two categories, coins and tokens. Coins are the medium of payment for a blockchain network, with only one coin per network. Tokens are created by a protocol that operates under a blockchain, and there can be an infinite number of tokens per blockchain. Examples of coins include Bitcoin and Ethereum, while ApeCoin and Cronos are examples of tokens.
• Diversify by industry focus: Blockchain technology is being applied to and disrupting many sectors, including healthcare, supply chain, transportation, entertainment, and climate change. Investors can buy cryptocurrencies focused on these industries to diversify their portfolios.
• Diversify by asset class: Crypto investors can diversify across other major asset classes such as stocks, bonds, and real estate. They can buy stocks of companies focused on the crypto sector or blockchain technology or invest in blockchain-based bonds or real estate tokens.
• Diversify by investment vehicle: Investors concerned about portfolio security can diversify across various investment vehicles and account types, such as digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralized financial products.
• Diversify by market capitalisation: Diversifying across different market capitalisations can help to reduce risk. Generally, the greater the market capitalisation, the less the volatility.

It is important to note that diversification may lead to potentially lower absolute investment returns. Additionally, selling or trading crypto assets to diversify a portfolio can generate tax liabilities for investors in the current tax year.

Crypto's volatility

Cryptos Volatility

Cryptocurrency is a digital currency based on a decentralised system that makes it faster and cheaper to transfer money. However, one of the key challenges to accepting cryptocurrencies is price volatility.

Volatility in financial markets refers to how much the price of an asset has increased and/or decreased over a period of time. Generally, the more volatile an asset is, the riskier it is considered to be as an investment. This means that volatile assets like cryptocurrencies have the potential to offer either higher returns or higher losses over shorter periods of time than less volatile assets.

Crypto market volatility is in a league of its own. In its 15 years of existence, Bitcoin has witnessed over eight 50% corrections but has managed to recover from each correction over the course of a full cycle to make new all-time highs, including its most recent all-time high of US$73,000 in March 2024.

Factors that affect crypto volatility include news and events, such as COVID-19, speculation, supply and demand dynamics, investor sentiment, and a lack of regulation.

For some crypto investors, high volatility is part of the appeal as it creates the possibility for high returns. For less risk-tolerant investors, there are strategies to limit the downside impact of volatility, such as dollar-cost averaging and investing in stablecoins like USD Coin and Dai, which have their prices pegged to a reserve asset like the US dollar.

Liquidity constraints

Liquidity is a cornerstone of efficient markets. It refers to the ease and speed with which an asset can be converted to cash. In the context of cryptocurrencies, liquidity refers to the ability to buy or sell crypto assets quickly without causing significant changes in their market price, thus underpinning market efficiency and stability.

Cryptocurrencies, including Bitcoin, have lower liquidity compared to traditional assets. This is because they are generally more illiquid, and transacting in them can come with extra costs and time delays. For instance, Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion in the first few months of 2024, while the average daily turnover in the forex market was about $7.5 trillion in 2022.

The lower liquidity of cryptocurrencies can have important implications for investors. Firstly, it can affect the performance of investment portfolios that combine traditional assets and cryptocurrencies. Studies have shown that once liquidity is considered, portfolios with the highest expected returns become unavailable, and the rest suffer losses in performance of 10-25% on the efficient frontier. This means that the benefits of adding cryptocurrencies to a traditional investment portfolio can be reduced by about 15% due to liquidity constraints.

Secondly, liquidity plays a significant role in the market efficiency and return predictability of cryptocurrencies. Higher liquidity leads to lower volatility and reduced return predictability in cryptocurrency markets. This means that investors may find it challenging to predict returns in highly liquid crypto markets.

To address liquidity constraints when investing in cryptocurrencies, investors can consider a Liquidity Bounded Risk-return Optimization (LIBRO) approach. This method combines risk-return portfolio optimization with liquidity constraints, ensuring that cryptocurrencies are only added to the portfolio in tradable amounts depending on the intended investment amount. By using the LIBRO approach, investors can improve the weight optimization of their portfolios and potentially increase returns compared to portfolios consisting only of traditional assets.

In conclusion, liquidity constraints are an important factor to consider when investing in cryptocurrencies. While cryptocurrencies offer potential benefits such as diversification and improved risk-return trade-offs, their lower liquidity compared to traditional assets can impact portfolio performance and market efficiency. Investors can mitigate these constraints by employing strategies such as the LIBRO approach to optimize their investment portfolios effectively.

Crypto exchange creation

Creating a cryptocurrency exchange can be a profitable venture, but it requires careful planning and execution. Here are the key steps to building a successful crypto exchange:

Market Research and Discovery Phase:

• Conduct thorough market research to identify the latest crypto trends, user preferences, and the features that attract crypto users.
• Determine the operational region by considering the legality and support for cryptocurrencies in different countries.

Choose the Type of Crypto Exchange:

Decide between a centralized exchange (CEX), decentralized exchange (DEX), or a hybrid exchange. Each type has its own advantages and considerations.

Budget Calculation:

Properly plan and calculate your budget to avoid unnecessary expenses. Consider factors such as architecture design, UX/UI design, payment processor integration, legal fees, and beta testing.

Design the Architecture of the Exchange:

Implement the necessary components, including a trading engine, multi-cryptocurrency wallet, admin control panel, and a user-friendly interface.

Create and Verify UX/UI:

• Focus on creating a user-friendly and intuitive interface that enables quick and smooth trading and transaction processes.
• Verify the UX/UI to ensure it meets the users' needs and expectations.

Development Approach:

Decide whether to build the exchange from scratch or use an off-the-shelf solution like cryptocurrency exchange scripts. Building from scratch offers uniqueness but may be more costly and time-consuming.

Partnership with Payment Processors:

Partner with a leading and trustworthy payment processor to facilitate fiat currency transactions. Choose a provider with a good reputation and a sufficient number of online facilities.

Legal Considerations:

Hire a legal team to ensure compliance with regulatory aspects related to cryptocurrencies and crypto exchanges, as these vary from country to country.

Implement Strong Features:

• Include essential features such as a robust trading engine, crypto wallet, trade analytics, push notifications, and a powerful admin panel.
• Integrate security features like end-to-end encryption, two-factor authentication, and protection against common cyber-attacks.

Beta Testing:

Conduct rigorous beta testing to identify and rectify any errors, issues, or bugs before the official launch.

Maintenance and Customer Support:

Provide responsive and effective customer and technical support to attract and retain users.

Community Building:

Focus on building a strong community around your exchange to increase its reach and attract a wider user base.

Choose a Reputable Development Company:

Consider working with a specialized crypto exchange development company to benefit from their expertise and experience. This can help ensure a smoother development process and a higher-quality end product.

By following these steps and staying adaptable to the dynamic nature of the cryptocurrency market, you can successfully create and launch your own crypto exchange.

Crypto mining

Bitcoin mining is the process by which transactions are recorded on the blockchain. Miners earn bitcoins in exchange for running the verification process to validate Bitcoin transactions. Miners need to use substantial hardware and software to mine Bitcoin. They need a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC). The ASICs can cost up to $10,000.

Bitcoin mining is still profitable for some individuals. However, it is difficult for all but a few to reap the legendary rewards that Bitcoin mining used to promise. Joining a pool and connecting a good home mining rig might net you a few hundred dollars monthly (if you're lucky) before you account for your expenses.

The profitability of Bitcoin mining is dependent on several factors, including the cost of electricity to power the mining machines, the speed of the miner(s), its cost, and mining pool payouts. The more expensive electricity gets, the fewer profits miners can make.

Frequently asked questions