Crypto Investment: Still Worthwhile?

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. It is a decentralised system that exists outside the control of governments and central authorities. Cryptocurrency is supported by blockchain technology, which maintains a tamper-proof record of transactions.

The most widely used cryptocurrency is Bitcoin, followed by Ethereum. Cryptocurrency has grown in popularity over the years, and now Bitcoin exchange-traded funds are available. However, it is still a risky investment due to the potential for high losses from security breaches.

So, is crypto still a good investment?

Crypto's volatility and risk

Cryptos Volatility and Risk

Cryptocurrencies are widely considered to be a volatile asset class. Crypto asset prices are often driven by media or social media hype and can rise and fall quickly and dramatically. This volatility is further accentuated by limited liquidity, which results in pronounced price changes during significant trading shifts. The interplay of regulatory changes, potential cybersecurity breaches targeting crypto exchanges, and the ever-present influence of official announcements, news reports, and prevailing social media sentiment can collectively shape the volatile landscape of the crypto market.

Historical Volatility

Historical volatility is a statistical measure of past price fluctuations, calculated as the standard deviation of the asset's price over time. The higher the standard deviation, the greater the volatility of the asset.

Implied Volatility

Implied volatility is a measure of an asset's expected future price movement. It is commonly used to price options contracts and is derived from the prices of those options.

Beta

Beta is a measure of an asset's volatility in relation to a benchmark, such as the overall market. A beta greater than 1 indicates higher volatility, while a beta less than 1 indicates lower volatility.

Risks of Investing in Crypto

• Loss of capital: Crypto's elevated volatility makes it a risky investment, with the potential for significant losses.
• Government regulations: Many governments have yet to fully regulate the use and trade of cryptocurrencies, creating uncertainty around legal and financial risks.
• Fraud: Fraud is common in the cryptosphere due to a lack of regulatory oversight.
• Hacks: Crypto exchanges are susceptible to hacking, and if you lose your crypto in a hack, you may have no recourse for getting back your investment.

Crypto Risk Management Tools

• Diversification: Spreading your investment portfolio across a variety of different investments to minimize the impact of price declines in any one asset.
• Stop losses: A feature on most exchanges that allows users to automatically place an order to sell an asset if its price falls below a certain threshold.
• Put options: A put option allows the holder to sell an asset at a set price (the strike price) on or before a specific date.
• Bumper: A newly launched DeFi protocol that allows users to purchase protection against potential price declines in their crypto assets.

Crypto ETFs

• Diversification: Crypto ETFs provide investors with an opportunity to diversify their portfolios by investing in a range of cryptocurrencies. This helps to spread the risk across multiple assets, rather than concentrating it on a single cryptocurrency.
• Regulation and Consumer Protections: While the crypto market is largely unregulated, crypto ETFs are subject to regulatory oversight and consumer protection laws. This adds an extra layer of security for investors, who can rely on established frameworks to protect their investments.
• Ease of Access: Crypto ETFs are traded on traditional stock exchanges, making them more accessible to investors who are familiar with these platforms. Investors can also take advantage of the research tools and resources provided by these exchanges to make more informed investment decisions.
• Lower Risk: Compared to directly investing in cryptocurrencies, crypto ETFs may be considered a lower-risk option. This is because the value of a crypto ETF is tied to a basket of cryptocurrencies, reducing the impact of price volatility in any single asset.
• Tax Efficiency: In some jurisdictions, such as the United States, crypto ETFs may offer tax advantages over direct crypto investments. For example, capital gains from crypto ETFs may be taxed at lower rates than short-term capital gains from direct crypto trades.

Despite these advantages, it is important to remember that investing in crypto ETFs still carries significant risks. The crypto market is highly volatile, and the value of crypto ETFs can fluctuate widely. Additionally, the regulatory landscape for cryptocurrencies is constantly evolving, and changes in government policies can impact the value of crypto ETFs. It is crucial for investors to carefully consider their risk tolerance, conduct thorough research, and consult with financial advisors before investing in crypto ETFs.

Crypto's legal status

The legal status of cryptocurrencies varies from country to country. In some countries, such as Japan, cryptocurrencies are recognised as legal tender and are taxed accordingly. In others, such as China, they are banned outright.

In the United States, cryptocurrencies are not considered legal tender, but they are also not illegal. The US government has been working on federal cryptocurrency legislation, and individual states have their own varying regulations. Cryptocurrency exchanges are legal in the US and fall under the regulatory scope of the Bank Secrecy Act (BSA). Cryptocurrency exchange service providers must register with the Financial Crimes Enforcement Network (FinCEN) and are considered money transmitters. The Internal Revenue Service (IRS) taxes cryptocurrencies as property, not currency.

Canada has also been proactive in its treatment of cryptocurrencies, primarily regulating them under provincial securities laws. Cryptocurrencies are not considered legal tender, but they can be used to buy goods and services. Cryptocurrency exchanges are legal and must register with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC).

In the European Union, cryptocurrencies are broadly considered legal, but regulations vary by member state. Cryptocurrency taxation also varies, but capital gains tax is common. Cryptocurrency exchanges must register with their respective regulators, such as Germany's Financial Supervisory Authority (BaFin) or France's Autorité des Marchés Financiers (AMF).

Other countries with notable cryptocurrency regulations include:

• Australia: Cryptocurrencies and exchanges are legal, and cryptocurrencies are taxed as property.
• Singapore: Cryptocurrencies are not legal tender, but exchanges are legal and must register with the Monetary Authority of Singapore (MAS).
• India: The status of cryptocurrencies and exchanges is unclear, as new regulations are being considered. A 30% tax on transactions has been proposed.
• UK: Cryptocurrencies are not legal tender, and exchanges have registration requirements. Cryptocurrency gains are subject to capital gains tax.
• Switzerland: Cryptocurrencies and exchanges are legal, and the country has a progressive stance on regulation. Cryptocurrencies are taxed as assets.
• Latin America: Regulations vary by country, with some like Bolivia comprehensively banning cryptocurrencies and others like Mexico commonly accepting them as payment.

Crypto's energy consumption

The debate about crypto's energy consumption is a complex one. On the one hand, crypto uses a lot of energy—Bitcoin alone consumes as much energy as a small country, and the entire Bitcoin network now consumes more energy than several nations. The energy used is primarily sourced from fossil fuels, and the carbon footprint of a single Bitcoin transaction is equivalent to the carbon footprint of 873,548 VISA transactions or 65,690 hours of watching YouTube.

However, it is important to consider the societal value and benefits of crypto when discussing its energy consumption. Crypto provides economic freedom to people in developing countries, and it consumes less energy globally than tumble dryers or domestic refrigeration. In emerging economies with unstable monetary systems, many people turn to cryptocurrencies to preserve their savings, send and receive remittances, purchase basic goods, and carry out business transactions. Crypto also removes single points of failure in the financial system and makes it easier to transfer funds between parties.

The crypto industry is also making progress toward greater sustainability. There are several initiatives and organizations focused on decarbonization and achieving carbon neutrality in the crypto space, such as the Crypto Climate Accord and Filecoin Green.

While crypto's energy consumption is a valid concern, it is important to weigh it against the benefits crypto provides to millions of people worldwide, especially in developing and emerging economies.

Crypto's future

Cryptos Future

Cryptocurrency is a digital currency that is decentralised and based on blockchain technology. It offers a new, secure way of making transactions without the need for a central authority like a bank. Crypto has grown in popularity over the years, and the recent introduction of spot Bitcoin exchange-traded funds (ETFs) has brought it even more into the investor mainstream.

However, crypto is a highly volatile asset and investors need to be aware of the risks involved. These include the potential for high losses from security breaches, fraud, and government regulation. The lack of a central authority also means that if you lose your private key, you lose access to your crypto with no way of retrieving it.

Despite the risks, cryptocurrencies and the blockchain industry are growing stronger. Financial infrastructure is being built, and investors are increasingly able to access institutional-grade custody services. Crypto is also gaining wider adoption by companies, with financial giants like Block and PayPal making it easier to buy and sell crypto on their platforms.

The increasing pace of adoption is a sign that the crypto industry is maturing. While it is still a risky investment, crypto is likely to become less volatile as it becomes more widely accepted and integrated into the financial system.

One of the main appeals of crypto is that it offers protection against inflation. As a finite resource, Bitcoin, for example, is seen as a hedge against the infinite supply of fiat currencies. Crypto also offers faster and cheaper transactions, especially for cross-border transfers.

In the future, crypto could become a truly global currency and a mainstream form of payment. However, this will depend on wider adoption and regulatory changes. Crypto also faces competition from central banks, which are developing their own digital currencies (CBDCs).

Overall, the future of crypto looks promising, but it is still a highly speculative investment. Investors should proceed with caution and only allocate a small portion of their portfolio to crypto. It is also important to do your research and understand the risks involved before investing in this volatile asset class.

Frequently asked questions