Crypto Investment: Why You Should Care And Invest Now

Cryptocurrencies such as Bitcoin are digital currencies that are not backed by real assets or securities. They are traded between consenting parties without a broker and tracked on digital ledgers. The original intent of cryptocurrency was to allow online payments directly from one party to another without the need for a central third-party intermediary like a bank. Cryptocurrencies can be bought from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers. They can also be bought through financial derivatives, such as CME's Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs.

Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend them twice.

Cryptocurrencies are generally used to pay for services or as speculative investments. Crypto prices are extremely volatile, and the industry is filled with uncertainty. There are tax consequences to buying and selling cryptocurrencies.

If you are thinking about investing in cryptocurrencies, it is important to understand the risks involved.

Potential for appreciation

Investing in cryptocurrencies has become an increasingly popular choice for many people. One of the main reasons for this is the potential for appreciation, or in other words, the possibility that the value of a cryptocurrency will increase over time.

Cryptocurrencies are unique in that their value is determined by the market's supply and demand. When demand for a particular cryptocurrency, such as Bitcoin, increases, its value tends to rise. This can happen when more people start using it for transactions or when investors see its potential and want to buy it. For example, the price of Bitcoin has experienced significant growth since its creation in 2009, when it was worth nothing, to reaching a value of over $7,000 in 2018.

The volatile nature of the cryptocurrency market also contributes to the potential for appreciation. While this volatility can lead to significant losses, it also creates opportunities for investors to profit from price swings. For instance, Bitcoin's value can fluctuate from $10,000 to $7,000 within a week, providing investors with the chance to buy at a lower price and sell at a higher one.

Another factor influencing the potential for appreciation is the limited supply of cryptocurrencies. For instance, Bitcoin has a maximum limit of 21 million coins. As demand increases and the supply remains constant or decreases due to factors like "coin burning," the price tends to rise.

Additionally, the use of blockchain technology in cryptocurrencies adds to their potential for appreciation. Blockchain provides a secure, transparent, and tamper-proof way of recording transactions, which increases trust in the system and can lead to higher demand and, consequently, appreciation in value.

Lastly, the decentralised nature of cryptocurrencies and their independence from government control or influence also contribute to their potential for appreciation. This aspect appeals to many investors who see cryptocurrencies as a way to diversify their portfolios and protect their wealth from the potential negative effects of traditional financial systems and central bank policies.

Portfolio diversification

Diversification is a fundamental principle of investing that helps to reduce a portfolio's risk. When it comes to building a cryptocurrency portfolio, managing risk in this burgeoning, volatile market is essential to protecting your bottom line.

Diversify by Coins and Tokens

One of the most obvious ways to diversify your crypto portfolio is to diversify your direct ownership of digital coins.

Investors can choose from many types of crypto coins, including:

• Payment tokens: Cryptocurrencies like Bitcoin and Ethereum are well-known payment tokens.
• Security tokens: Tokens that are backed by an underlying security, such as real estate.
• Utility tokens: Tokens that have a specific use case within a blockchain or crypto ecosystem, like Filecoin.
• Governance tokens: Tokens that enable users to participate in the governance of a blockchain, like Uniswap and Compound.
• Basic attention tokens: Users can be paid for their attention, such as to digital advertising, using basic attention tokens.
• Gaming tokens: Investors can own coins that both have in-game value and are traded on third-party exchanges, like Decentraland’s MANA.
• Non-fungible tokens (NFTs): Investors can own digital tokens that signify ownership of a specific asset.

Diversify by Industry Focus

Another way to diversify your crypto or blockchain portfolio is to invest in cryptocurrency projects that focus on different industries. Blockchain technology is being applied to—and disrupting—many sectors.

You can expand your crypto portfolio into industries such as:

• Healthcare: Blockchain technology can make the healthcare sector more efficient and secure.
• Supply chain: Blockchain tech can make supply chains more transparent.
• Transportation: Blockchain technology can innovate and improve many aspects of the transportation sector.
• Entertainment: Blockchain platforms can support a variety of entertainment options, and entertainment companies can integrate blockchain technology.
• Climate change: Blockchain tech can support initiatives to fight climate change.

Diversify by Asset Class

Crypto and blockchain investors have many options across asset classes to diversify their crypto portfolios.

These are some other major asset classes that can provide portfolio diversification:

• Stocks: Investors can buy stocks of companies focused on the crypto sector or with large cryptocurrency holdings on their balance sheets.
• Bonds: Investors may be able to buy blockchain-based bonds or own bonds that invest in cryptocurrencies.
• Real estate: Investors can buy blockchain-based real estate tokens to gain exposure to the world's largest asset class.

Diversify by Investment Vehicle

If portfolio security is a concern, investors can choose to diversify their crypto holdings across various investment vehicles and account types, including:

• Digital wallets: Investors can use different digital wallets to facilitate the direct ownership of digital coins, including special-purpose coins like NFTs and real estate tokens.
• Taxable brokerage account: Investors can hold crypto-focused securities investments in a taxable brokerage account.
• Cryptocurrency IRA: Crypto investors can establish self-directed individual retirement accounts (IRAs) to invest in digital assets.
• Decentralized financial products: Blockchain-based decentralized finance (DeFi) platforms can support a variety of ways to invest and hold digital assets, such as decentralized savings accounts and staking platforms that produce interest income.

The Benefits of Diversification

A diversified portfolio of crypto assets has both benefits and drawbacks.

Benefits

• Lower price volatility: Diversifying your crypto investments across sectors and asset classes can stabilize the overall value of your portfolio, especially during periods of market turbulence.
• Ability to rebalance crypto holdings: If one of your crypto investments performs particularly well, you can rebalance your portfolio to ensure it aligns with your investment objectives and risk tolerance.
• Opportunity to learn more about the crypto economy: Diversifying a crypto portfolio provides the opportunity to learn about many exciting projects and investment opportunities in the crypto sphere.

Drawbacks

• Potentially lower absolute investment returns: Investing across asset types can provide greater portfolio stability but may lower overall investment returns compared to investing in a single, highly volatile, speculative project.
• Possible tax consequences: Selling or trading crypto assets to diversify a portfolio can generate a tax liability for investors in the current tax year.
• Requires investor research: Diversifying a crypto portfolio takes time and effort in the form of conducting research. Investors need to devote sufficient time to developing a smart and customized diversification strategy.

High expenses for trusts and funds

Investing in cryptocurrencies has become an increasingly popular option for many people. Cryptocurrencies such as Bitcoin are digital currencies that are not backed by real assets or tangible securities. They are traded between consenting parties without a broker and are tracked on digital ledgers.

One reason why people might choose to invest in cryptocurrencies is that they offer a way to diversify an investment portfolio. Cryptocurrencies are not correlated with other asset classes, so they can provide a hedge against traditional investments such as stocks and bonds.

However, it is important to consider the high expenses associated with certain types of cryptocurrency investments. Cryptocurrency trusts and mutual funds, for example, can come with high fees that exceed 2% or more of the investment. These fees can eat into any potential profits, so it is important to carefully consider the costs involved before investing.

Another option for investing in cryptocurrencies is through exchange-traded funds (ETFs) and mutual funds that provide exposure to spot cryptocurrency, cryptocurrency futures contracts, or companies focused on the cryptocurrency market. These funds invest in cryptocurrencies directly, as well as related equities and futures contracts.

Additionally, investors can choose to buy cryptocurrencies directly from popular crypto exchanges, apps, or through brokers. This allows investors to have more control over their investments and avoid some of the fees associated with funds and trusts.

Overall, while cryptocurrencies can offer an attractive investment opportunity, it is important to carefully consider the high expenses associated with certain types of investments, such as trusts and funds, before deciding how to allocate your capital.

Volatile and unpredictable

Cryptocurrency is a highly volatile and unpredictable asset class. Significant price swings that would be considered major events in traditional financial markets are common in the world of crypto. This volatility is driven by several factors, including speculation, news events, investor sentiment, and the unique characteristics of the crypto market.

Market Sentiment and Speculation

Media outlets, influencers, and industry leaders play a significant role in shaping market sentiment and driving price volatility. Positive or negative news about a particular cryptocurrency or the overall market can lead to rapid price movements. For example, when Tesla bought Bitcoin in January 2021, the markets reacted with exuberance, driving up the price.

Supply and Demand

The distribution between supply and demand also affects the volatility of crypto prices. Bitcoin, for instance, has a limited supply of 21 million coins. As the supply approaches this limit, prices are expected to climb higher due to increased demand and limited availability.

Investor Actions

The actions of large investors, known as "whales," can also impact crypto prices. If these whales suddenly start selling their holdings, it could trigger a panic among other investors, leading to a rapid decline in prices.

Regulatory Uncertainty

The lack of comprehensive regulation in the cryptocurrency market contributes to its volatility. Regulatory changes and crackdowns by governments can have unpredictable effects on the market. For example, China's ban on cryptocurrency transactions in 2021 led to a significant drop in Bitcoin prices.

Market Maturity

Crypto is still a relatively new and immature market compared to traditional asset classes. As the market continues to evolve and mature, some of the factors driving volatility may subside. However, until investors gain more certainty about crypto's long-term utility and regulatory standing, price discovery will remain a significant driver of volatility.

24/7 Trading

Unlike traditional financial markets, the crypto market operates 24/7, allowing for continuous trading. This constant availability can lead to price changes at any time and contributes to the overall volatility of the market.

Largely unregulated

Investing in cryptocurrencies like Bitcoin and Ethereum has become increasingly popular. These digital currencies are traded between consenting parties without a broker and are tracked on digital ledgers. Cryptocurrencies are not backed by real assets or tangible securities, and their value stems from a combination of scarcity and the perception that they are a store of value, an anonymous means of payment, or a hedge against inflation.

One of the main attractions of cryptocurrencies is that they are largely unregulated. This means that they are not subject to the same government control and financial regulations as traditional investments such as stocks, bonds, and cash. The lack of regulation allows for greater freedom and flexibility in trading and investing. It also enables faster transactions and lower transaction fees compared to traditional online payment methods.

However, the unregulated nature of cryptocurrencies also comes with risks. The spot markets on which they trade are relatively new and may be more vulnerable to fraud and security breaches than established, regulated exchanges. This means that investors are entirely responsible for the security of their cryptocurrency holdings, and there is little protection if things go wrong. Cryptocurrency assets are accessed using a key, and if this key is lost or misplaced, the assets cannot be recovered.

Additionally, the unregulated nature of the cryptocurrency market can make it more volatile, with prices fluctuating rapidly. This volatility can lead to significant financial losses for investors, especially those with direct exposure to the spot market.

Despite these risks, the potential benefits of investing in cryptocurrencies have attracted many adherents. The lack of government control and the potential for price appreciation that may outpace traditional investments have made cryptocurrencies an appealing option for those seeking alternative investment opportunities.

Frequently asked questions