Unlike the fiat currencies which are printed by governments, cryptocurrencies (Cryptos) are digital or virtual currencies. You cannot feel it by your hands. They operate on a technology called blockchain. Blockchains are highly specialized computers which act as a ledger to process and record a transaction. A transaction processed and recorded cannot be undone. Since these computers are spread all over the globe, blockchain acts as a decentralized ledger that records all transactions and use cryptography for security. Bitcoin, Ethereum, and Ripple are among the most popular cryptocurrencies. Unlike traditional currencies issued by governments, cryptocurrencies are decentralized, which means they are not controlled by any central authority like a central bank. True, but not essentially to the core of it as each crypto currency is managed by a group of its developers much like any corporate governance. Currently, there are more than 2 million crypto currencies with a market cap of more than 2.4 trillion dollars. Every day new crypto currencies are being developed and brought in the market sphere.
Why invest in Cryptocurrencies (Cryptos)?
Here are the four most important reasons why one should consider investing in crypto currencies. Having said that, one must understand that there are risks involved in crypto currency investments which we will discuss next.
- Potential for High Returns: Cryptocurrencies have shown a high potential for returns, with some coins experiencing significant price increases over short periods. There are different reasons for this which we will discuss below.
- Portfolio Diversification: Cryptos offer an alternative asset class, allowing investors to diversify their portfolios beyond traditional stocks and bonds.
- Decentralized Nature: As they are decentralized, they offer a hedge against economic or political instability in specific countries. Cryptos are usually inversely related with economic and political instabilities in the long run.
- Technological Innovation: Blockchain technology has broad applications in many sectors such as finance, health, transportation, and supply chains. Therefore, investing in cryptocurrencies often represents a stake in the potential future applications of this technology.
Before one decides to jump into investing in cryptos one must consider the risks Involved in Cryptos Investment. These are the important risks which one must consider before investing in crypto currencies.
- Volatility: Volatility is a two-way lane. On the one hand it can give significant profits, on the other hand it can lead to significant losses as well. Â Historically, cryptocurrency prices have undergone high volatility, leading to significant losses in a short period. Many investors do not have the risk-taking aptitude and /or financial capability to bear those losses. One should therefore first assess both before deciding to invest in cryptos. Cryptos are not the kind of assets which should be invested based on cryptos frenzy.
- Liquidity Risk: Many cryptos have wide bid and ask spread in addition to a much lower volume traded per day resulting in poor liquidity.
- Perishing Risk: It is a significant risk to be kept in mind. As per one estimate, in the last 15 years as many as 3000 to 4000 crypto currencies have perished leading to significant losses to investors.
- Regulatory Risks: Cryptocurrencies operate in a legally ambiguous space in many regions, and sudden regulatory changes can impact their value.
- Security Risks: Digital wallets and exchanges have been vulnerable to hacking, and have suffered losses due to hacking.
- Market Speculation: The cryptocurrency market is often driven by speculation rather than fundamentals, which increases unpredictability.
Financial and Risk Profile of an Ideal Investor:
Investing in cryptocurrencies requires a high-risk tolerance and a strong financial base. Suitable investors typically:
- Have High-Risk Tolerance: These investors are comfortable with the possibility of losing a significant portion or even the entirety of their investment. They have a robust risk tolerance and will not have sleepless night in case of the losses.
- Are Financially Secure: Ideally, these investors have a stable and higher income, emergency savings, and no high-interest debt, allowing them to take speculative risks.
- Have a Diversified Portfolio: These investors should consider cryptocurrencies as part of a broader portfolio, where traditional and safer investments balance out the risk.
- Have a Long-Term Perspective: Cryptocurrency investments are more suited to individuals willing to hold through volatility, often for several years, to allow for potential growth.
Summary
Cryptocurrencies represent a disruptive shift in the way we think about money and transactions. While they present exciting opportunities for innovation and financial inclusion, they also carry inherent risks and challenges that must be understood. As the cryptocurrency ecosystem continues to evolve, it is crucial for beginners to educate themselves, exercise caution, and stay informed about the latest developments in this rapidly changing landscape. By doing so, they can better navigate the world of cryptocurrencies and harness their potential for financial empowerment.
**I have been in the investment profession for more than a decade and a half. For the last many years, I am involved in creating various financial models for growth and value stocks. In the recent past, I have created two proprietary Crypto Indices to measure the strength of the crypto markets every day. They are named Crypto AM10 Index: CAM10 and Crypto AM30 Index: CAM30. As the name suggests they measure the strength of the crypto market based on multi-factors for the chosen 10 and 30 cryptocurrencies respectively.
We produce crypto research reports based on in depth study and analysis of select crypto currencies which will help you with a solid understanding of what those crypto currencies are, their technological, business and economic model so that you are able to decide better. Besides you will get monthly projections for those crypto currencies.