With trillions of dollars spent, all the buzz around cryptocurrencies, and new crypto projects being launched on a regular basis, many investors are wondering if cryptocurrencies are a smart investment.
Despite losing the majority, if not all, of their investment in scams like as the Squid Game token, TerraUSD stablecoin, and other altcoins, is it still a good idea to invest in cryptocurrency? Even with the extreme volatility seen thus far and stories of crypto millions won or lost overnight, would a cautious investor consider putting their money into the market?
What to Consider First?
Before making any investing decisions, consider asset allocation. Simply explained, asset allocation is the process of distributing your investments across multiple instruments in order to deliver diversified long-term returns. The same applies to cryptocurrencies – you should decide on your risk tolerance, financial goals, and timescale to decide how much of your investment portfolio may be assigned to cryptocurrencies.
You should undertake research and due diligence on any cryptocurrency or digital asset that you are contemplating. Simply listening to a friend’s hot tip or purchasing digital assets out of fear of missing out (FOMO) is not advisable. Before making any crypto-asset investment, read the whitepaper to better understand the cryptocurrency’s goal, technology, and use case.
Understanding the team also provides insight into the track record of the individuals involved. Finally, given the lack of regulation and monitoring in digital assets, you want to avoid trading a cryptocurrency that fails due to fraud.
Once you’ve identified a cryptocurrency asset in which you feel comfortable investing, you must decide how to invest in it. Do you acquire crypto assets directly? If so, will you keep your investment in your crypto exchange or broker account, or will you hold it yourself? If so, have you set up a digital wallet? Will you invest through exchange-traded funds or an asset manager, such as a hedge fund or mutual fund?
Do you opt to invest by proxy and purchase equities on cryptocurrency exchanges? Or invest in other publicly traded firms active in blockchain technology or that supply the sector, such as GPU manufacturers. Each of these investments has advantages and disadvantages, and a sensible investor would consider all of the available possibilities.
Is Cryptocurrency a Good Investment for You?
First, we must distinguish between investment and trading, with the most significant difference being the time horizon. Trading in any asset typically has a short time horizon and is often more speculative. Traders frequently perform dozens of deals every day to capitalise on intraday price swings.
Trading versus Investing
Trading is approached with discipline, as the most successful traders meticulously manage their exposure. Investing, on the other hand, is a disciplined plan for achieving specified financial goals over a longer period of time, typically five years or more . Investors may build a strategy in order to save for college, purchase a house, or plan for retirement.
Next, you should assess your risk tolerance. Given the volatility of cryptocurrencies, whether they are a suitable investment depends on how much risk you are willing to take. If even minor price fluctuations cause you to lose sleep, higher volatility investments may not be for you.
Crypto assets are experiencing price volatility levels that aren’t too different from those seen by other asset types, such as growth stocks or high-yield bonds.
Liquidity limitations:
Another factor to consider is the liquidity limits that some crypto assets experience. Liquidity is simply the ease or difficulty with which one can purchase or sell a specific item without significantly affecting the price.
For example, if you want to buy a rare automobile, there aren’t many of them around, and if you do locate one, the amount you’ll pay is essentially what the seller commands. If you acquire it, the next seller will undoubtedly demand a greater price from the next buyer, making the market extremely illiquid.
However, if you want to buy something more generic, such as Japanese yen in return for US dollars, there is plenty of liquidity, so the price you pay for the yen will be whatever the market dictates. The next buyer of the yen will most likely pay the same or similar amount you did, given there is plenty of liquidity in JPY sellers willing to receive UD in exchange.
Certain cryptocurrencies are more liquid than others, which means that investing in them requires you to be prepared to deal with illiquidity when buying and perhaps selling. A worst-case scenario is the inability to sell your crypto investment when you need to, due to a lack