Is Cryptocurrency a Good Investment for You?

With trillions of dollars invested and all the hype in cryptocurrencies and new crypto projects being rolled out daily, the question that many investors are asking themselves is whether cryptocurrencies are a good investment. 

Despite investors losing most, if not all, of their investment in scams like the Squid Game token, TerraUSD stablecoin, and other altcoins, is it still wise to invest in cryptocurrencies? Even with the incredible volatility experienced so far and stories about crypto millions made or lost overnight, would a prudent investor still look at putting their money into the market? 

Cryptocurrency is a decentralized digital currency that operates on blockchain technology, ensuring secure and transparent transactions. Unlike traditional currencies, cryptocurrencies are not controlled by governments or financial institutions. Popular examples include Bitcoin, Ethereum, and newer players like Solana and Cardano.

Before you decide on any investment, you should look at asset allocation. Simply put, asset allocation means spreading your investments across various instruments to provide diversified returns over the long run. The same applies to cryptocurrencies – you should decide on your risk tolerance, financial goals, and timeframe to decide how much of your investment portfolio can be allocated to cryptocurrencies. 

You should research and conduct due diligence on the cryptocurrency or digital asset you are considering. Simply listening to a friend’s hot tip or buying digital assets out of the Fear-of-Missing-Out (FOMO) is not recommended. For any crypto-asset investment, it would be wise to read the whitepaper in order to understand better the cryptocurrency’s purpose, technology, and use case.

Understanding the team also gives you a sense of the track record of the people responsible. Ultimately, given the lack of regulation and oversight in digital assets, you want to avoid the risk of trading a crypto asset that collapses due to fraud. 

Once you find a crypto asset you are comfortable investing in, you need to decide how to invest in it. Do you buy the crypto asset directly? If so, will you use your account at the crypto exchange or broker to hold your investment, or will you hold it yourself? If so, do you have a digital wallet set up? Or will you choose to invest via Exchange Traded Funds or an asset manager, like a hedge fund or mutual fund?

Do you decide that you want to invest by proxy and buy the stocks of crypto exchanges? Or buy stocks in other publicly listed companies that are involved in blockchain technology or supply the sector, like GPU manufacturers? Each one of these investments comes with its own pros and cons, and the prudent investor would weigh all of the given options.

Trading vs Investing

Trading is approached with discipline, as those who are most successful carefully manage their exposures. On the other hand, investing is also a disciplined plan that meets specific financial goals over a longer period, usually five years or more. Investors may build a strategy in order to save for college, purchase a house, or plan for retirement. 

Next, you need to examine your risk tolerance. As cryptocurrencies experience volatility, whether cryptos is a good investment depends on how much risk you can bear. If even small swings in prices keep you up at night, higher volatility investments may not be the suitable investment for you.

With crypto assets experiencing levels of price volatility that aren’t too different from those experienced by other asset classes, such as growth stocks or high-yield bonds, they are risky assets. You need to be prepared to face fairly significant price swings or potential losses.

Liquidity constraints

One further consideration is the liquidity constraints that face certain crypto assets. Liquidity is simply the relative ease or difficulty with which one can buy or sell a certain asset when they want to without moving the price significantly.

As an example, if you are looking to buy a rare automobile, there are that many of those around and if you can find one, the price you will pay is effectively the seller commands. If you buy it, the next seller will certainly command a higher price for the next buyer – making the market very illiquid.

However, if you are looking to buy something more generic, say some Japanese yen, in exchange for your U.S. dollars, there is ample liquidity, so the price you pay for the yen will be wherever the market lies. The next buyer of the yen will also likely purchase the yen at or near the same price you transacted, as there is abundant liquidity in sellers of JPY who will accept UD in return.

Certain cryptocurrencies are more liquid than others, which means that to invest in such cryptos, you must be prepared to deal with the illiquidity when you buy and potentially when you sell. A worst-case scenario would be the inability to sell your crypto investment when you need to, due to a lack of liquidity in that particular cryptocurrency.

Who Should Consider Investing in Cryptocurrency?

• Risk-Tolerant Investors: If you’re willing to endure volatility for potential high returns.
• Tech Enthusiasts: Those who believe in the transformative power of blockchain.
• Diversifiers: Investors looking to add a unique asset class to their portfolio.

Who Should Avoid Cryptocurrency?

• Conservative Investors: If you prefer stability over risk.
• Uninformed Individuals: Investing without understanding the market is a recipe for disaster.
• Short-Term Speculators: Timing the crypto market is notoriously tricky.

Cryptocurrency can be an exciting and potentially lucrative investment, but it’s not for everyone. By weighing the risks against the rewards and understanding your own financial goals, you can decide whether this digital frontier aligns with your investment strategy.

Ready to explore the world of cryptocurrency? Start by educating yourself and investing wisely—remember, knowledge is your greatest asset!