TL;DR
- Cryptocurrencies are virtual assets powered by blockchain. They are secured via cryptography and managed by a group of computers called nodes.
- Cryptos have risks associated with them. But with high risk comes high reward. Top cryptos have outperformed all major financial markets in the past decade.
- They are a good way to diversify your investment portfolio, gain early access to promising projects, and bag a chance to make exponential gains, etc.
- The downsides include the asset’s volatility and possible scams due to crypto’s unregulated nature. But you can protect yourselves from this by taking the necessary steps.
Introduction
There is this urban legend of an old couple that has apparently converted their retirement fund into Bitcoin and now roams around asking people how to retrieve their crypto with a secret phrase handed over to them by their investment advisor. This leads us to the million-dollar question: Is cryptocurrency a good investment?
But first, if you do not want to end up like them, let us spend some time learning about cryptocurrency. Even if you do not plan to invest, it will help you in the long run from a relevancy perspective.
What is Cryptocurrency?
Cryptocurrency is a digital asset that lives on a blockchain. Wait, let us try again. Cryptocurrencies are virtual assets that are powered by a decentralized ledger called blockchain. These cryptocurrencies are secured via cryptography and managed by a group of computers called nodes. Nodes are typically spread across the globe, making cryptocurrencies immune to a single point of failure and hence resilient against authorities.
And since these cryptocurrencies are decentralized to the extent that even the founders cannot influence the course of its progression, they are truly democratic in nature. Being permissionless, anyone can opt to become a node and hence have a say in the project’s overall direction.
So far so good? While cryptocurrency is definitely a technological marvel, there is this overlap with the finance world which makes it so lucrative. Bitcoin, the first ever cryptocurrency, evolved as digital gold, while Ethereum is changing the way applications are built. These cryptocurrencies are emerging as a great tool for someone looking to invest in innovations with immense growth prospects.
Is It Safe to Invest in Cryptocurrency & What Are Its Pros and Cons?
Cryptocurrency, just like any other asset class, has risks associated with it. But with high risk comes high reward. In the past decade, top cryptocurrencies have outperformed all major financial markets. Moreover, at this moment, it is hard to ignore them.
So why not understand the pros and cons behind investing in cryptocurrency so that you can leverage this disruption?
Benefits of investing in cryptocurrency
Let us cut short the euphoria and try to understand why someone would invest in cryptocurrencies. For that, let us consider the following basic factors which make cryptocurrencies an attractive investment option.
1. Diversification
They always say never put your eggs in the same basket. And you being a smart investor, carefully allocate your funds into equity, debt, gold, and real estate.
While you successfully try to mitigate the risks by investing in fundamentally different assets, they all still possess the risk of economic dependency. While the global economy is way more connected than we think, many of these assets hold value as long as government policies align with the nation’s interests.
Consider the case of Russia, where the stock market plunged by ~70% during wartime. There were no buyers left for gold. Real estate? Who wants to move to Russia now?
On the other hand, cryptocurrency was the least impacted asset due to the war. In fact, the Putin government recently confirmed that Bitcoin could be used to transact globally from Russia. Therefore, diversification into an asset not susceptible to governmental policies is extremely important.
2. Exponential gains
All asset classes go through phases. In their initial stages, they show high risk and high growth potential, which later gets phased out, and the asset stabilizes. Cryptocurrencies are in that stage of their life cycle where they possess high volatility and high risk, but the upside could be exponential if it all works out.
As the asset class matures, the volatility around it will subdue, and so will the expected returns. However, for early adopters, they might be a gateway to exponential returns.
3. First mover advantage
In a traditional world, any new innovation is accessible to VCs first. Then it goes through various rounds of increased valuation. And finally, retail investors are allowed to get their hands dirty via a public offering. This often means that rich institutions dump their bags on us, leaving us with little to no returns.
Cryptocurrencies, on the other hand, are way more democratic. Quite often, the fundraising would start with ICO, where retail investors would directly get the opportunity to hold the tokens of the Web3 projects. There is a reduced barrier to entry as compared to traditional markets like stocks. And even if you miss out on any such opportunity, bear in mind that we are still very early. Holding valuable tokens could create generational wealth for its believers.
Risks Involved in Investing in Cryptocurrency
Isn’t it wonderful the way confirmation bias works? Confirmation bias is the phenomenon of getting tricked into ONLY believing information that complies with your initial hypotheses. For example, if you believe that cryptocurrency can make you rich overnight, it is highly unlikely that you would pay attention to anything that speaks against that notion.
This single phenomenon is strong enough to drive your decisions in the wrong direction. So, with an open mind, let us discuss some of the risks associated with investing in cryptocurrency.
1. Volatility
Well, you saw this coming, didn’t you? And while crypto is often blamed for being volatile, it is no different than any other new entrant in the market. For any investment class to establish, it has to go through a cycle of ups and downs. If you compare Bitcoin’s volatility between the initial years and now, there has been a significant improvement. The entire market will follow suit.
So, are cryptocurrencies volatile? Yes, they are. Think of this volatility as the cost of holding an asset with insane potential.
Most blue-chip cryptocurrencies, like Bitcoin, Ethereum, etc., have risen from the ashes in the past. In moments when the world declared them dead, they reached newer heights.
2. Scams
Yin and Yang, anyone? Well, if you are dealing with permissionless, unregulated financial instruments at the peak of their hype cycle, some dark forces would likely try to siphon off money from unwitting investors. The need of the hour is to control your greed and not become a victim.
How Much Should People Invest in Cryptocurrency?
Just like every other investment, investing in cryptocurrency is also subjective. You should evaluate your risk profile by your age, stage in life, debts, assets, near-term expenses, long-term expenses, etc.
Once you have done that, you can decide how much of your total portfolio goes into cryptocurrency.
For example, for a 25-year-old person, it is easy to onboard riskier assets on the portfolio. Also, crypto isn’t alone in the ‘risky asset’ bucket. You have to fit in stocks there as well. Basically, anything with a non-fixed rate of return goes into the risky bucket. So, for someone that age, one may easily invest 10-15% of the portfolio in cryptocurrency. However, this will vary widely based on the factors above, and you may invest more or even way less.
This allocation would change as you grow older and more responsibilities hit. At that point, you should not go berserk with your crypto investments and stick to safer choices.
Are Cryptocurrencies Good for Long-Term or Short-Term Investment?
Once again, it depends on your goals and also your skillset. If you are someone who does not have time at hand to research and pick cryptos on a daily basis, you should invest via Coin Sets. You can bet on themes rather than picking individual assets.
This would save time and effort for you since they are expert-managed crypto baskets periodically rebalanced and altered to give you the best risk-to-return ratio.
As far as the time horizon is involved, crypto can benefit both short-term traders and long-term holders. Due to its volatility, it is a great asset to long or short for a brief duration to make quick returns. Alternatively, you can hold good, well-researched cryptocurrencies for good returns over a period. Let us look at both these perspectives separately:
1. Cryptocurrencies as a long-term investment
If you believe that the underlying blockchain technology is robust enough, you can go in for the long term. From a regulatory standpoint, it is almost impossible to curb Bitcoin. Its resilience is its biggest enemy and a friend at the same time.
Simultaneously, the second largest cryptocurrency by market cap, Ethereum has already laid down a five-year development plan. It recently went through a significant upgrade called ‘Merge’ and would soon move to Surge, Purge, and Splurge. This instills confidence in the minds of the investors that this is here to stay.
With that being said, crypto investors are prone to survivor bias. The biggies like ETH and BTC would be quoted in every conversation, and the whole graveyard of cryptos that couldn’t make it is ignored completely.
Most governments across the globe welcome blockchain technology while crypto is still being evaluated. One may think that the industry is being steered in a different direction because of this notion.
2. Cryptocurrencies as a short-term investment
Some traders are really good at making short-term bets on the market, leveraging its violent swings. These folks barely care about the fundamentals and invest based on the trend charts. For example, the trading volume of a meme coin called $DOGE is $1 billion as of today (24th September). This talks a lot about the trading fraternity in this space.
Other traders often get into trading valuable assets like Bitcoin by relying on macro and trends. Based on that, they would purchase Bitcoin early and try to sell it close to a hype cycle.
Be Aware of Scams in the Cryptocurrency Field
The cryptocurrency field is a hotbed for scammers to exist. Mainly because it is relatively new, a lot of people are learning about it as we speak, and there aren’t any stringent regulations. Of course, it requires a little bit of practice and spending time to understand how scams work, but here are a few red signals that should alarm you immediately.
How to spot a scam?
Well, these scammers do this for a living. So they can get pretty desperate at times. This should reveal their deceitful intentions most of the time. Here’s how to spot one:
1. No risk
A pitch that claims good returns with no risk is the biggest way to catch a scam. There are no free lunches in the world and you shouldn’t expect one, to be honest. Therefore, keep an eye on someone who is selling you risk-free returns.
2. Guaranteed
Oh no! Even bank fixed deposits aren’t guaranteed these days. How can someone guarantee returns in a space that is known for its volatility? So next time someone knocks on your door with a promise of sure shot returns, ask them to make a move!
3. Free money
You send me XYZ, I will send you back 2x of XYZ. We are doing this to ensure that we give away only to the real accounts—a classic trap. Please don’t fall for it.
4. FOMO
Is someone pitching you a limited offer? Are they giving it to the first 10 participants only? It is most likely a scam that feeds off your inability to calm down and think. If someone is being too pushy, they are likely to scam you.
5. Grammar nazi
Yes. A lot of scammers don’t have English as their native language. Therefore, quite often, they leave a trace via incorrect spellings or weird grammar. Keep an eye on such messages, for they are least likely to be typos.
Examples of Scams
Now that you know how to spot a scam, it is time to discuss a few types of scams that are quite popular in the realm. This would help you catch one as soon as it comes across.
1. Impostor scam
Once again, a pretty famous one. Scammers impersonate a famous celebrity and try to share a message wherein they are conducting a giveaway. Yay! But in order to be fair and legit (and to avoid bots), they would only send some free crypto (usually a large amount) to the people who send an X amount to them first.
And no surprises for guessing what happens if you fall for it and send them your funds. Here’s an actual scam tweeted by someone impersonating Elon Musk.
2. Phishing
Oldest trick in the book. Web2 was plagued with it. Web3 is no different.
The scam starts with creating a web page with a URL similar to the original website of a popular crypto application. The contents of the web page are also mimicked to ensure that the user falls for it.
Finally, you are asked to put in your sensitive information like ID/Password/Wallet key phrase. Once you do that, it is stored in the background, and hackers can now access all the crypto in that wallet.
Given below is the list of websites that are pretending to be Binance.
3. Cloud mining
This scam is very common on social media platforms like Instagram and Telegram.
The attacker will reach out to you and try to begin a conversation. Once you start showing some interest, they will present you with a business opportunity where you stand a chance to make decent returns each day.
How, you ask? Well, it is through something called ‘Cloud Mining. ‘
The scam involves asking you to pay an upfront deposit which will be used to open up your account with them. Once you open an account, you can start earning your mining rewards. The scam involves asking you to log in to their account and then loading their wallet with the ‘registration fee.’ Sed life.
4. Pump and dump
As the name suggests, scammers would deploy various tricks to boost the value of a shit coin. Once enough traders would hop in and buy that coin using something valuable like ETH or USDT, they would dump their bags on you and leave for good.
What to Do If You Spot a Scam?
Well, the most obvious thing to do is to maintain distance. Block and report the scammer if you are being approached via social media and continue living your life. Don’t forget to pat yourself on the back for figuring it out.
Also, once in a while, it may be a good time killer to stall these scammers, play along and take their hopes to the peak, and bam! Just reveal who’s the boss on the final step. Hopefully, this might teach them a lesson.
But if you are already a victim and realized it a little late, here are a few steps that you should immediately do:
- Change all your passwords and ensure you have 2FA wherever applicable.
- Contact your bank if you have made any form of payment through banks.
- Report the crime to the authorities.
Trading Vs Investing: Which Is Better?
Trading and investing are both different forms of discipline. Each of these art forms requires diligent planning, research, effort, and constant nurturing to see your funds grow. So it ultimately boils down to your skill set.
Trading definitely requires an understanding of charts and trends, technical indicators, and correlation with macros. If you have been doing this for stocks, transposing that knowledge to crypto shouldn’t be difficult.
On the other hand, if you feel hard-pressed on time when it comes to watching the charts and trends, it is better that you invest in cryptocurrency for a longer horizon.
With that being said, an ideal investor is the one who has a fair understanding of technicals as well. Similarly, a trader should also be able to keep his trading and investing portfolio separately.
What Is the Future of Cryptocurrency?
Cryptocurrency is a highly risky asset class. However, the returns are in proportion to that. In the past, Bitcoin has outperformed every asset class to have ever existed. When it comes to the future, we need to evaluate what big players think.
As per BCG, one of the world’s largest strategy consultancy, cryptocurrency market capitalization is likely to grow 5x by 2030. This means you are in for a lot of returns if you make your bets wisely.
Similarly, JP Morgan predicts Metaverse could be a one trillion dollar economy.
Let us try to take an educated guess at Bitcoin. Considering its positioning as digital gold, it should ideally match the market cap of gold in the upcoming years. The current market cap of gold is approximately $8T. If BTC matches that, with a 21M cap, each piece could be priced at 400K. That is an upside of 200x from the current price. However, take this with a pinch of salt.
They always say if you do not understand trading, follow the whales. Michael Saylor, ex-CEO of Microstrategy, recently took his Bitcoin holdings up to 130K $BTC. This makes him the largest corporate owner of Bitcoin. If you find it hard to believe your instincts, trust the experts.
What we are trying to say is that if you have conviction, hold on for dear life! Early adopters are always rewarded exponentially.
Conclusion
There will always be two sides to every coin that exists. If there are people who bash crypto as a scam and Ponzi, there are people who are betting on them big time. If there are people who have promised to NEVER invest in cryptocurrencies, there are some who have committed their lifetime to building Web3.
It’s time that you make your own narrative, learn, unlearn and relearn.
FAQs
1. Is it too late for crypto?
No. It is rather early for crypto. Imagine this. There was a time in Web2 when you were struggling to play videos. You would download converters to convert them into a suitable format. Then VLC came along and changed the entire picture, only to eventually move to Netflix, where you’d never have to download a video again.
You should ask yourself if we have a Web3 version of Netflix yet. The answer is No! We are super early in the day.
2. Which cryptocurrency is best to invest in?
It depends on your usage. If you are looking for a store of value that is decentralized, censorship-resistant, and deflationary, you should adopt Bitcoin. And if you are betting big on a decentralized world run by smart contracts, Ethereum is your go-to crypto. If you think Ethereum has scalability issues, layer 2s and other Layer 1s need to be looked at.
3. When should I buy and sell cryptocurrency?
You should buy cryptocurrency in regular bursts as a SIP to reap the benefits of dollar cost averaging. And you should sell it once your investment goal is met.
This strategy is best suited for people who are investing in this technology for the long term. This would help you get the best price while keeping your calm by not trying to time the market. And just like every other investment, crypto investments should be goal based.
