Should You Invest in Cryptocurrency?
Investing in cryptocurrencies can be risky, but can offer both tangible and intangible rewards.
In the past, investing in cryptocurrencies was limited to researching a few tokens, purchasing one’s top picks, and then hoping these picks would rise in value. These days, investing has become a much more complicated matter.
There are over 7,000 different cryptos to choose from including pure-play cryptocurrencies, stablecoins, and tokens that support different exchanges, platforms, or blockchain use cases. And beyond just buying and holding tokens, investors now enjoy a whole range of different investment vehicles like funds and indices, derivatives, and interest-earning platforms.
In this guide, Crypto Briefing offers readers a broad overview of the different factors to consider when investing in cryptocurrencies.
Cryptocurrencies are notoriously volatile, so understanding one’s appetite for risk is critical.
In the midst of the coronavirus market panic, Bitcoin lost 40% of its value in a single day in March 2020. Although this is an extreme example, it’s indicative of the risks involved.
Another consideration here is that cryptocurrencies often don’t perform as expected. Sometimes Bitcoin’s price moves the same way as other asset classes, and other times it will move against market conditions.
Risk-averse investors must keep this in mind when seeking exposure to such a turbulent market. This could mean simple diversifying a portfolio into stablecoins or using more complex hedging instruments.
Perhaps the best part of the old adage “buy and hold” is that it involves very low activity, so it’s good for passive investors. But investing in crypto caters for everyone these days.
Derivatives and margin trading, for instance, give the opportunity to short sell, plus you can be more active in using instruments such as options to hedge against losses.
However, even the most passive types of cryptocurrency investments can be more active due to the nature of crypto. Blockchain is an emerging technology, and the crypto space is developing rapidly.
For a newcomer, there can be a steep learning curve.
Along with the mind-boggling array of different projects and tokens, diligent investors must also learn about the underlying technology, get up to speed with complex jargon, and familiarize themselves with different exchanges.
Then, of course, comes the rabbit hole that is crypto Twitter. For a curated list of high-quality Twitter accounts, Crypto Briefing has created one here.
In short, crypto can easily become an absorbing hobby, even if your investment strategy is geared towards the passive end.
In the boom of 2017 and 2018, many people were dazzled by the hype of shiny new projects promising to deliver the world on a plate.
In reality, many of those startups folded, and people were left with worthless tokens that they couldn’t sell or get rid of. As a result, regulatory clampdowns now mean that there’s slightly less risk of everyday investors getting sucked in by flimsy ideas written on fancy white papers.
Nevertheless, even the most experienced investor should tread with caution when buying obscure tokens. A crypto exchange can choose to delist tokens at any time, meaning liquidity is reduced, and one’s ability to sell may become compromised.
Before buying in, particularly for smaller tokens, investors must make it part of their due diligence to check the market demand for a token using a service like CoinMarketCap or CoinGecko.
Which exchanges are listing it, and how much volume is being traded? This will help identify the liquidity risks.
Further, it’s important to remember that even the most liquid cryptos such as Bitcoin or Ether aren’t particularly spendable. It may take hours or even days to convert one’s holdings into cash.
As the saying goes, “not your keys, not your crypto.”
Investing in cryptocurrency comes with security considerations that simply don’t exist with stocks or other types of traditional assets. Exchange hacks and phishing attacks are unfortunately still all too common in the cryptocurrency space.
Therefore, you’ll need to think about how you plan to safely store your cryptocurrencies.
Although some exchanges have better security records than others, using a personal hardware wallet is still the best bet. Furthermore, an offline, hardware-based wallet such as a Trezor or Ledger Nano is better yet.
It will involve an initial cost of around $75, and investors must also learn how to keep their private seed key safe. This is particularly important because, in the case of Trezor, the hardware itself has been proven to be fallible.
Though there is a slight learning curve for proper key management, it is an essential part of due diligence.
Cryptocurrency Investment Options
Once investors have worked through the above considerations, they’ll need to think about how they plan to invest in cryptocurrency.
Cryptocurrencies and Tokens
Most people begin investing in cryptocurrency by buying some Bitcoin or Ether and then perhaps branch out into buying tokens for the particular projects they like.
Although there are various ways of buying crypto these days, many start off by depositing some fiat onto an exchange such as Coinbase or Binance.
From there, investors can buy Bitcoin or Ether, and in turn, start browsing other cryptos and tokens paired with either.
Simply buying and holding cryptocurrencies doesn’t offer any guarantee of returns.
However, investors can put their crypto investments to work by depositing them in many of the interest-earning platforms. There are plenty of companies offering this, including BlockFi, Celsius, or Cred.
Different platforms offer various options. Investors can shop around to find out which platform offers the best interest rates for different assets, using an aggregator such as CoinMarketCap’s Interest feature.
The crypto-derivatives markets have exploded over the last year or two. Traders can buy and sell crypto-backed futures, perpetual swaps, and options at a variety of derivatives exchanges.
Many offer high leverage, along with the opportunity to speculate on a wide variety of underlying crypto-assets.
Investing in cryptocurrency derivatives is a high-stakes game best-suited for more advanced traders and investors who understand the risks involved. It’s also a very active style of investing. Investors will need to be very hands-on with their portfolio if they take this route.
Index funds haven’t yet taken hold in the crypto space in the same way as the other investment vehicles listed above. Nevertheless, there are a few options available, including Bitwise, Crypto20, and Iconomi.
The challenge with index funds for the crypto space is that, unlike an index such as the S&P 500, crypto is heavily-weighted towards Bitcoin.
Although index funds make a great passive investment vehicle for traditional asset types, for crypto, they are somewhat limited. This is because many coins, even major altcoins, tend to follow Bitcoin’s price trends.
That said, if one is looking for a simple way to gain exposure to cryptocurrencies, then index funds may be a solid choice.
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