Over the past few years, the popularity of cryptocurrencies has become so big that the words «bitcoin», «ether» or «mining» can be heard from people who are very far from the world of crypto technologies. Investors are also actively entering the digital money market. The Financial Times’ Crypto and Digital Assets Summit based in London on May 5 2022 became another event where representatives of the crypto industry gathered to discuss current problems and the future of this sphere.
Regardless of whether you are new to the world of investing or already an experienced investor, you may be wondering if there is a place for cryptocurrencies in your portfolio. Given the staggering growth in the value of bitcoins and other cryptocurrencies, it is easy to understand why these forms of investment are of such great interest. But even in this case, it is worth acting carefully. Cryptocurrency can have a place in your investment portfolio, but only after you evaluate the main advantages and risks of this instrument.
Sometimes, people who just started investing in cryptocurrencies lose their minds because of the variety and sky-high prices. They hope to get rich quickly by acquiring this or that asset. Many of them do not understand how to work with cryptocurrency.
Nevertheless, many experts, such as Dan Morehead from Panther Capital, are convinced that crypto is a new asset class and in 10 years everyone will have blockchain. The world is not standing still, and with it, cryptocurrency technologies. Let’s figure out what makes investing in cryptocurrency so promising and what pitfalls are hidden in this area.
The first advantage is the rapid development of the cryptocurrency market. The crypto market is developing faster than all other financial markets and today its total capitalization exceeds billions of US dollars. Of course, 62% of this volume is the capitalization of Bitcoin, but other projects are showing growth too, which is largely due to the increase in the value of BTC.
Moreover, compared to stocks, bonds, mutual funds and precious metals, cryptocurrencies are much more flexible in use. BTC and ETH coins are more than just investment assets, they are a form of virtual money. More and more shops, restaurants, and banks are already accepting payments in cryptocurrency, and only greater recognition of digital money as a payment instrument is expected. This provides greater flexibility and freedom for the investor, including the ability to turn their assets into goods and services with one click.
Sarojini McKena, co-founder of Alien Worlds, confirmed the flexibility of cryptocurrencies speaking about such a phenomenon as NFTs, which also have a wide range of applications. NFTs primary purpose is to prove ownership. Now it’s usually digital art or metaverse objects, but experts argue that it could be pretty much anything. Take legal property documentation – NFTs could drop a great amount of bureaucracy if applied correctly. They are used by numerous companies, from fashion houses like Gucci and Tommy Hilfiger to food giants like McDonald’s and Coca Cola. Non-fungible tokens become a reason for pride, involvement in the latest technologies or just entertainment.
Despite all the advantages of cryptocurrencies, there are several disadvantages that sufficiently blacken this positive landscape. First of all, it is security. Cryptocurrency investments are not like stocks and bonds, and the security situation is one of their drawbacks. New investors are often surprised to learn that their assets can disappear if hackers gain access to their accounts, and, unlike other investments, there is usually no way to get the money back. That’s why some cryptocurrency investors prefer to keep their coins in cold wallets, isolating them from Internet access and the risks associated with it.
Regarding a high price change of cryptocurrencies, it is important to understand that such high volatility can play against you. The crypto market is decentralized and it ensures a very high level of volatility: fluctuations in the exchange rate of different coins can vary from 1-2% to 100-300% over a short period of time. In addition, cryptocurrency is strongly tied to demand. That is, if large market players buy certain coins for a certain time, it moves the market in one direction or another. Volatility and speculativeness are the main risks in this area. Throughout the history of cryptocurrencies, there were several cases when billionaires became millionaires in just one night. Such a reduction in the cost of cryptocurrencies may not affect billionaires much, but it will hit the less affluent cryptocurrency owners.
Another real risk in the cryptocurrency market is associated with future taxation and additional regulation. In many countries, the possibility of legislative regulation of cryptocurrencies and taxation of transactions with digital money is being worked out, but so far this issue is being debated on. So far, many central banks have decided not to legalize cryptocurrencies as legal tender, since they are not subject to state regulation.
We can observe a similar problem with the trust of state institutions in cryptocurrency, for example, in Italy. Pierro Cipollone, the Deputy Governor in Banca d’Italia stated that the crypto market moved much faster than regulators. They do not understand what measures they need to take to prevent illegal actions with cryptocurrency, for example, the sponsorship of terrorism or money laundering. Sometimes, their actions are chaotic and illogical, which negatively affects the crypto sphere. This also introduces an imbalance in the general mood towards cryptocurrencies.
Summing up, we can say that the cryptocurrency investment market really has great potential and major players such as Visa or Mastercard entered it. On the other hand, it still continues to be new, unstable and problematic from the point of regulation. As with any investment, a sober look at the situation and a correct risk assessment are needed here. However, the active development of this industry gives hope that after a relatively short period of time, the world will use cryptocurrencies, minimizing negative factors.