Byline: Craig Brogan
Many investors are asking themselves whether cryptocurrencies are a good investment given the trillions of dollars spent, the hype surrounding cryptocurrencies, and the daily launch of new cryptocurrency ventures.
Is it still a good idea to invest in cryptocurrencies even though most, if not all, investors lost money in fraudulent events like the Squid Game token, TerraUSD stablecoin, and other altcoins? Would a wise investor still consider investing in the industry despite the extreme volatility shown thus far and reports of cryptocurrency millionaires making or losing millions overnight?
How Are Cryptocurrencies Made?
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Bitcoin uses a procedure called “mining,” a typical method for creating cryptocurrencies. Computers must solve challenging puzzles as part of the bitcoin mining process to validate the legitimacy of transactions on the network. The owners of those computers can get newly minted cryptocurrency as payment.
Other cryptocurrencies manufacture and distribute tokens differently, and many have a noticeably smaller environmental impact.
What Should You Consider When Investing in Cryptocurrency?
You should do your homework when considering a cryptocurrency or other digital asset. It is not advisable to buy digital assets based solely on a friend’s hot tip or out of FOMO (Fear of Missing Out). It would be wise to study whitepapers before making any crypto-asset investments to understand better the cryptocurrency’s goal, technology, and use case, as well as the potential value in it for you.
Knowing the team of investors and brokers helps you get a feel of the track record of those in charge. Ultimately, you want to avoid the risk of trading a crypto asset that crashes due to fraud, given the digital assets’ lack of regulation and control.
The level of risk you can tolerate will determine if cryptocurrencies are a good investment because of their volatility. Higher volatility investments might not be the right choice if even minor price fluctuations keep you up at night.
Cryptocurrency assets are risky investments since their price volatility is comparable to other asset types like growth stocks or high-yield bonds. You must be ready to deal with potentially devastating price swings.
Because some cryptocurrencies are more liquid than others, investing in them requires you to be ready to deal with illiquidity during the buying and selling process. The worst-case scenario is that you cannot liquidate your cryptocurrency investment when you need to because there isn’t enough market activity in that particular cryptocurrency.
It might also benefit novice investors to look at cryptocurrency’s popularity. Most respectable cryptocurrency projects include publicly available metrics that display information like how many transactions occur on their systems. A cryptocurrency may establish itself in the market if its use is increasing. Additionally, “white papers” that describe how cryptocurrencies will operate and how they plan to distribute tokens are typically made available.
Benefits of Investing in Cryptocurrency
As cryptocurrencies grow and develop, as we’ve seen with Bitcoin and Ethereum, a new asset class for these types of assets is also emerging. Significant professional fund managers have established dedicated investment funds that only invest in Bitcoin and other cryptocurrencies, like Cathy Wood from Ark Investment Management.
Some contend that the diversification effects of cryptocurrencies are advantageous, particularly in the face of growing inflation. Additionally, we’ve witnessed the emergence of new investment vehicles that profit from the rise of particular cryptocurrencies, such as options and futures on Bitcoin and Ethereum, as well as particular investment vehicles that handle cryptocurrencies expertly on behalf of investors.
Last but not least, the industry is still relatively young, so there may be even more developments in the future that will increase the appeal of investing in cryptocurrencies. Examples include stablecoins and digital currencies backed by assets linked to the value of a fiat currency.
Stricter laws, such as those governing Initial Coin Offerings, may be implemented to safeguard investors if fraud is a concern. Futures on cryptocurrencies were stated, and if the market changes, futures on other cryptocurrencies traded on reliable exchanges may become available. Additionally, the future of the Metaverse enables bitcoin bears (or lows) to short-sell the asset, increasing total liquidity.
Some investors favour cryptocurrencies because they are increasing in value and are not concerned about the currency’s long-term adoption as a means of transacting in financial services.
According to findings by Bitcoin 360 AI “Through a practice known as staking, several cryptocurrencies give their owners the ability to generate passive income”.. Crypto staking entails leveraging your digital assets to support blockchain protocol transaction verification. Despite the hazards, staking can let you increase your cryptocurrency holdings without having to acquire more.
Risk management methods in your cryptocurrency portfolio include diversifying the types of coins you purchase. The CEO of Coin Insider was quoted saying that by investing in various products, you may protect yourself — to some extent — from losses in one of your holdings since cryptocurrency assets may rise and fall at varying rates and over varying periods.
Although cryptocurrency can yield astronomically huge gains overnight, there is also a sizable drawback. Investors should assess whether their liquidity needs, time horizon, and risk tolerance match their investor profile. Investors must complete their research, allocate a suitable portion of their investment, and acquire the necessary investing skills.
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