Cryptocurrency adoption is growing, and many are wondering whether to include digital coins into their investment portfolios.
Here is the list of objective factors why to invest in virtual currencies.
1. High growth potential
Cryptocurrencies generate higher potential returns than other asset types. Despite the relatively new technology behind digital currencies, they have been among the best-performing assets of the past decade, if not the very best.
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For example, within the past 12 months, Bitcoin increased by more than 700%, while the Dow Jones (stock market index that measures the performance of Top 30 U.S. companies) grew by around 45%, and gold price is only about 5% higher than a year ago.
Flipside:
Crypto markets are more volatile compared to traditional ones. The coin prices may shoot up or drop by double-digit percentages in minutes.
This happens because crypto space is still driven mainly by speculations, psychology, and emotions rather than intrinsic value. However, big institutional investors are jumping into crypto and becoming a significant force behind it. Their appearance may lead to a more liquid and less volatile market.
2. Legitimate asset class
Digital currencies are no longer a novelty or a niche. Governments have opened for them, businesses all over the world started accepting cryptos for goods and services. Bitcoin became the number six among the world’s top assets by market capitalization.
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Institutional billion-dollar investments created more confidence around cryptos and established them as a legitimate asset class. The sophisticated financial instruments like crypto derivatives became an important force in the cryptocurrency market, marking the evolution of cryptos as an asset class.
Flipside:
The technology behind cryptos and their infrastructure is relatively young; there are various issues to overcome, including cybersecurity and the lack of regulations for a safer investment environment.
3. Portfolio diversifier
There is a common saying among investors – don’t put all the eggs into one basket. Because if you drop, you’ll lose all eggs at once. The same with investments: if you invest in a single asset, you may lose everything if its price crashes.
Portfolio diversification (or investing in different types of assets) is a key investment principle that helps you manage the risk. A balanced portfolio should include assets whose prices move in different patterns and have no relation with each other (do not correlate).
Cryptocurrencies generate higher gains than most other asset classes. Adding them to investment portfolios can boost the returns and improve the performance of the entire investment portfolio.
Flipside:
Crypto markets are notorious for their volatility. Prices of digital coins do not always follow predictable patterns; the fluctuations may be pretty extreme.
4. Hedge against inflation
Cryptocurrencies are volatile assets, but they are also capable of holding value over time. You may purchase them, hold and sell in the future for a higher price.
When the global pandemic shook up the economies in 2020, governments worldwide started implementing various relief measures to increase spending. But they also increased inflation.
Money began to lose its purchasing power and cash savings simply melted. Investors were forced to look for options to diversify their portfolios and find the best store of value. Bitcoin became one of the best options, with almost 700% yearly returns.
Flipside:
Cryptocurrencies have different amounts of coins issued. The value of a particular currency strongly relies on its supply. The limited supply creates scarcity, thus more significant demand, hence price growth. The unlimited supply, on the contrary, leads to inflation and a drop in value.
5. Highly liquid market
The cryptocurrency market is highly liquid. Simply speaking, it is an active market where anyone can easily buy or sell their digital assets. Multiple market participants can fill orders in seconds. This can be critical, especially in terms of unexpected events.
Market liquidity is a critical metric to consider before investing. The liquid market means there is a large number of sellers and buyers that can quickly execute trades. Consequently, the prices are more competitive and less affected. The market itself becomes more stable and less risky.
The illiquid market, on the opposite, has lower supply and demand. It is also much riskier in terms of price swings. The lack of buyers or sellers impacts the asset price as it might be difficult to convert it to, for example, cash.
Flipside:
Not all digital coins are liquid. Smaller ones or those of low market capitalization may have lower trading volumes. This means that it may have a significant impact when the demand increases and leads to higher volatility.
