Understanding the Risks and Rewards of Cryptocurrency Investments: A Comprehensive Guide

2024-02-25 13:08:38

In the 2010s, cryptocurrencies made nearly a hundred thousand people millionaires. Over the course of the industry’s ten-year history, approximately 430 million people have come into contact with blockchain-linked digital currencies, which is less than 5.5% of the Earth’s surface. Investing in innovation and technology can be a great opportunity, but at the same time, it doesn’t hurt to be aware of the risks and, depending on this, to examine whether it is worth chasing the returns.

What are the risks of cryptocurrencies?

The exciting, innovative industry, which primarily aims at transparent and public trading between equal parties without an intermediary system, has been around for many years. with risk has, which should not be taken lightly, because one mistake can have irreversible consequences. These risks are:

  • Volatility: Although the cryptocurrency market has reached a market capitalization of $2,000 billion after November 2021, and the daily volume is around $50 billion, it is still dwarfed by the traditional stock market, and due to its small size, the price drag for players with high exposure easy. In comparison, the total securities market reached $115 trillion in February 2024, or almost 60 times the size of the crypto market. The smaller the capitalization of a project, the easier it is to fall into the trap of volatility, despite the fact that most currencies move with Bitcoin, whose market capitalization has exceeded $1 trillion.
  • Inadequate rating: While in the stock market it is possible to determine the value of some shares based on the performance of the underlying company, in the case of the crypto market it is difficult to determine the true value, since most people hold cryptocurrencies solely for the purpose of speculation. Despite this, Bitcoin, as a valuable asset, holds its place among the “big ones”, as it is the asset with the 10th largest capitalization in the world. The first is gold, which is almost 14 times larger than Bitcoin.
  • Hacking: It is interesting that more than half of the network is validated by hackers, and because of this, the user can easily become a victim of a scam in a careless moment. Technical information – credit, bridging – hides an additional risk for the industry, so it is worth buying on reliable exchanges (e.g. Binance, Coinbase, Kraken) despite the higher costs. And for storage, it’s worth getting a wallet – hot or cold.
  • Decentralization: Decentralization is a double-edged sword, because what is an advantage is also a disadvantage for the market. There is no central organization that would take over the operation, the user is dependent on the community, where it is easy to take over with a well-organized attack.
  • Keys: If you don’t own the key, you don’t own the cryptocurrency either. Cryptocurrencies are protected with keys that, if lost, are almost impossible to recover. Portfolios should be managed both digitally and analogically, so that you can prepare for all circumstances.
  • Regulations: Currently, few countries have exact regulations regarding cryptocurrencies, and even fewer countries – only El Salvador and the Central African Republic – accept them as a means of payment. Every country handles this issue differently, cryptocurrencies are assigned different classifications, which everyone should be aware of depending on where they live.

Who is recommended to invest in cryptocurrencies?

Basically, investing in technology and innovation has always paid off, but investing in cryptocurrency requires a lot of research and constant information. As with all investments, it’s worth determining the time period over which you think about the investment, since you can’t get rich from it from one moment to the next. According to experts, 1-5% of the entire portfolio should not be invested in cryptocurrency, but it is not recommended for seasoned investors to make this ratio more than 10% either. In the case of cryptocurrencies, it is worth looking not only at the yield, but also at the adaptation for the future, a mission that aims at a financial system without intermediaries and stability of value compared to the fiat financial system, where billions of dollars are printed every day by central banks.

Diversification is extremely important, and the individual’s risk tolerance is even more important, since the goal is to make the earned income work while we sleep. Currently, the safest investment is savings life insurance, which is equipped with risk protection. Government securities are also among the safer picks, but at the same time there is a risk of non-payment in the event of state bankruptcy. Corporate bonds are also capable of an average return of 4-5% in the long term, with relatively low risk, but they cannot be said to be risk-free.

At the same time, there is also the possibility of higher returns in investment opportunities with higher risk. Individual shares, option trading or investing in cryptocurrencies are already in this category, where the return mostly depends on others, and not on us or a specific company. Institutional investors turn over billions of dollars on a daily basis, and they get even richer from careless, weak-handed small investors. And leveraged trading / CFD / FOREX already belongs specifically to the gambling category.

What do the numbers show?

Experts use different indicators to compare investments, but at the same time, the size of the market, the composition of assets and the demographic situation also often determine what we can invest in. Thanks to the institutional investors, it is possible on the stock exchange with relatively low transaction costs, so-called to buy stock indexes, the most popular of which is the S&P-500, which weighted the shares of the 500 largest companies in the United States. In the cryptocurrency market, Bitcoin is considered dominant, accounting for more than half of the market as a whole (51.2%), while in the case of the S&P-500, only Microsoft (7.13%) and Apple (6.36%) account for 4% share greater than

In order to compare the investment options, it is worth examining the average yield of a given asset, based on which we can calculate according to the time period and objective. Due to the age of the cryptocurrency market, it does not have as large a sample as the stock market, but in the case of Bitcoin, we can determine the cyclicality that characterizes the market. Currently, if we look at the annual returns, then one loss year is followed by three years full of profits, and thus its average return since 2013 is 107.96%, while in the last 5 years it is 63.18%. In contrast, the average return of the benchmark S&P-500 has been 13.75% since 2013, and 15.69% over the past 5 years. By the way, the correlation between markets is at a new peak thanks to the improving macro environment.

Although it is not worth drawing a far-reaching conclusion based on the average return, since the last few years have been punctuated by a COVID-19 epidemic, a Terra Luna collapse, the bankruptcy of the FTX crypto exchange, at the same time, it is quite obvious that since the 2010s, Bitcoin has been the largest it is the best performing device among devices, and it will arouse the interest of many people sooner or later.

Published on the BitcoinBázis page.

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