Over the past few years, crypto investing has become increasingly mainstream. Today, even people far removed from this industry recognise words like «bitcoin,» «ether,» or «mining».
Investors are also actively entering this market, as crypto garners global attention. One example was the Financial Times’ Crypto and Digital Assets Summit that took place in London on May 5, 2022. Leading crypto representatives gathered to discuss the future of this industry and the problems it still faces.
Whether you are new to investing or already have experience, you may wonder if there’s a place for cryptocurrencies in your portfolio. Given the sheer growth of bitcoin and other crypto assets, it’s easy to understand why they hold such great interest.
But even so, it’s worth acting carefully. Cryptocurrencies can have a place in your investment portfolio, but only after you evaluate the main advantages and risks. Sometimes, people who have only just begun investing in crypto can get lost in the sheer variety and sky-high prices. They hope to get rich quickly, but many of them don’t really understand how to work with these assets.
Nevertheless, many experts, such as Dan Morehead from Panther Capital, are convinced that in 10 years, everyone will have blockchain and crypto. The world is not standing still, and the same is true of crypto technologies. Let’s figure out what makes investing in these assets so promising and what hidden pitfalls one should watch out for.
Why Cryptocurrencies Attract Investors
The first advantage of the cryptocurrency market is how rapidly it grows — faster than all other financial markets. Today, its total capitalisation exceeds billions of US dollars. Of course, 62% of this volume is the capitalisation of Bitcoin, but other projects are showing growth too.
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 already accept crypto payments, and this recognition will only grow. This provides greater flexibility for an investor, allowing them to turn crypto into goods and services with a single click.
Sarojini McKena, co-founder of Alien Worlds, supports this point on the flexibility of cryptocurrencies. She speaks highly about the phenomenon of NFTs (non-fungible tokens), 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 remove a great amount of bureaucracy if applied correctly.
Numerous companies, from fashion houses like Gucci and Tommy Hilfiger to food giants like McDonald’s and Coca-Cola, also use them. Non-fungible tokens are becoming a reason for pride, involvement in the latest technologies or just entertainment.
Key Pain Points of Crypto Investing
Despite all the advantages of cryptocurrencies, there are several drawbacks that darken this positive landscape.
- Security
First of all, there is the matter of security. Cryptocurrency investments are not like stocks and bonds, and their security situation causes worries. 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.
- Volatility
Then it’s also important to keep in mind the rapid price jumps of cryptocurrencies, and that such high volatility can play against you. The crypto market is decentralised, 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, crypto is strongly tied to demand: if large market players buy certain coins for a certain time, it moves the market in one direction or another. Volatility and speculation are the main risks in this area. Throughout the history of cryptocurrencies, there were several cases when billionaires dropped to being millionaires in just one night. Such plunges in prices may not affect crypto whales much, but they will certainly hit the less affluent owners.
- Regulatory uncertainty
Another real risk in the cryptocurrency market concerns future taxation and additional regulation. Many countries are busy working out the legalities of crypto transactions, but so far, this issue is still up in the air. Many central banks have decided not to legalise cryptocurrencies as legal tender, since they are not subject to state regulation.
We can observe a similar problem with the trust of state institutions, for example, in Italy. Pierro Cipollone, the Deputy Governor of Banca d’Italia, stated that the crypto market moves much faster than regulators. They do not understand what measures they need to take to prevent illegal actions — like sponsorship of terrorism or money laundering — with cryptocurrencies. Sometimes, their actions are chaotic and illogical, which negatively affects the crypto sphere. This also introduces an imbalance in the general mood towards cryptocurrencies.
Conclusion
Summing up, we can say that the cryptocurrency investment market really does have great potential, with even major players like Visa or Mastercard having entered it. But on the other hand, it still continues to be new, unstable and problematic from the regulatory point of view.
As with any investment, crypto investing requires a sober look and proper risk assessment. However, this industry is developing rapidly, so there is hope. Hope that, after minimising negative factors, the world will start using crypto broadly. And that it will not take a long period of time to get there.
