Features of investing in cryptocurrencies: Advantages and disadvantages of investments
Regardless of whether you are a professional investor or just a beginner in investing, most likely you have thought at least once about investing in cryptocurrencies.
Large number of new investors entered the market when the cryptocurrency boom took place in 2017. Despite the long-term correction after the rally, many investors still remained in this market, and new investors continued to enter it. This confirms the significant growth in liquidity in the cryptocurrency market over the past few years.
In turn, trading instruments such as futures and options become more accessible in the cryptocurrency market. This gives retail and institutional investors more opportunities to benefit from the crypto market, and the investing process has become more convenient for the market participants.
If you are considering the option to invest in the crypto market, then you should know the main market’s features, what you should prepare for, and what to expect from the market.
Advantages
Significant growth potential
Nobody knows what the value of cryptocurrencies will be in a year or ten years from now. But still, in the long term, cryptocurrencies have already shown that they can be a great investment. For example, in 2010, bitcoin was worth less than $1, now it costs about $ 20,000.
The cryptocurrency market is still in its early stages of development, and many projects are only a few years old. The crypto market is often compared to the beginning of the Internet era. It was also difficult to assess the potential of “internet companies”. We quickly forgot about some of them while others have become tech giants without which it is difficult to imagine our life.
The same applies to cryptocurrencies, not all of them will be successful, but many have limitless potential. With the growth in user support and mass adoption, the price of cryptocurrencies may face significant upside movement.
Diversification
Cryptocurrencies were developed as an alternative to the traditional financial market and services. Therefore, it is not surprising that the movement of the crypto market does not always correlate with, for example, the forex or commodity market. This opens up a great opportunity for diversification when building an investment portfolio.
Experts recommend investing at least 1-10% in cryptocurrencies when building a portfolio. The percentage depends on the investor himself, his goals, strategy, and confidence in the market itself. In addition, sometimes it is worth rebalancing the portfolio, especially if it contains cryptocurrencies, since the cryptocurrency market is more prone to rapid changes.
Also, you should consider investing in several cryptocurrencies to diversify the portfolio. It can help hedge risks and unleash the potential of cryptocurrencies.
Trading accessibility
Cryptocurrencies make trading and investments available to everyone, regardless of what country you live in, what’s your starting point, and the individual’s background. Anyone with an Internet connection can start investing in cryptocurrencies with any amount. At the same time, the commission for transactions and trading is very low compared to other assets since you can invest without intermediaries.
Don’t forget that cryptocurrencies are a digital asset, which means they are quite easy to store, transfer, and convert into another currency. For example, you can easily exchange Litecoin to Bitcoin in a few seconds and then withdraw it to your wallet.
Moreover, the cryptocurrency market is available 24/7, unlike, for example, the stock market. Traders can make trading decisions whenever they want without having to wait for the market to open or close.
Disadvantages
Volatility
Cryptocurrencies are a relatively new asset that is not as widely popular for investing as stocks or real estate, so they are highly volatile. The crypto market has a fairly large number of retail investors who act emotionally and can sharply move the price in one direction or another.
While volatility provides more earning opportunities, it also increases risk, especially when trading on margin. For those who are used to trade with some strategy or with protection orders, the cryptocurrency market may seem a little chaotic. Therefore, you may have to adapt your strategies to the cryptocurrency market features.
For long-term investors or so-called HODLers, volatility has practically no effect since they have little interest in trading. Over time, the high volatility may become an echo of the past as the market matures, more institutional investors enter, and the market itself becomes more liquid.
Regulation uncertainty
In many countries, the status of cryptocurrencies remains uncertain due to the lack of proper regulations or a clear regulator’s position. Without a legal framework, an investor cannot be sure whether he should invest in cryptocurrencies and what taxes to pay on this. It also limits the availability of cryptocurrencies for the investor, as even global exchanges may not support fiat transactions from certain countries.
Regulation uncertainty can affect the process of interacting with crypto. For example, not all banks are crypto-friendly, so an investor may have to look for new ways to start investing in cryptocurrencies and to convert profits.
Big price for the mistake
Successful investments in cryptocurrencies require one to be well-versed in the crypto industry. This concerns not only the choice of cryptocurrencies for investment but also how these cryptocurrencies work.
The cryptocurrency world does not forgive mistakes. If you enter the wrong destination address or confuse cryptocurrencies with each other, then you may expect a loss of funds.
You also need to ensure the safety of your funds by yourself. Cryptocurrency transactions are irreversible and there is no third party to complain about a mistake. You should only blame yourself if you make a mistake. Therefore, investing in cryptocurrencies requires good and proper self-management.
