In March, as the world economies started to shut down and stockholders fled the markets due to the coronavirus outbreak, crypto currencies were becoming again a buzzword among investors. Before jumping into the fray, you might need to know a few things.
Historically, gold is the preferred option to diversify risk and hedge against stock volatility. But then in June, JPMorgan Chase & Co published a report that read like this: The coins market structure turned out to be more resilient than those of currencies, equities, Treasuries and gold. The coin referred to here is nothing other than what is known today as digital gold – Bitcoin, or in broader terms, cryptocurrency.
Up until recently, cryptocurrency was considered an anathema for some and an enigma for many. But if we go by the JPMorgan report titled Cryptocurrency takes its first stress test: Digital gold, pyrite, or something in between? and by what we have seen during the pandemic, it is here to stay. So, would it be a wise option to invest in it as we go forward?
Crypto currency as an investment option is not risk-free. In fact, its 12-year history suggests high risk and high volatility. Yet many analysts anticipate above-average institutional investor demand for crypto currencies like Bitcoin in the post-Covid19 era.
During the initial weeks of the Covid19 crisis, which marked the worst recession since the Great Depression, most traditional investments took a considerable hit. Markets crashed, real estate values dipped, unemployment surged, and companies went bankrupt. Out of this chaos emerged a significant number of conversations suggesting using crypto currencies as a safe investment option.
Why crypto?
Once looked at with scepticism, considered the currency of the dark web and even branded as a fraud by none other than the chief executive of the very same JPMorgan; crypto currencies are gradually making it to the mainstream helped by a number of highly respected experts recommending a certain exposure to crypto currencies within investment portfolios.
JPMorgan even went so far in softening its stand towards cryptocurrencies as to provide banking services to the Coinbase and Gemini crypto exchanges.
The latest reports by Bloomberg note that governments across the globe are forced to dole out billions of dollars in stimulus to counter the damages caused to the world economy by the pandemic. This represents a big opportunity for crypto currencies, which are expected to gain amid their renewed mainstream adoption.
On April 4, 2020, Robert Kiyosaki, co-author of the bestseller Rich Dad Poor Dad tweeted, DEATH OF DOLLAR. People desperate for money. Very sad. If government gives you free money take it yet spend it wisely. DO NOT SAVE. Buy gold, silver, Bitcoin. Dollar is dying. In fact, he predicted that Bitcoin prices would reach $75,000 per coin in three years. (The price of Bitcoin today is around $11,000).
What sets it apart
During the peak of the crisis in March, all cryptocurrencies, just like most other asset classes, took a nosedive. Bitcoin crashed to under $4,000. However, it proved its resilience by bouncing back faster than most: by the end of April, it had recovered most of its value.
Though the bubble collapsed as dramatically as it inflated, Bitcoin has rarely traded below the cost of production, including the very disorderly conditions that prevailed in March, the JP Morgan report said.
In addition to this, the report notes that even during the peak crisis there were few signs of flight to liquidity within the asset class as most crypto currencies fell simultaneously.
And yes, its called digital gold for a reason. Similar to gold, cryptocurrency has little correlation to other asset classes, especially stocks. Moreover, it is one of the most liquid investment assets if you are looking for short term profits.
But…
All that said, crypto currencies remain highly risky and volatile. From a peak of $20,000 per coin in 2018, it crashed to less than $4000 within a year. And while the complex algorithms and its decentralised nature make it difficult to corrupt, it is equally difficult to track or to pursue any form of legal recourse. Lastly it still remains unclear whether we have the infrastructure ready to ensure its safety and safeguarding.
So how to go about investing in it?
As crypto currencies become mainstream, we will see more governments bringing in policy frameworks and regulations which will iron out some of the concerns. According to experts, a 1-3% of allocation to cryptocurrency would be a wise choice. So, if you want to be that early bird and start investing in cryptos here are a few things to keep in mind.
- Do not put all your eggs in one basket – Many who invested in a single crypto coin or ICO paid dearly during the crypto market deflation in 2018. Diversify the risk by investing in a pool of cryptocurrencies screened by specialists. Remember that there are many coins other than Bitcoin.
- Invest through regulated professionals – Find certified financial professionals to help you choose a good portfolio of coins that could provide steady RoI and reduce your exposure to a down market. This would save you to have to understand the complications of the crypto ecosystem. But that doesnt mean blindly trusting your adviser or app, which brings us to the next point.
- Do due diligence – Education is extremely important before any investment. It is foolish to entrust an app or a person with the basic work and research that you must be doing. So, pull your socks up and get schooled on digital assets as well as its underlying blockchain technology. Go through those white papers, understand the utility of the token and the value the project is bringing on to the table.
In short, there are important risks that come with cryptocurrencies price volatility, you could lose your digital wallet due to a hard drive crash or a virus, your government might even outlaw it. So, take a calculated risk. Risk only as much money you can afford. Be a part of the future, but do not fall for FoMo.