As digital currencies continue to gain in popularity, there are also a growing number of investors looking to get in on the action by investing in cryptocurrencies. No one can doubt the immense growth that digital currencies such as Bitcoin, Ethereum, and Binance Coin have seen over the years. Asides from traditional currencies, native currencies of DeFi and NFT projects have grown so much that many believe that investing in these new projects could produce the next batch of millionaires, if not billionaires.
However, those who are skeptical may often wonder what makes crypto investments so attractive. Especially when a fraction of financial advisors tag cryptocurrencies as a facade. Read along as I talk about what cryptocurrencies are and one major factor that makes investing in crypto so enticing.
What is Cryptocurrency?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Without the aid of outside intermediaries, they make it possible to make safe online payments with the help of blockchain technology.
Bitcoin, first released in 2009, is the most well-known cryptocurrency. It was created by Satoshi Nakamoto, a man we’re yet to know, who shared a whitepaper introducing it to the public in 2008. Since then, thousands of cryptocurrencies have been created and are now available on the market.
You can mine cryptocurrencies or buy them via crypto exchanges. Not all online stores let customers use bitcoins to make transactions. In reality, barely any retail transactions are conducted using cryptocurrencies, even well-known ones like Bitcoin. However, the value of cryptocurrencies has skyrocketed, making them popular.
Investing in cryptocurrencies have a number of other advantages over traditional investments such as low entry barriers and no fees associated with them. This makes them a good choice for people who want to invest in a high-growth investment opportunity. However, this barely scratches the surface. Let me tell the major reason why crypto investments are so attractive to many today.
The Asymmetric Nature of Cryptocurrencies
There are a number of reasons why investors are attracted to cryptocurrencies. For starters, cryptocurrencies are not subject to national currencies, so they offer a degree of safety and immunity from political and economic uncertainty.
Additionally, many cryptocurrencies can be used as a medium of exchange, which makes them attractive for use in commerce. However, there is one important reason why investors love to invest in cryptocurrencies. This is because of the asymmetric nature of cryptocurrencies.
The asymmetry of cryptocurrencies is one of the things that fascinates me. What is asymmetry? An item that is not similar on both sides of a centerline is considered to be asymmetrical. This implies that, in the case of cryptocurrencies, the risk you run is only as great as your investment. However, you may often earn a lot of money from a single investment.
Let me first show you how asymmetric investment works. When you invest $100 and have the potential to earn $100, this is known as symmetrical risk. That represents a 100% return.
With positive asymmetric risk, you can turn an investment of $100 or $1,000 into $100,000 without compromising your current lifestyle. Even if you lose $100, it won’t be the end of the world. Of course, it’s not fun. But it won’t take you back to the slums. You stand to lose $1,000 if you decide to invest $1,000 in cryptocurrency. However, you also have the chance to earn 25 times your original investment.
Let’s assume you have a net worth of $100,000 and you decide to invest 5% of your whole net worth in cryptocurrencies. You only run the chance of losing $5,000 if you make this choice. The $5,000 becomes $50,000 if the investment succeeds and you earn 10 times what you initially put in. If you make 20x of your original investment, your $5,000 investment becomes $100,000. Your $5,000 becomes $250,000 if you make 50x.
If you invest in cryptocurrencies, what you stand to gain surpasses what you stand to lose. Okay, enough of the fiction. Let’s use real life examples.
If you had invested $5,000 in Bitcoin in November 2012, you would have received $482,000 one year later. In only 367 days, you would have made a profit of $477,000. Your profit is 4.8 times your net worth if you compare it to your original net worth. How about if you had invested in Bitcoin between July 2016 to December 2017 with the same amount, you would have made a profit of $143,050. That is a substantial ROI.
When you take a look at all these examples, there’s a similarity — the risk is limited to your investment, but the profits can be huge. Without exerting any effort, you can earn ten times your original investment. This is why investing in cryptocurrencies is so enticing for investors.
5 Things to Consider Before Investing in Cryptocurrencies
Before investing in cryptocurrencies, remember to put your finances in order. This could mean setting up an emergency fund or creating funds for diverse investments. Before starting out, pay attention to these five important factors.
1 – Know What You’re Investing In
Know precisely what you’re investing in, just like you would with any other investment. When purchasing stocks, it’s crucial to carefully research the company and read the prospectus. Plan to use the same procedure for all cryptocurrencies, since there are literally hundreds of them, each of which operates differently, and more are being produced daily.
Many cryptocurrencies have no backing whatsoever, whether in terms of physical assets nor monetary flow. Many crypto assets depend on the market becoming more positive and bullish for you to earn, unlike stocks where a firm may increase its profits and generate returns for you that way. This is why you should be aware of the possible gain and downside before investing. Your financial investment might become worthless if it is not supported by an asset or cash flow.
2 – Be Cautious of Volatility
The most volatile asset values are cryptocurrencies. They might fall in a matter of seconds based only on an unfounded rumor. That may be wonderful for experienced investors who can quickly execute transactions or who have a firm understanding of the market’s fundamentals, its current trend, and its potential future directions.
However, this is a minefield for novice investors without these abilities or the sophisticated algorithms that guide these deals. High-powered Wall Street traders play a game of outgunning other wealthy investors in the volatility market. The volatility might quickly overwhelm a novice investor.
This is because volatility frightens traders, particularly newcomers, and shakes them out. Other traders could enter the picture at a discount. In other words, whereas novice investors “buy high and sell low,” expert traders may “buy low and sell high.”
3 – Don’t Risk More Than You Can Afford to Lose
Finally, it’s crucial to avoid investing money you need in speculative assets. You shouldn’t invest in volatile assets like cryptocurrencies or other market-based assets like equities or exchange-traded funds (ETFs) if you can’t afford to lose it all.
It’s not advisable to use money you will need to use in the next few months or years. Such funds should be kept in secured accounts for when you need it. There is one that you should avoid by all means. Borrowing money to invest in crypto in the hopes that you can double the amount and make some profits. No one can fully predict the market and it is highly risky to use life-saving money to invest in cryptocurrencies.
4 – The Past May Not Always Predict the Future
One advice most crypto traders follow is always finding a pattern and making investment based on this. If a crypto asset always has a pattern of falling below a certain support line and surging past its predicted resistance line, there’s a higher chance such pattern would happen again.
However, novice investors make the error of projecting previous results to the future. Inasmuch as this theory is a solid one, it doesn’t always work out. A cryptocurrency that has a history of being worth pennies can surge just like Bitcoin did. However, will that growth persist in the future, even if it does not do so nearly as quickly? is the crucial question.
5 – Apply Risk Management
Risk management is important when trading any asset on a short-term basis, but it may be particularly important when dealing with volatile assets like cryptocurrencies. Therefore, as a more inexperienced trader, you’ll need to comprehend the best ways to control risk and create a strategy that helps minimize losses. The method might differ from person to person:
- The simplest form of risk management for a long-term investor may be to never sell, regardless of price. The investor can maintain the investment thanks to their long-term outlook.
- However, a short-term trader may control risk by establishing rigorous guidelines for when to sell, such as after a 10% decline in an investment. The trader then slavishly adheres to the guideline in order to prevent a very little fall from later turning into a devastating loss.
- For starters, beginning traders might think about saving away a particular amount of trading money and just utilizing a fraction of it. They will still have money in reserve to trade with if a position swings against them. The bottom line is that if you don’t have any money, you can’t trade. Maintaining a cash reserve ensures that you will always have a trading account.
Risk management is crucial and avoiding it will cost you emotionally. Although selling a lost investment stings, proper risk management will prevent further losses that are more severe.
Conclusion
Cryptocurrencies are a new and exciting asset class that is growing in popularity by the day. They offer investors a unique set of benefits, such as the ability to make high-returns without relying on traditional financial institutions. So, if you’re interested in investing in cryptocurrencies, be sure to do your research and find the right crypto project for you. And once you have found it, don’t forget to invest with proper risk management.
