Even seasoned crypto investors must admit that the eighteen months between January 2020 and July 2021 have been an emotional rollercoaster. 2020 started with cryptocurrencies continuing to recover slowly across the board, and cautious optimism was in the air. Then, just as more people began asking, ‘Should I buy cryptocurrency,’ the full force of COVID-19 lockdowns came crashing down on an unsuspecting market, causing Bitcoin to lose more than half its value in a matter of days. Fuelled by a bloated money supply, aggressive government stimulus, and a wave of institutional adoption, the crypto markets recovered spectacularly since then to reach new all-time highs.
However, a crypto crackdown in China and cooling interest from retail and institutional investors caused a big Bitcoin crash that wiped off around $1 trillion from the crypto markets since mid-May 2021. Once again, the volatility of cryptocurrencies in both directions has caused the age-old question of ‘Should I buy cryptocurrency?’ to resurface.
Motivation For Investing in Cryptocurrencies
The first and most important reason for investing in cryptocurrency relates to our desire for a long-term store of value. While fiat money can inflate uncontrollably and lose its purchasing power over time, most cryptocurrencies have a finite supply controlled by mathematical algorithms. Furthermore, because of the cryptographic structure of cryptocurrencies, your wealth is indeed yours, and no one can confiscate it from you. Financial self-sovereignty may not mean much to those living in developed countries that respect the rule of law, but it can be the difference between life and death for refugees and citizens of failed states. When it comes to store-of-value cryptocurrency, Bitcoin continues to be the standard-bearer for the rest of the market.
Another motivation for investing in cryptocurrency is the potential of yielding high returns on early-stage investments. Projects like Ethereum and Cardano are remaking the internet as we know it with smart contract technology. Buying the respective tokens of these two chains allows investors to participate in any success they may experience. Furthermore, investors can leverage a range of decentralized finance (DeFi) and staking applications to earn even more yield. Younger generations are especially attracted to DeFi due to its open nature.
While DeFi platforms continue to draw in more users and capital, it’s crucial to bear in mind that these platforms are experimental by nature and thus carry a fair share of risk.
Even though cryptocurrencies are highly volatile by nature, their risk-reward profile has been better than other asset classes over the last year. To compare the risk-adjusted performance of cryptocurrencies to stocks and gold, we’ll use a metric known as the Sharpe Ratio.
What is Sharpe Ratio?
The Sharpe ratio is a tool that helps investors analyze an investment’s return about its risk. The return earned over the risk-free rate per unit of volatility or total risk is known as the ratio. Volatility is a measure of an asset’s or portfolio’s price changes. An investor might also generate an estimated Sharpe ratio using predicted portfolio performance and the projected risk-free rate.
A Sharpe Ratio of 1 is considered good, two is great, and three is excellent. So how do Bitcoin, Ethereum, gold, and stocks perform?
Would you look at that, even though cryptocurrencies are far more volatile than other asset classes and have dropped by nearly 50% since all-time highs, Bitcoin is slightly behind stock on a risk-adjusted basis and Ethereum way outperforms them both. Meanwhile, gold has had a challenging year and has returned precisely 0%. Gold has historically done well during periods of inflation, so it’s surprising to see such underperformance given all the inflation fears prevalent in the market. Perhaps Bitcoin is making good on its potential as a challenger to gold in the store of value category earlier than we thought.
How To Decide On The Best Cryptocurrency To Invest In
While Bitcoin remains the king crypto, drawing in investment from institutions and governments alike, there are plenty of opportunities outside of Bitcoin for the enterprising crypto investors.
- A strong project will have a lot of development activity. If activity is lacking or diminishing, this is cause for concern.
- In addition to the pace of development surrounding a project, it is also crucial to pay attention to the growth of its user community. Gauging the sentiment of a token’s supporters on Twitter, Reddit, and other social forms is essential to the decision-making process.
- It’s critical to monitor the token’s overall supply and the rate at which new tokens get added.
- When it comes to selecting cryptocurrencies, block timings and transaction prices can be useful.
Some tokens with strong communities and token models include Dogecoin, Cardano, and Ripple, all of which are available for purchase on Coinmama!
Diversifying Your Crypto Portfolio
As any savvy investor will tell you, putting all your eggs in one basket isn’t an optimal strategy to take. By dividing up one’s money and investing in different assets, investors aren’t dependent on the movement of any single asset. That way, if one asset underperforms, perhaps the other investments in one’s portfolio can do better and bring up the overall return of the portfolio. It’s important to note that when it comes to crypto, diversifying across tokens doesn’t necessarily make a portfolio less risky.
This is due to the fact that cryptocurrencies are highly correlated by nature. For example, the correlation between Bitcoin and Ethereum is 87 %.
However, when compared to other asset classes, crypto’s correlation is weak and thus a balanced portfolio of stocks, real estate and gold could definitely use a crypto investment. In short, diversified portfolios need Bitcoin and crypto.
While many advocates hope that digital currencies will eventually become part of everyday life, speculative trading presently dominates the bitcoin market. Because each person’s circumstance is different, you should always do your own research before making an affirmative, educated decision to buy.