Bitcoin investment may be a good or bad decision for different types of people. It actually depends on the capacity of taking financial risks for a person. The analysts at MoneyGeek, however, agree that cryptocurrencies are here to stay and represent a significant new asset class.
As the bitcoin market is known to contain the highest rate of volatility among all, one shouldn’t invest all savings in it. A lower than 5% is enough for this market, as per the recommendations of many experts.
Over the past five years, adding even a little bitcoin to your portfolio would have enhanced profits while increasing risk.
Based on our research into the hypothetical 70/30 stock/bond portfolio’s historical returns over the past five years, it is determined that allocating 3% of the portfolio to cryptocurrencies instead of equities for a 3/67/30 portfolio increased overall returns by 42%. Also, crypto raises a portfolio’s overall volatility; our 3/67/30 strategy results in an 18% increase in overall portfolio volatility.
Also, unlike bonds and equities, which are the two most used traditional assets, cryptocurrencies’ long-term returns and behavior are primarily unknown. It may be argued that as more money enters the bitcoin market, returns would fall as volatility increases.
Weekly Volatility in Cryptocurrencies Was Four Times Higher than Stocks
Volatility, or the amount by which returns fluctuate over time, is commonly used as a proxy for risk. Higher volatility readings indicate more extreme price swings, whereas lower volatility readings indicate more stable performance.
Regular returns typically have a smaller potential for substantial gains since investors typically forego high potential returns in favor of enhanced consistency. Weekly cryptocurrency volatility is four times that of stocks and 26 times that of bonds since 2013.
Limiting your overall exposure is especially important when dealing with highly volatile investments like cryptocurrency. In this approach, a positive change in the asset’s value contributes to your portfolio, and a severe decline won’t ruin it.
When investing, it is best to avoid short-term fluctuations and focus on the long-term picture.
The reasoning goes as follows: if your portfolio suffers a rapid fall in value and you’ll need the money within the next several years (or even within the next decade, according to others), it may never recover.
Using this strategy, you can be a successful crypto investor in the future. You can trust a reputed platform to check Bitcoin and its uses, to begin with.
Constraints inherent to cryptocurrency systems
Some retail investors are hesitant to put money into cryptocurrencies due to two main issues: a lack of regulatory control and a shortage of information intermediaries. Although cryptocurrencies have thus far operated mostly unchecked, they are increasingly seeking legitimacy, which suggests the need for new legal frameworks. Several factors contribute to this extra carelessness.
First, due mainly to a lack of regulation, bitcoin can finance illegal operations (such as organized crime or drug trafficking). Cruz points out that to get rid of the bad actors, the sector needs to establish ground rules with the support of international regulators.
Moreover, no official intermediaries in the cryptocurrency field serve as the source of smart investment decisions, as opposed to investment within traditional asset classes, where certified financial advisors and analysts provide market information and buy/sell advice.
Without the mediation of established institutions, the cryptocurrency market is left to internet discussion forums like bitcointalk.org and reddit.com. Investor advice can be given by active users of these sites who monitor the crypto markets, but they have no credentials to back up their claims.
Lastly, the fact that cryptocurrency is not yet supported by exchange-traded funds (ETFs) is a barrier to entry for cryptocurrency investment. This makes it much more difficult for regular traders who like to make a diversified portfolio and trade all those currencies.
Theft, scam, and other losses
The uniqueness and impressiveness of cryptocurrency are its strengths of it as well as serves as its greatest weaknesses too. Cryptocurrencies are decentralized; thus, it is up to each individual to keep their cryptographic keys, which are used to access their blockchain address, secure.
Investors who venture into digital currencies should be aware that several unique security precautions are required and that these may not be enough to safeguard their assets from hackers who continually improve their methods.
Hackers have taken a lot of people’s owned tokens from exchanges as well as from wallets are actually, proving that theft is still one of the most common risks for cryptocurrency users.
Furthermore, various frauds are designed to deceive users into parting with their tokens, including doubling scams, social engineering, market manipulation, and phony ICOs.