Crypto Essentials: Minimum Risk vs. Maximum Returns
May 31st 2020
Recent years have seen Bitcoin become dubbed "digital gold", and 2019 saw this become far more of a reality when U.S. Congressman Brad Sherman (D-CA) claimed Bitcoin
could threaten the US Dollars dominance in the global economy.
Since its release in 2009, Bitcoin has experienced unprecedented growth and investment following that increase daily. This crypto was the first of its kind to be any form of success, and it made governments and traditional institutions nervous - was it really possible that a decentralised digital currency was on the horizon?
There's no denying, the hype surrounding Bitcoin in its early years sparked other cryptos to enter the market. High potential ROIs ensured a strong demand and rogues and players were quick to take advantage. Unregulated Individual Coin Offerings (ICOs) sprang up and the market became volatile. A single Bitcoin's worth rocketed to nearly $20,000 in 2017, then plummeted throughout 2018 to settle between $3,500 and $4,000. This made investors nervous, many turning their back on crypto in favour of more traditional, tried-and-tested investments.
The last year has seen a comeback. The market has matured and more regulations and dollars are in place to support trading and limit the risks. This has brought about a whole new wave of investors entering the crypto world with hopes of gaining lottery-style rewards.
It's somewhat of an inevitability that a digital currency is around the corner. Just as our lives have become smarter and we now rely more heavily on computerised banking systems and processes, a decentralised currency driven online is lightly to be the currency of the future. It's an exciting prospect and one that naturally sparks investor interest. Now is a good time to invest in the future, but in doing so, unless you fully understand the technology and market intricacies, it's a good idea to hedge your bets, employ professionals and minimise the risks in order to gain the best rewards.
Crypto Basics: The best ways to minimise risks and maximise returns.
1. Hedge your investments and spread the risk.
Most of us have heard the saying, "don't put all your eggs in one basket". Well, there's some truth in this. Although it is possible to see extremely good ROIs when investing in crypto, it is still high-risk and the market can be volatile. If you're starting out, it's a good idea to spread your investment over a number of different cryptos rather than going all-in on one. Talk to a registered advisor about diversifying your funds into a portfolio of currencies, just as you would spread the risk via 401 accounts and index funds. It's highly lightly that you will see good returns and at least one crypto will perform far better than expectations.
2. Use a Registered Investment Advisor (RIA)
You will find no end of websites and so-called "digital advisers" online claiming to know the crypto market and promising clients phenomenal results. But, do your homework and only use a Registered Investment Advisor (RIA) who has earned accreditation from the Securities Exchange Commission. RIAs should act in their clients best interest, they have a fiscal duty to do, meaning the odds are in your favour.
3. Do your homework.
It's all well and good buying into the crypto-hype and wanting a piece of the action, but do your homework first. Gain a basic understanding of the market and the technology involved before investing - at the end of the day, it is you that's ultimately responsible for your investment and the risks you take, if you want the best results, take an interest in the market and educate yourself. Avoid investments in low liquidity crypto's and opt for those with a better potential for growth.
4. Make sure your crypto holdings are stored and traded safely.
Cybersecurity is obviously a concern for crypto investors and there have been some well-publicised hacks to exchanges and personal wallets. Unfortunately, cybercriminals do exist along with their fake websites and campaigns aimed at capturing your account and log-in details. Thankfully the security measures in place on trading platforms and with regard to personal accounts have increased dramatically and continue to do so daily. Although cyber-attacks are on the decline and it is now far safer to trade crypto than it ever has been before, it is still vitally important to protect your crypto assets and be aware of security scams.
Cryptocurrency, should you invest?
Cryptocurrency is still an emerging market and investing in crypto is a high risk, high return activity. While the volatility of the more established cryptos like Bitcoin (BTC)
and Ethereum (ETH)
has reduced substantially over recent years as they become a more globally-recognised investment asset, the newer cryptos can still be unstable, in some cases their daily worth dropping and soaring more than 50 per cent either way.
The crypto market is heavily media-led and sensationalist headlines and negative and positive media campaigns (often driven by rival blockchains) do impact crypto worth and rattle the market. The safest way to reduce market risk in crypto is to diversify, especially with regard to mid-cap and small-cap coins.
When debating whether to invest in crypto or not, it's worth remembering that although crypto investment is high-risk and a regular portfolio of bonds and stocks can produce more stable long-term returns, no diversified traditional asset class portfolio can result in returns we have seen on the crypto market.
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