Given the billions of dollars invested, the buzz around cryptocurrencies, and the daily introduction of new cryptocurrency companies, the question that many investors are asking themselves is if cryptocurrencies are a viable investment. Even though most, if not all, cryptocurrency investors lost money on scams like the Squid Game token, TerraUSD stablecoin, and other altcoins, is it still a smart idea to invest in cryptocurrencies? Given the extraordinary volatility seen thus far and the claims of cryptocurrency millionaires gaining or losing millions overnight, would a prudent investor still consider investing in the sector? The time horizon is the most significant distinction between investment and trading, thus we must make it first. Any asset dealing frequently has a short-term time horizon and is more speculative. Dealers may perform hundreds of trades each day to profit from intraday price fluctuations.

Trading calls for a disciplined approach since experienced traders appropriately manage their exposures. But investing is a disciplined strategy that accomplishes predetermined financial goals over a longer period, usually five years or more. Investors could create a plan to save money for retirement, a home purchase, or a child’s education. Determine your level of risk tolerance in the following stage. Because of their volatility, cryptocurrencies will only be a good investment if you can stomach a certain amount of risk. If even little price changes keep you up at night, higher volatility investments might not be the best option for you. Due to their price volatility, which is equivalent to that of other asset classes like growth stocks or high-yield bonds, cryptocurrency assets are risky investments. You must be equipped to handle potentially disastrous pricing changes.

Another element to consider is the liquidity limits that some crypto assets have. Simply said, liquidity refers to how simple or challenging it is to buy or sell a certain item at any moment without significantly affecting the price. If you want to buy a rare automobile, for instance, there are many of them available, and if you can find one, you will simply pay what the seller requests. Because the following seller would surely seek a higher price from the subsequent buyer if you bought the market, it is very illiquid. But if you want to buy something more general, such as exchanging some Japanese yen for your US dollars, because there is a lot of liquidity, the price you pay for the yen will be wherever the market is. The next buyer of the yen will probably purchase it at a price that is comparable to or near the one you transacted, given there is a lot of liquidity among JPY traders that take UD as a form of payment.

We’ve discussed some of the important aspects that investors should be aware of so far, but there are also compelling justifications for investing in cryptocurrencies.

A new asset class for these kinds of assets is likewise developing as cryptocurrencies expand and change, as we have seen with Bitcoin and Ethereum. Like Cathy Wood from Ark Investment Management, several notable professional fund managers have created specialised investment funds that solely invest in Bitcoin and other cryptocurrencies.

The aforementioned institutional investors also strive to diversify their risks by owning a variety of investments that behave differently under the same economic conditions. Some claim that cryptocurrency diversification benefits are helpful, especially in light of inflation being on the rise. Additionally, we have seen the introduction of brand-new investment vehicles that profit from the ascent of certain cryptocurrencies, such as options and futures on Bitcoin and Ethereum, as well as specific investment vehicles that properly handle cryptocurrencies for investors.

Not to mention that the market is still very new, so there may be even more advancements in the future that will make investing in cryptocurrencies more appealing. Stablecoins are one type of cryptocurrency that is backed by assets and is correlated to the value of a fiat currency. If fraud is an issue, tougher regulations, such as those governing initial coin offerings, may be put in place to protect investors. Futures on cryptocurrencies have already been announced, and futures on more cryptocurrencies that are traded on reputable exchanges could also become accessible if the market changes. Furthermore, futures make it possible for bitcoin bears to short-sell the commodity, boosting overall liquidity.

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