Cryptocurrency is definitely not going away. In fact, a Deutsch Bank Research report from late last year predicted that the rise of crypto and digital currencies by 2030 was inevitable. It went on to further assert that an unraveling of fiat currencies was an increasingly likely scenario. So crypto isn’t going anywhere, but fiat may be on the way out. Those sentiments were published before the coronavirus unleashed the pandemic we’re now living through. The current situation only makes these predictions more likely. Given these two expectations and a looming recession, you might be eying up Bitcoin, Ether, or some other form of cryptocurrency as a possible investment to keep your money working through the tough times we’re anticipating. The question is not will crypto still be around in a decade from now, but rather what kind of investment should I be making?
Choosing to invest in cryptocurrency
You’ll have heard it before and no doubt you’ll hear it again – don’t invest money in anything if you can’t afford to lose it. It’s sage advice and you should take heed – no matter if it’s property, blue-chip stocks, or cryptocurrency that you’re thinking of sinking money into. Even gold isn’t a ‘safe bet’ these days.
Before you go opening an account to buy any digital currency, you need to get comfortable with the fact that cryptocurrencies see a lot more ups and downs than most other types of investments. If that doesn’t sit easily with you, it’s likely that this is not an investment you’ll enjoy. If it’s not such an issue, do some research and figure out which coins, if any, might be right for you. Don’t rush this, take your time, and do your homework – it’ll pay off in the long (or short) run.
There are a few simple steps for narrowing down the various currencies to the ones that are likely contenders for sinking your spare cash into. You’ll need to answer the following questions to your own satisfaction:
What value does X crypto currency create? Bitcoin, the digital currency that made these markets possible, creates value by giving access to a store of value to everyone. Its decentralized platform allows micropayments to be made by anyone, anywhere to anyone else in any corner of the globe, safely and without the need for banks or other financial institutions getting involved. It is and is most likely to remain, the Big Daddy of cryptocurrency. Ethereum, on the other hand, still uses blockchain tech, but its value is derived from the smart contracts that can be built with its technology and the automation of digital transactions. The utility of this will grow with the Internet of Things.
Other currencies are backing other applications. Check out the whitepapers behind the coins that spark your interest. The whitepapers should explain the offering behind the coin and help you to understand the value that cryptocurrency is bringing to the ecosystem. If the whitepaper behind a coin is non-existent or gobbledygook, you’ll do well leaving it alone.
Is the currency’s market cap high enough to make an investment worthwhile? This is the value of all of the coins that are currently in circulation. Total coins multiplied by the current price per coin = Cryptocoin market cap. It’s a fairly broad way to understand the amount of risk and possible potential of each currency. There are various platforms you can check for this information – Coin Market Cap is one and there are plenty of others out there, just Google ‘cryptocurrency market cap’ and you’ll get a list of options. This article explains in more detail what a market cap is and why it’s important.
Figure out the value of the project that the currency is backing: The purpose of the project behind the coin, the features it will bring, and the role it will play are the important factors in determining what a currency is bringing in terms of value to its users. The more value and functionality a project creates the more reason people have to use coins associated with it, the more a coin is used, the higher its value can rise.
Once you’ve figured out if cryptocurrency is an investment you have the stomach for and the coin you want to put your money behind, it’s time to figure out if you’re in it for the long haul or short and sharp flutters with the market are more your thing.
Short term cryptocurrency investments
Short term investments are usually made with smaller amounts of money and are generally not over more than a 36 month period. The idea behind them is to get a greater return in a shorter period of time. Because of this, short term investments are usually higher risk and a bit more labor-intensive than long term investments.
When it comes to short term investments in cryptocurrencies, anything up to 12 months is considered short term; longer than that and you’re getting into hodling. This is mostly because of the high volatility of crypto markets, which is exactly what a short term crypto investor tries to take advantage of.
There are pros and cons to each type of investment. For short term investments, the pros include the possibility of a quick win – if you buy low and sell high. This could conceivably be done within a few weeks or even minutes. It’s also possible to use short term investments to trade between coins, further increasing your chances of riding a crypto-wave and jumping off at a crest with a considerable profit.
If taking this tactic, there are a few things you will need to remember and take care of if you want to come out a pro-surfer and avoid being wiped out.
- You’ll need to be able to consistently devote time to your crypto portfolio
- You’ll need a good level of resistance to stress – watching the rise and fall of crypto markets can be a little like watching a rollercoaster ride.
- You’ll need to be able to analyze data quickly, efficiently and with confidence
If you have those three things down, you stand to make good gains. However, you must remember that you also stand to make a loss, so circle back to the advice at the beginning of this piece.
Long term investments
A long term investor in crypto does their research and then purchases part of a coin, a whole coin, or multiple coins. The amount doesn’t really matter here, it’s the length of time that does. Anything over 12 months in the crypto market is regarded as a long term investment. The idea behind a long term investment is to ride out the ups and downs that this market is sure to provide and stick to a strategy based on profit, time, or both.
There’s not a huge amount of effort involved in this take on investing. You begin with your research, just as you would with a short term investment, then take the plunge. After purchasing the currency there’s no need to watch the rise and fall cycle each day – unless of course, you enjoy that kind of tension.
It’s a passive investment so after purchasing you’re best removing it from whatever marketplace you used to make the purchase and storing the digital asset in an off-line cold wallet or vault. This is the safest way to ensure your investment isn’t hacked from under your nose.
If choosing this tactic, you’ll need to make sure that:
- You’re confident the currency you’ve chosen will increase in value over time despite the ups and downs it takes to rise. Do your research thoroughly.
- You’re happy with a passive investment and can ignore the rollercoaster peaks and troughs for a set amount of time.
- When the time comes to sell, you have the knowledge and energy to watch the markets for the best time within that month to do so. You won't need to rush a sale.
The type of investment you choose – long or short term, is mostly going to be influenced by your type of personality, the amount of time you care to give the investment, and your inclination to watch the market and ride the waves. If you enjoy a game of risk and the thrilling promise of high returns, short term investing and cryptocurrency trading may well be what tickles your fancy. On the other hand, if you’d just like to put any savings that have gone into a 0% or negative interest situation into a store of value without having to watch and nurture it to make it grow, choose an investment that you believe will mature well with time and provide you with a nice surprise in years to come. This could be crypto, but it may also be just as beneficial to sink your money into something less likely to grab headlines. Consider all your options, be honest about who you really are, and never, ever, put money you can’t afford into an investment of any kind.