The great growth in the cost of cryptocurrencies in the past few years has led to increasing interest in the asset class by nearly every investor all over the globe. Even the most conservative people have considered investing in the class. But not all the investors in the financial markets want to dabble in it. For example, Warren Buffet has stated that he and his firm will not invest any money in this asset class through any mechanism. He has said that he will not short them or take any other position. The reason he gives is that cryptocurrencies will not have a good end. Most conservative investors also have similar opinions as Warren Buffet or the Oracle of Omaha, as he is popularly known. So, is cryptocurrency a good or bad investment? In this article, we will take a comprehensive look at the question.
Cryptocurrencies such as Bitcoin and others operate on a tech called the blockchain. This tech is a distributed ledger system that is powered by miners. The network of Bitcoin has a lot more processing power than the servers of Google. This makes it one of the most secure networks around the entire globe. Interestingly, blockchain tech gets its great level of safety by developing incentives to make tampering a loss-making initiative for anyone who tries to do it. This means that the tech relies on probabilistic thinking to ensure functionality and security instead of certainty. To hack any blockchain, a person would have to control a majority of the miners on the entire network. This makes breaches in safety nearly impossible. But the crypto exchanges are still at risk of being hacked by anyone. So, a person is not totally safe from their crypto being stolen unless they store theirs in a hardware wallet.
Blockchains are considered to be nearly impenetrable. But cryptos such as Bitcoin are still investments that are considered risky. It is not unusual for the value of Bitcoin to go down to near zero in a bear market. About seven years ago, Bitcoin lost nearly all of its value. A few years later, the asset again lost nearly all its value in a bear market. But more long-term investors and institutions are entering this space. Thus, the fluctuations are going to decline in a huge way. The blockchain of Bitcoin is one of the safest, along with Ethereum. After that, it gets a little complex. This is because the safety of the crypto is directly related to a hacker's capability to take over a majority of the mining network. So, smaller networks can be targeted easily and are less secure. So the security of the asset is not the same for all the coins.
Much like the other investments made in the financial markets, investing in crypto assets is not insured. But there are choices for insurance in a few investments related to this asset. For instance, coin cover gives insurance choices in cryptocurrency exchanges and wallets. If these firms utilize coin cover, the currency of their users is insured for theft. It also helps when the users lose their private keys. The private key is what gives the user access to their crypto wallet. Several decentralized insurance choices function on the blockchain. Nexus Mutual is one of the top decentralized insurance protocols that permit its investors to buy a share of the insurance fund. When the investors purchase into the fund, they are given Nexus tokens that are proportional to the share of the entire fund. The token price is calculated mathematically based on the absolute number of tokens in the fund, the number of open insurance contracts, and the minimum reserve requirements. Firms can utilize Nexus Mutual to insure the exchanges in a breach in security.
So Is Cryptocurrency a Good or Bad Investment?
Most of these asset class investors see it as a long-term investment. Several investors say that they will never sell their investments in this asset because they think that crypto will be the replacement for fiat currency and gold. But cryptos have seen a lot of losses in bear markets that have prolonged for multiple years. This led numerous investors to lose nearly half or more of their entire portfolio. But Bitcoin has broken through the all-time high costs continuously. But the view here is that the returns in this class are inflated by survivor bias. The investors in this asset tend to see the performance of the existing currencies, such as Ethereum or Bitcoin, as a representative and overall sample of the entire asset class without any regard for the numerous cryptos that have gone to zero. On the contrary, several traders in the asset class even purchase tokens that do not have any real value. This is because they believe that the price of the tokens will increase again.
Is it Good for the Short Term?
Investors who put their money in this asset class for the short term do not care much about the functions of the currency. They care more about the price history of the asset. For instance, several crypto investors for the short term are investing in Dogecoin. It has no major benefits over the other bigger currencies, such as Bitcoin. But people looking to make swift gains invest in this asset class because of its great fluctuations in its price. Other people who invest for the short term purchase the asset during an increase in its prices. They hope to buy the asset to ride out all the fluctuations in the beginning. There are a few investors who can make money in this manner. But the better method is only purchasing and holding on to the asset for the long term. Investments in crypto for the long term are also better from a mathematical viewpoint than a short-term investment. The Wharton School of Business says that the median return for most alternate coins is less than the mean return.
This means that many days the investor loses money or makes a small amount of money. But these days are compensated in a big way by some outliers. So, the basic strategy regarding the portfolio of an alternate coin is to hold on for the long term to get an outlier move in the financial markets.
Is Cryptocurrency a Good Investment in the Long Term?
You may be a believer in the tech of blockchain. Then, cryptos are a good long-term investment for you. Bitcoin is still considered a store of value. Several individuals think that it can replace gold as an investment asset in the future. Another one of the biggest cryptos in the market is Ethereum, according to capitalization. It also has a great potential for growth as an investment in the long term. It is also vital to consider that the investments in Ethereum or Bitcoin are not the usual investments in blockchain tech. There will be new types of blockchain tech that could be a major player in the industry in the future. It may lead to Ethereum and Bitcoin going obsolete. Bitcoin and Ethereum are considered some of the building blocks of the entire cryptocurrency space. Ethereum has decentralized apps that allow investors to use the coin for complicated financial transactions. This includes derivatives, insurance, and loans. These apps can also be video games. When the game runs on Ethereum, it allows the gamers to purchase and sell items in-game to each other by utilizing blockchain tech.
Before making any investments in the crypto space for the long term, you should know everything about what you are putting your money in. You should find out the issues that the asset is trying to solve. After that, decide whether there are any real-world advantages of blockchain tech as a part of the overall solution. Several firms in this space develop a token to swiftly raise money from unaccredited investors. There is no real advantage for their firm to function on a blockchain.
Is cryptocurrency a good or bad investment? The answer depends on several variables. If you decide to invest in this class, do it based on accurate information and not on hype. This is because there is a lot of hype regarding many cryptos. Before you purchase and sell any digital currency, find out about all the risks so that you can analyze if investing in the asset is a great idea for you and your investment goals.