Summary
- The extreme volatility of Bitcoin makes it difficult for quite a few investors to invest in it.
- Bitcoin moves quite sharply and has the tendency to change direction quickly.
- Cryptocurrency is an unregulated space, which itself poses a lot of challenges for an investor.
When it comes to investing, there are many asset classes to choose from, each having different fundamental characteristics. These characteristics define the expected return, risk, and volatility of the asset. For instance, an individual who cannot withstand volatility should stick to bonds and avoid equities. Similarly, investors trying to invest in inflationary period have commodities as a much better option than other assets.
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Cryptocurrency is a relatively new asset class, which is gaining popularity these days. However, investing in Bitcoin or any other cryptocurrency is not everybody’s cup of tea, owing to its extreme volatility, unregulated market and a lack of long-established history. All of these factors combined makes is difficult to analyse, invest and hold these coins for long term.
Despite, if someone wants to take some exposure in Bitcoin or any other crypto, here are five factors that need to be evaluated before putting your hard-earned money on the line.
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1. Extreme volatility
Cryptocurrency as an asset class is probably the most volatile amongst other cryptos. The extreme volatility of Bitcoin makes it difficult for quite a few investors to invest in it. A recent example of the volatility was witnessed on 19 May 2021, when Bitcoin nosedived by almost 30% in a day, while recovering more than 30% from the loss on the same day.
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This heightened volatility easily takes out both the long and short position in the blink of an eye. If you cannot withstand these kinds of extreme moves, then it’s better to avoid the entire crypto space.
2. Difficult to gauge true value
One thing that is common to investors of every asset class is, in order to make profits, one needs to find undervalued assets. The values can be determined for traditional asset classes such as stocks, bonds, and real estate, but its relatively very difficult to gauge the true value of Bitcoin as there is no physical asset backing it up, nor it is guaranteed by the government like in the case of a fiat currency.
Therefore, finding the right price is very much subjective and may vary a lot from investor to investor.
3. Less predictability
Bitcoin moves quite sharply and has the tendency to change direction quickly. What might seem to be an uptrend might turn to be a downtrend in the next moment. However, if one thinks it’s a good thing for a mean reversion trading, then Bitcoin can also surprise you with its prolonged and often strong trends.
When there is a trend in Bitcoin, it can easily last a few months and remain overbought/oversold for a very long time.
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4. No regulations
Cryptocurrency is an unregulated space. That in itself poses a lot of challenges for an investor. For instance, an investor would have a hard time in getting legal authorities on the move in case their Bitcoins are stolen or they fall victim to any other fraudulent activities like a scam.
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Money laundering, cyber-attacks, and ransom etc. are all very common in the crypto world and security breaches may not just lead to losses to an investor but also further crimes. Due to increased crimes, some authorities are also focusing on making it mandatory to report Bitcoin transactions.
5. Highly sensitive to market sentiments
Bitcoin is very sensitive to the prevailing sentiment in the market. But what’s more interesting is a few crypto enthusiasts can make or break the sentiments. The best example is Elon Musk, whose single statement practically moved the crypto space.
Recently, China banned Bitcoin trading and mining and other related financial services, which dropped a bomb on the crypto space. Therefore, being able to analyse broader market sentiments could be helpful while investing in Bitcoin.
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