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Risk is often accompanied by a reward, and in investment space, higher the risk, higher the reward. Seasoned investors usually know underlying risks in the market. For example, when the central bank is titled toward raising benchmark rates, they book profits in shares and invest in the bond market.
In the cryptocurrency space, however, risks are largely unforeseen. Same goes with rewards.
The crypto world has made many millionaires. Many have seen their investments in Bitcoin and altcoins skyrocket over past few years.
Today, let’s assess the opportunities in the digital currency investment space, and simultaneously, look at the risks accompanying such investments.
- Wealth creation
One can undeniably make money in cryptos. This statement comes with a rider. To make money, one has to know when to book profit, which means knowing when to sell the holdings.
Set a target, say 10-15 per cent growth. Book profit as soon as you realize the target. On the flip side, if your investment is down by same percentage, exit the market without waiting for any miracle to happen.
- Blockchain
If there is one attribute that truly differentiates cryptocurrencies from other forms of money, it is the underlying blockchain technology.
Proponents say it is the most advanced tech of today. Any record entered into a blockchain is immutable. Developers can create smart contracts on blockchain. Large institutions like banks have started exploring how to integrate blockchain into their IT infrastructure.
- Institutional interest
Canada approved the world’s first Bitcoin ETF in February 2021. Since then, Ether ETFs too have started trading on exchanges. What’s more? Businesses like airBaltic, Latvia’s flag carrier, accept payments in cryptocurrencies.
S&P Dow Jones has introduced new indices that track the movement in prices of cryptocurrencies tied to them. Major US banks including JPMorgan Chase and Wells Fargo have either introduced or will soon introduce crypto funds to their rich clients.
- CBDCs
Central bank digital currency or CBDC has become an area of interest for all central banks. The Bank of Canada has tied up with three prestigious universities to work on the design of CBDC.
CBDCs owe to cryptocurrencies. Had cryptos like Bitcoin and Ether not become the talk of the town, CBDC projects would have never gathered speed. Experts suggest CBDCs will use the blockchain tech but in a different manner than how it is used in crypto space.
- Bitcoin has become legal tender
El Salvador made Bitcoin a legal tender in June 2021. By doing so, it became the world’s first country to give Bitcoin official currency recognition.
The country does not have its own currency and the President is hopeful that Bitcoin adoption can save the country billions of dollars in remittance. Blockchain makes money transfer quicker and cheaper.
Risks in crypto space
- Unproven utility
Cryptocurrencies were not designed to serve as an investment instrument, let alone a speculative one.
Bitcoin was envisaged as a replacement of fiat currencies, or at least something that could complement the currency space. To this day, Bitcoin or any other cryptocurrency has yet to demonstrate this utility.
- Central banks’ reluctance
No central bank, except The Central Reserve Bank of El Salvador, is ready to endorse cryptocurrencies. Fiat currency, like the Canadian dollar, is issued by central banks, and they fear that cryptos can threaten this traditional setup.
Cryptocurrencies have no regulatory oversight, which makes them a breeding ground for speculation.
- Crackdown in multiple countries
Bitcoin prices started tumbling after April 2021 owing to crackdown on crypto trading and mining in China.
Authorities in the US and Canada are also acting fast. The Ontario Securities Commission had initiated action against crypto exchange platforms, subsequent to which Binance, the world’s largest, exited the Ontario market.
- No reliable forecast
One can find predictions on price movements in cryptocurrencies. However, these predictions rely only on perceptions. Data or any future development in cryptocurrency realm is too uncertain to make reliable predictions.
The April highs quickly subsided on the back of some negative tweets from Elon Musk and China’s tough stance. Market demand of cryptocurrencies relies on sentiments alone. Earnings or events like merger and acquisition are virtually absent in crypto space for forecasters to confidently predict the future.
- Too much energy use
Some experts believe that too much energy consumed in cryptocurrency mining can be the single straw that will break the camel’s back.
Bitcoin mining energy usage dwarfs electricity consumed by many small countries. Carbon footprint is high and at a time when world leaders are pledging to zero emissions, cryptocurrencies have a bleak chance to survive without shifting to clean sources of energy.
Copyright © 2021 Kalkine Media
Despite all these risks, the cryptocurrency investment space has piqued the interest of every investor.
If you are a retail investor, the best practice to be followed while investing in cryptos is to set the limit of your gains or losses in the very beginning. Once that limit is attained, exit. Holding on for a longer time neither guarantees higher returns nor guarantees recoupment of losses.
Below, let’s understand volatility in crypto space using historical price data.
Bitcoin price growth data
Bitcoin is by far the most popular cryptocurrency. According to price data, one bitcoin was worth nearly US$840 in January 2014. In January 2015, the price was down to around US$225.
The price breached the US$400 mark through 2015. However, it was down to nearly US$378 in January 2016.
It was in February 2017 that Bitcoin soared above US$1,100. By December, the price breached US$13,000.
Nearly 3,400 in January 2019, Bitcoin was above US$12,000 mark in June. It was down to nearly US$6,400 in March 2020, the month when most economies were in the initial stages of COVID-19 outbreak.
By April 2021, one bitcoin was worth over US$64,000. Since then, the price has been declining in wake of multiple negative forces surrounding the cryptocurrency space. Bitcoin trades at nearly US$33,000 in mid-June 2021.
Bitcoin price in US$
How have altcoins fared?
Dogecoin is a fairly popular altcoin. Its price was fueled by memes and even Elon Musk spoke favorably about the future prospects of Dogecoin.
After trading below US$1 mark until December 2020, price of one Dogecoin rose consistently in first four months of 2021. One dogecoin was worth nearly US$5 in March 2021, and it breached US$30 in April.
At the same time when Bitcoin started sliding from its peaks, Dogecoin too lost much of its market value. By mid-June one Dogecoin could be bought for less than 50 cents.
Dogecoin price in US$
Price growth data in itself is enough to outline opportunities and risks in cryptocurrencies.
