Cryptocurrency – one of the latest new 21st century financial instruments of the digital world, is becoming more and more popular as an investment day by day. For those who are unaware, a cryptocurrency, or crypto is a virtual currency which utilizes digital blockchain technology to act as a means of exchange for all kinds of transactions online, buying of goods and services or making payments (Investopedia). Although Crypto has been around since nearly a decade, digital transformation and more awareness has fuelled its rapid adoption in the last few years, which has made crypto more popular amongst individuals and corporates across the globe.
The world of Bitcoin, Ethereum, and Dogecoin is indeed very exciting, and financial investors do get attracted to the prospect of having low transaction costs coupled with faster money transfer, but one key thing for any new investor to understand before exploring crypto investments is volatility.
Cryptos are probably the most volatile form of investment one can find – because it’s entirely speculative. There is no controlling authority or presence which oversees how crypto is functioning. Prices of cryptos fluctuate day in and day out based on demand and supply by investors and user sentiments. It is not like equity where in India SEBI (Securities and Exchange Board of India) regulates the securities and commodities market. This makes it difficult to have confidence in crypto, as there is no regulatory framework which can be relied upon.
We have also seen how the value of different cryptocurrencies can fluctuate based on statements and comments by influential individuals or organizations. One tweet by Elon Musk on Dogecoin where he posted the words “Doge” caused the price to rise sharply the next day. On the other hand, when Tesla announced that it will not accept cryptocurrencies as a form of payment, the value of Bitcoin crashed. One can see 200% rise in their invested sum within a day, but an immediate fall back also within hours – thus it is extremely unpredictable, and sentiment driven. However, high volatility does mean that the chances of high returns is also possible – which makes cryptos indeed an attractive investment.
As an investor who wants to take a dip into digital currencies, I would urge any reader to first be aware that crypto is not a risk-free investor – so one should be prepared for losses. If you are someone who monitors their portfolio every day and bounces off based on its gains and losses – and does not have the capacity to take a hit – then crypto is not for you. I would advise any potential investor to start small, get a taste of the market and then once you’re more comfortable with the fluctuations and the volatility, invest more. Starting slow will boost your confidence to undertake bigger, more educated risks later. One more key step is to be globally aware of events happening related to digital currencies.
As we saw, a simple tweet can cause major price fluctuations. So even if you are in India, understanding key financial events in US or Europe can impact your investment and profitability. Lastly, as we have seen, digital currencies are susceptible to hacking. Digital hackers have been able to breach the blockchain security to steal data and billions of dollars have also been lost to scammers and Ponzi schemes. Thus, being diligent about the currency you’re investing in, and the company you’re investing through to be secure.
There has been a tremendous interest and focus towards the crypto industry, but the market itself is constantly evolving, with investors not convincingly knowing how the long-term prospects of cryptos will be. Although cryptocurrency, in my opinion, is definitely not a very safe investment, the way forward it seems is that it is here to stay. As an investor, being aware of the different financial investment possibilities is critical to diversify one’s portfolio and given how crypto adaptation is increasing day by day, even in larger organizations and Governments, it is necessary to be aware of it, in order to manage potential risks and to avail of the benefits as an investment. The world of crypto and digital currency is exciting. The volatility means that one can form a fortune or lose a fortune in a matter of minutes. Thus, being prudent about investing, and being aware of risks is essential to try and maximize profitability and gauging your risk appetite.
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