That’s over 200% return in less than 2 months. Impressive, correct?
That’s not to say that this wasn’t a risky bet. However, experience can help investors gauge the market sentiment and enter at the right time. When the strategy plays out favorably, investors walk out with a lot more money than they put in.
Even with the associated risks, businesses are quickly beginning to accept cryptocurrencies as a valid form of payment. The financial infrastructure is beginning to strengthen and retail investors are starting to invest actively in cryptocurrencies too. Plus, small investors also have accessibility to more tools that they need to safely invest in cryptocurrencies.
Giant companies such as PayPal are now making it easier for investors to buy and sell cryptocurrencies. Institutions aren’t just facilitating crypto transactions though. Large corporations like Square and Tesla have invested billions of dollars in Bitcoin.
Granted that these factors don’t reduce the associated risk, but these certainly imply that blockchain technology is beginning to mature. Institutional as well as retail investors are beginning to show interest in taking direct exposure to crypto coins, and some are even investing a considerable amount.
Believers of blockchain technology that are prepared to ride out the storm and stay invested over the long term have an edge over short-term investors. There are several ways to reduce risk in any investment, and a longer time horizon is one of them.
Investors typically diversify their holdings across market caps and value propositions when it comes to reducing the risk associated with investing in cryptocurrencies. Staying invested for the long term, much like diversification, helps reduce the risk.
Let’s look at some data to back this claim. Look at the price of any fundamentally strong crypto coin. Most will have appreciated in value over the long term. Following are the prices for the two most popular crypto coins:
Those returns are probably going to pop some eyes out, but it’s important to realize that these massive returns also come with a lot of risks. Nevertheless, investors that stay invested for the long term are probabilistically going to come out with a healthy profit.
There is a group of investors that vows not to take on excessive risk. This is a quality that often saves investors a lot of pain. Investors must always identify the level of risk they can tolerate before investing their money. Taking on excess risk is a sure-fire way to lose sleep.
This shouldn’t mean that investors with low risk tolerance can’t gain exposure to the crypto space. Thanks to stablecoins, investors that want to invest money in crypto and preserve their money’s value have options.
Stablecoins are to the crypto-verse what T-bills are to the traditional asset classes. They offer a low-risk alternative to their risky counterparts (altcoins) for investors that want to gain some crypto exposure.
There’s just one caveat, though. Stablecoins don’t generate any capital gains because their price is pegged to another asset, typically a fiat currency. For instance, investors that buy USDC are essentially buying digital dollars. The price of USDC is pegged to the U.S. Dollar and tends to hover in a tight range around $1.
Fortunately, there is another way to generate returns from stablecoins. Think about it, they are what T-bills are to traditional investments… ring a bell?
Well, stablecoins can generate a fixed income for investors when deposited with a platform like Nexo that offers as much as 12% returns. 12% is still more than most asset classes can return in the U.S. The 12% return, again, carries risk — high returns are always a form of compensation for higher risk.
The first risk is that the platform can change the offered rate at any time at their discretion. The uncertainty about the returns poses a challenge during financial planning. Plus, unlike bank deposits, money deposited with such platforms isn’t protected by FDIC or SIPC. If the platform goes bust, there’s no way to recover the money.
Even with those risks, an investor with a relatively low appetite for risk could invest a small portion of the portfolio to stablecoins. 12% is nothing to sneeze at, after all.
Though the fees differ among blockchain networks, most are relatively more cost-effective than making payments through a bank. Transferring payments via bank generally comes with “maker” and “taker fees, deposit or withdrawal fees, and foreign transaction fees.
However, none of these fees are a problem with cryptocurrency payments. While the percentage of the fees charged by banks appears minuscule, they can accumulate into a considerable amount over time, or when the amount being transferred is relatively large.
Making these payments using a cryptocurrency allows bypassing these fees. Plus, there’s no lag in payments either. The payments are processed almost instantly and the receiver will likely receive the coins in their account in less than a minute.
Although the cost-effectiveness of payments has nothing to do with generating returns, they can increase the overall ROI on a person’s crypto holdings given the savings in fees. This is especially true for people transferring large amounts frequently.
Investors that want to get some of the crypto action should get in while the party lasts. Blockchain technology is about to revolutionize the world and investors stand to gain from the consequent increase in the value of crypto coins.
If it looks like the world is losing its mind with crypto, it’s because everybody wants to make money. This is fair, of course, as long as investors realize the degree of risk they’ll be taking by putting money in a cryptocurrency. If an investor invests money that they’ll need in the short term, or in worst cases invests their emergency fund, they’re putting their financial well-being in grave danger.
As long as an investor walks into the cryptoverse with their eyes wide open and a solid strategy, they’ll likely walk out with substantial gains. The more time they stay invested also has an impact on the overall returns. To survive through phrases of volatility, investors need thick skin. A panic-induced sell decision can translate to some serious losses.