Back in time, there was this medium of communication called mails. They came in envelopes and were paid for and decorated with stamps.
They took a long time to reach the recipient and were inefficient as they required a lot of paper.
Things have evolved now from mail to e-mail & today;, email is entwined with our daily lives.
But mind you, e-mail was not adopted overnight; people faced many challenges transitioning from mail to e-mail.
Just like email revolutionized communication, cryptocurrencies are revolutionizing money.
No need to stand in a bank or maintain many digital banking passwords. All you need is a digital wallet and crypto in it that can be transferred globally.
But this is only one aspect of cryptocurrencies. Cryptocurrencies are evolving as a new investment class also.
To answer that, let us have a deeper understanding of cryptocurrencies.
Features of Cryptocurrencies
Cryptocurrencies are digital currencies backed by blockchain technology. Most of which cannot be altered or controlled by any central authority, making them freely usable across the world.
Some of their characteristics are:
- Hack Resistant: Any transaction on the blockchain cannot be altered or removed easily.
- Robust: System failure is rare. In fact, Bitcoin has not experienced a network failure over the past decade.
- Transparent: Every transaction ever made on the blockchain can be traced back to its parties.
- Global: Its decentralized nature allows cryptocurrencies to be transacted freely from any part of the world. For instance, one Bitcoin in India is the same as one Bitcoin in the US.
But the most important characteristic of it is its store-of-value proposition.
Cryptocurrencies like Bitcoin, Ethereum, Bitcoin Cash, etc., are also being seen as store-of-value assets by investors worldwide, much like gold or other physical commodities.
Cryptocurrency As An Asset Class
You may be familiar with the fact that cryptocurrencies are a pretty young market. They have been around for just more than a decade and yet managed to catch global attention.
The first cryptocurrency – Bitcoin was launched in the year 2009. Since then Bitcoin have come a long way and is now considered to be “Digital Gold”.
Today it stands as one of the top-performing asset classes of the decade (2010-2010) with a multifold increase in its price.
At the time of inception, its value was at zero, and the last I checked, the cost of one Bitcoin currently is roughly ₹15 lakhs per Bitcoin.
What made its value rise beyond measures?
The answer is simple:
The demand & supply determine the price of Bitcoin or any cryptocurrency.
Like gold, Bitcoins and many other cryptocurrencies are scarce. Since there are only 21 million Bitcoins available, many investors seek to own a piece of this rarity.
As the demand rises, the investors buy the shrinking supply of an already scarce commodity, and this cycle keeps continuing, and hence the value of Bitcoin keeps growing.
Not only that, as we saw earlier, cryptocurrencies have the potential to transform into the new normal in finance. We may adapt it to make purchases or payments just how we adapted email for communication.
So yeah, cryptocurrencies are here to stay and are making themselves an excellent alternative asset class.
The Problem With Sticking To Just Traditional Assets
The financial friction brought about by the coronavirus would have affected most of the investors.
Highly performing portfolios consisting of all the traditional assets such as stocks, bonds, and money markets also have crashed during the lockdown.
The problem with just having invested in traditional assets is – in times of economic crisis(pandemic, natural calamity, market crash, etc.), the value of your investments drops down quickly.
To avoid this, many investors seek alternative investments.
Alternative investments are other assets that do not fall under the category of stocks, bonds, or money market. They act as a hedge against market downfalls, thus protecting your portfolio from eroding.
Now, cryptocurrencies are the most sought-after alternative asset as they show a very low correlation to traditional investments.
In other words, when the stock market falls or rises, the price of cryptocurrencies remains largely unaffected by it. Thus making them an excellent tool for portfolio diversification.
Role Of Cryptocurrencies In Your Portfolio
The value of cryptos, such as Bitcoins, is skyrocketing in recent times. Even Institutional investors are keeping some of the cryptocurrencies in their portfolio as a hedge against market risks.
In an interview with CNBC, Chamath Palihapitiya, a renowned investor, said :
“Everybody should own at least 1% of Bitcoins (cryptos)”
Instead of 60/40 stocks and bonds, having 59% stocks, 40% Bonds, and 1% Bitcoins could give the benefit of diversification to investors.
Just 1% of Bitcoins added to your portfolio may be enough to shield you from portfolio erosion. However, this is not investment advice but a way to put things in perspective.
However, a more significant percentage invested in cryptocurrencies may yield higher returns to help you achieve your financial goals.
By now, you may be clear on the fact that cryptocurrencies are a vital asset class for every portfolio. Even a small percentage can make a huge difference. However, making a small allocation does not absolve you from doing your research.
It requires knowledge and understanding to make informed decisions for investing in cryptocurrency. KuberVerse is an initiative to equip you with such knowledge and help your crypto investment be smooth.
So what are you waiting for?
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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