Bitcoin, Ethereum, Ripple, Litecoin, Dogecoin.
They are some of the most popular cryptocurrencies (a.k.a, digital money). Over the past couple of years, cryptocurrencies are snowballing across the globe. They excite people, and millions of potential investors are racing to buy cryptocurrencies.
But Why? Why invest in cryptocurrency? Is it a good investment option like everyone claims?
Before we get to that, let us unpack the basics of crypto.
What are Cryptocurrencies?
Cryptocurrencies are digital currencies. They are unique because they are available only in digital form. They cannot be controlled by any individual/ organization and can operate without banks. Cryptos are secured with a specialized computer code called cryptography which makes them highly improbable to hack.
Why are Cryptocurrencies So Popular?
Cryptocurrencies have replaced Gold as a Top Performing Asset. They are extremely popular among young folks and appeal to investors for a variety of reasons:
Currency of the future
Cryptocurrency is faster, safer and more efficient than the present financial system. Many people believe that they are the future of money and want to be a part of the system early on.
The absence of a central governing authority like the central bank (RBI) makes international payments more accessible and instantaneous. Who wouldn’t want their transactions to be faster, cheaper and simpler?
Cryptocurrency is backed by blockchain technology. Since it uses cryptography to secure the files, it is almost impossible to alter or tamper with the record of cryptocurrency transactions.
Many cryptocurrency platforms are offering crypto to retail investors like you and me. Anybody who owns a smartphone and has a legit profile can access cryptocurrencies.
Most people like cryptocurrencies for profitability. Over the past decade, the cryptocurrency market has grown a millionfold. For example, Bitcoin (BTC) rose nearly 500% in six months. Ethereum has returned almost 400% in the past year, while Dogecoin witnessed a rise of 8500%.
PS: We will be taking the example of Bitcoin going forward because it is the largest cryptocurrency in terms of market cap.
Why Invest in Cryptocurrency?
Hailed by investors as a new revolution in finance and demonised by authorities as a disruptive creation, cryptocurrencies are always on the headlines. These assets may be in a rage now, but why should one invest in cryptocurrency?
Well, here are the 6 most important reasons to invest in cryptocurrency in India:
1. Fastest Growing Asset Class in India
Cryptocurrencies have been the fastest growing asset class so far. Here are some numbers that speak for themselves.
Ten years ago, if you had invested some amount of money in,
- Real estate – your investment value may now be 38% higher.
- Sensex – you would have made 114%.
- Gold – you would have earned 202% returns.
The second-largest cryptocurrency, Ethereum (ETH), has returned over 400%, and Bitcoin (BTC) rose over 300% in the past year.
The rise of cryptocurrency has been remarkable. It has grown from zero to over ₹45 lakhs for a brief period in just one decade. Investors who got in early and ‘hodled‘ earned massive returns.
For a better perspective, let us compare cryptocurrency with some popular traditional investments.
Cryptocurrency vs Gold
Gold and cryptocurrencies like Bitcoin (BTC) both carry high value and have a limited supply.
For centuries, gold has managed to dominate the alternative asset market. Cryptocurrencies were launched only a decade ago and have already proved their potential as a hedge against inflation.
Let’s say you invested ₹1000 in gold about five years ago. The value of your investment would have increased by 56%. The current value of the gold you bought five years ago will be ₹1560.
On the other hand, Bitcoin grew nearly 12,000% in value in five years. Meaning – if you had invested ₹1,000 in it five years ago, its value would have grown to be ₹12,000.
Cryptocurrency vs Stocks
Stocks and cryptocurrencies are both high-risk, high return investments.
On average, it is estimated that stocks return ~15% on investment annually. The average return on Bitcoin (BTC) is ~150% annually.
So, let us assume that you invested ₹1,000 in the stock market and Bitcoin. After one year, the value of your stock would have increased to ~₹1,150. At the same time, the value of Bitcoin would have grown to ~₹2,500.
Cryptocurrency vs Deposits
Investing money in deposits can be as good as keeping it idle. Though you earn interest on deposits, it is very negligible.
If you don’t believe it, here are some numbers.
Bitcoin (BTC) has generated 10,000X returns in the last 10 years. So, if you had invested ₹1000 in 2010, its value would now be close to ₹1 crore. If you had invested the same amount in a fixed deposit at the rate of 7%, you would now have ₹1,967 before taxes.
2. Alternative Asset Class
Another strong reason to consider investing in cryptocurrencies is that they are an alternative investment class.
An alternative asset is an umbrella term used for those assets that do not fall under the category of stocks, bonds or cash.
Some examples are – gold, real estate, cryptocurrencies etc.
Technically even your pokemon card collection could be an alternative asset.
Generally, (but not always) when the stock market or the money markets crash, the value of alternate assets rise. For instance, when the stock markets crashed at the pandemic onset, there was a steady rise in the cryptocurrency market.
Note: Alternative assets are not meant to replace your portfolio. Instead, they enhance your portfolio performance.
Cryptocurrency is a Great Alternate Asset Class
Cryptocurrencies are the newest addition to this class. Yet, they are the most sought after alternative investment.
- They remain strong and pull through the financial crisis.
- Easier to buy and sell compared to other alternative assets.
- It is in the process of becoming a regulated market.
- Public listed companies around the world are already exploring it.
- Low barriers to entry – anyone can invest.
Most importantly, cryptocurrency investing is simpler for investors with the entry of cryptocurrency platforms like CoinSwitch Kuber.
Fun Fact: Cryptocurrencies are a new monetary asset class, gaining value in real-time. Gold took 5000 years to get where it is today. But thanks to the super twined internet world, cryptocurrencies like bitcoin are moving at a much faster pace.
3. Effective tool for Portfolio Diversification
Diversification means dividing your investment into various asset classes.
When you put your savings in different asset classes, you reduce risk.
Exposure to various unrelated assets helps you balance your risk and goal.
Diversification helps you balance risks vs goals.
A decade ago, investors would diversify only in stocks, bonds, mutual funds, real estate, etc., Now the list includes assets like cryptocurrencies.
Research by Bitwise indicates that a small percentage of cryptocurrency in your investment portfolio could increase your returns significantly. Suppose you allocate 2.5% of Bitcoin (BTC), your regular traditional portfolio, which holds 60% equity and 40% bonds. In that case, the average returns from your investments in three years could be boosted by 15.8%.
In traditional investment terminology, the increase in the performance of this portfolio is brought by something called Sharpe Ratio. This ratio is the additional return you get for over and above the risk taken.
Bitcoin is the only asset with a “Sharpe ratio” > 1 [return>risk], making it an ideal investment to own.
4. Security and Transparency
Cryptocurrencies are backed by blockchain technology. It is a public ledger of all transactions that ever happened within the network.
The entire system continually reviews the blockchain. Thus, making attacks on the cryptocurrency itself highly questionable.
On the storage front, your currencies are as safe as the wallet used to store them. Storing your cryptocurrencies in a reputable wallet can reduce the risk of theft and hacks.
5. High Liquidity – 24*7 market
Crypto markets function 365 days a year for 24X7.
This ensures that the level of liquidity is much higher than any other traditional market at any point in time.
The cryptocurrency market offers three kinds of liquidity:
- Market Liquidity: Determines how quickly a cryptocurrency can be bought and sold. The internet enables users to make transactions and convert cryptocurrency into money and vice versa instantly.
- Time Liquidity: It gives you the liberty to trade at your own time since the market is functional throughout the day and all year long.
- Exchange Liquidity: Over 2000 exchanges operating across the globe make cryptocurrency easily accessible to everyone. Thus transactions are instantaneous.
6. Government Regulations & Recognition In-Progress
Cryptocurrencies are legal in India, but they are yet to be regulated.
Although the government has been the most prominent critic of cryptocurrencies, it has recently expressed its interest in exploring the technology.
Recent news also suggests that the government may form a panel of experts to study the possibility of regulating cryptos in India.
While cryptocurrencies are already impacting the financial sector, a positive regulation towards crypto could open the markets to a larger group of investors.
Should You Invest In Cryptocurrency?
The reasoning discussed so far resonates with the fact that crypto is a good investment option. While it proves to be the most rewarding asset class, it also carries inherent risks.
Pros and cons of investing in cryptocurrencies:
- Volatile: The price fluctuations in the crypto market are the highest. They may swing 50% in any direction in a matter of hours.
- Not Yet Regulated: As mentioned above, though cryptocurrencies are legal, they are yet to be regulated. The government seems to be moving in the direction of positive regulation. However, the market currently remains unregulated.
- Uncertainty: You cannot predict the reactions of the crypto market. Lack of regulation and governing body adds to the sense of uncertainty among investors.
- Young Market: The crypto market is relatively new. It is yet to evolve and join the bandwagon of mainstream assets.
Now coming back to the question, should you invest in crypto? The decision is yours to make.
Our two cents:
- Cryptocurrencies are a potential asset class to build your wealth.
- Research and analyze well before investing in any cryptocurrency.
Anyhow, if you have bought into the idea of why you should invest in cryptocurrency and wish to jumpstart your crypto journey, here’s a blog to help you pick the best cryptocurrency for long term investment. However, if you are still looking for more reasons to invest in cryptocurrency, a quick look into the future of cryptocurrency should help you decide better.
1. Why is Cryptocurrency a good investment?
The potential of cryptocurrencies to yield exponentially high returns, safety, and transparency are some of the few reasons to invest in cryptocurrency for most people.
2. What are the benefits of Cryptocurrency?
Cryptocurrencies make for a great diversification asset as it is an alternative asset. It doesn’t get affected by the movements of the stock markets.
3. Is it worth investing in Cryptocurrency 2020?
2020 was one of those times when the cryptocurrency market experienced a massive bull run. It may not have been the right time to invest in cryptocurrencies then, but if you ask us – Should I invest in cryptocurrency today? All the assets are settling right now and you may get your favourite crypto at a steal.
4. What is the cheapest cryptocurrency?
There are several cheap cryptocurrencies like Tron, Matic etc., that one can invest in. Check out our list of the cheapest cryptocurrencies to know about them.
P.S: 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.
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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