If the aim of investing is to increase the value of your assets, it appears that crypto currencies could be a valid form of investing as long as you can endure a roller coaster ride of volatility. We will explore how good an investment in crypto currencies is, in this article.
Risk acceptance and management
Any form of investing is associated with a degree of risk. Whether it be investing in government bonds, which represent the lowest forms of risk, or in alternative investments such as fine wines, art or classic cars, where risks are generally higher, a core part of investing is to define your risk tolerance.
As stock markets react to world and local events, news and rumour, investing in equities, options and futures is often associated with medium to high levels of risk. These risks can be reduced by investing in stock index trackers, rather than individual stocks, however by careful stock selection, the returns from an individual equity may exceed the returns from an index tracker. There is always a balance between risk and reward.
Successful risk management can also be achieved by holding an investment for a long time as history shows that assets generally increase in value over a long time period. Holding an asset for many years allows the peaks and troughs to be evened out so that the investor can benefit from the long-term inflation of asset prices.
Equity markets are also regulated by governments, so companies have to abide by reporting obligations which provide investors with accurate and honest appraisals of current trading conditions and future growth plans. These regulations protect investors from fraudulent actions by companies, or pump and dump actions by influential people, allowing them to make investment decisions based on accurate information.
Crypto currency volatility
As you can see at https://cryptolaun.ch/, the success of Bitcoin, Ethereum and other Alt coins shows that crypto currencies have brought huge returns to investors since their launch.
Crypto-currencies are unregulated which means that these markets operate without any legal or regulatory restraints. This presents a valuable opportunity for price manipulation by influential individuals. The lack of accountability and transparency in ownership and trades also creates an opportunity for fraud and false information to manipulate prices.
Deliberate market manipulation can create the extreme levels of volatility that are seen in some of the leading crypto currencies. It only takes one tweet from Elon Musk saying that he is considering to allow Bitcoin to be used for the purchase of his Tesla cars, to cause an immediate spike in Bitcoin values by 10% or more. A few weeks later, he tweets a less optimistic view about the crypto currency that sends its value down by thousands of dollars. As there are no regulatory controls in place, this is perfectly acceptable behaviour, and there are no checks and balances to prevent such deliberate market manipulation.
For those investors who have long term holdings in some of the leading crypto currencies, they will be sitting on gains of that are impossible to achieve with most assets. They would have endured some savage price falls, as well as adrenaline inducing price rises, but fortunes are being made by those who have developed successful investment strategies, combined with fortunate market timing.
Once an investor has determined their tolerance to risk, the next stage is to balance risk and reward according to their investment time horizons and risk acceptance. This is where creating a portfolio of investment assets plays an important role.
A sensible approach is to include a variety of assets in the portfolio that protects the capital whilst allowing for growth. This generally includes balancing exposure to government and company bonds with exposure to equities, with the percentage allocations being defined by risk tolerance. This strategy, over a time period of several years, should reward the investor with good returns, however, depending on market conditions, this return may not be spectacular.
If spectacular returns are hoped for, it may be sensible for the ambitious investor to allocate a proportion of his capital to investments in crypto currencies. His portfolio would contain a variety of low risk/low reward bonds for capital protection, equities for capital growth with a greater risk profile plus exposure to crypto currencies which are pure speculative.
He would have to accept that the speculative investments in crypto currencies could yield spectacular returns, or he could lose all his money in those currencies.
There are basic principles to investing that balance risk against reward, and there are strategies that an investor can use such as creating a balanced portfolio, determining how long to hold the investments and ensuring that the investments are made in regulated financial markets.
Crypto currencies operate in non-regulated markets which can be manipulated, and offer no transparency to the investor. This creates highly volatile price swings that would frighten traditional investors. However, there is an opportunity to make huge gains (and losses), which could enhance an investment strategy in which crypto currencies form the speculative component of a balanced investment portfolio.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.