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Should You Invest In Cryptocurrencies?

Updated on: 26 Aug 2022 // 4 min read // Personal Loans
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Cryptocurrencies, as an emerging asset class, have remained extremely volatile since the inception of so-called digital tokens. Investors, traders and speculators across the world have been increasingly considering cryptocurrencies, including bitcoin, ether, ripple, and Cardano’s ADA, as a potential investment option, given the massive appreciation in the indicative market prices. 

Witnessing the colossal price rise, a large section of retail investors have also taken sizable positions in various cryptocurrencies, majorly in bitcoin, ether, and a number of emerging crypto assets, namely dogecoin, solana, polkadot, binance coin etc., without actually realising the downsides of cryptocurrencies and how they are unnecessarily exposing their portfolio to higher risk. 

Why are cryptocurrency prices so volatile?

Erratic price variations in cryptocurrencies are largely due to the weak foundation as none of them possesses an underlying value. The majority of transactions in the crypto ecosystem are controlled by a handful of organisations and high-net-worth individuals (HNIs) representing a considerably higher stake in separate cryptocurrencies. 

The central banks across the globe have time and again warned the investors who are transacting in these virtual assets to capitalise on the haywire price increases. There was a time when every other asset noticed a sharp dip in the market prices after the initial shockwaves of the Covid-19 pandemic hit the financial markets. 

The cryptocurrencies, likewise benchmark equity indices, bounced back very sharply, with both the asset classes registering their respective record highs in early 2021. The massive appreciation in the prices was apparently short-lived as the leading cryptos crashed in the middle of 2021, losing nearly 50% of the market capitalisation. 

The indicative market prices more than doubled within a span of four months, making the headlines again and re-igniting the interest of investors in cryptocurrencies. This was the time during which the New York Stock Exchange introduced the first-ever bitcoin ETF, paving the way for mass adoption of crypto-asset and bringing in a notable recognition for a virtual asset on a conventional stock exchange. 

However, the prices of major crypto assets, including bitcoin, ether, litecoin, Cardano’s ADA, dogecoin and others, have collapsed up to 82% from the first week of November of 2021 to the present date. 

The crazy price fluctuations in every other cryptocurrency clearly indicate the chaotic behaviour of investors as and when there is an adverse development that is likely to impact the financial markets, majorly the crypto ecosystem. Of late, the ever-evolving fears of multi-decades high inflation have affected cryptocurrencies, like any other asset. 

Why are cryptocurrency prices crashing in 2022?

Cryptocurrencies are highly susceptible to market rumours, as well as actual voices that are against these assets. Unlike equities, cryptocurrencies are not backed by a corporation or an enterprise that has some tangible or intangible assets that can be exchanged for a unit of crypto. The conversion of these virtual assets into real work currencies is heavily dynamic, as you may end up receiving 10% lower today in real currency terms as compared to the price conversion done a day before and vice-versa. 

As far as the steep decline in cryptocurrency prices in the present calendar year 2022 is concerned, inflationary hurdles with every other nation, the challenging economic output, back-to-back interest rate hikes by the US Federal Reserve, the Bank of England, the Reserve Bank of India, the Reserve Bank of Australia and the Bank of Canada have collectively hammered the cryptocurrencies. 

Alongside this, the companies that announced to start accepting cryptocurrencies as a legal 

tender for their products have stopped accepting payments in virtual assets while selling a substantial stake. In a surprise move, Elon Musk-controlled automaker Tesla said it would not accept bitcoin as legal payment for their product in May of 2021 as mining such virtual assets requires a lot of fossil fuel-fired electricity. 

Very recently, the electric carmaker disclosed in July of 2022 that it had sold nearly 75% of its bitcoin holdings in the April-June quarter. Bitcoin, the world’s most popular cryptocurrency, crashed approximately 54% during the three-month period and is now hovering near 19-month lows. 

On the other hand, the constant fear surrounding the launch of central bank digital currencies (CBDCs) by some of the leading central banks, including the RBI, coupled with the freshly-introduced taxation, has severely hurt the crypto ecosystem. 

Are cryptocurrencies better than stocks?

Cryptocurrencies are nowhere near stocks as company shares do have underlying fundamentals (whether they are in good shape or not, that’s a different issue altogether) and a regulatory framework that supervises the market dealings. 

For stocks representing companies, you have the capital market watchdog Securities and Exchange Board of India (Sebi), the Reserve Bank of India, the Competition Commission of India, and many others that are applicable according to the nature of the industry. For instance, there is the Directorate General of Civil Aviation (DGCA) for the aviation sector, the Insurance Regulatory and Development Authority of India (Irdai) for insurance sector players, and the Association of Mutual Funds in India (AMFI) for fund managers, so on and so forth. 

Believe it or not, cryptocurrencies are not governed by any of the regulatory bodies present in India or any part of the world, the primary reason for their instability and turbulent price actions. 

Should you invest in cryptocurrencies?

The decision to invest in cryptocurrencies depends entirely on the objective of investment, the disposable money which is readily available to park in various assets and the risk-taking capacity of an individual. 

Particularly for cryptocurrencies, a large section of investors progressively picked up various crypto assets following the introduction of bitcoin ETF on the NYSE. The central purpose of investing in cryptocurrencies and virtual assets was to capitalise on double-digit returns at a time when the growth in equities was moderate single digits, with shares of some prominent market players turning negative on the year-to-date (YTD) scale. 

As far as the portfolio of retail investors is concerned, all risk-averse investors, as well as individuals who are not willing to expose their portfolio to a wild ride of volatility, should either avoid the cryptocurrencies at all or should not invest more than 5-10% of the investible amount in the so-called alternate asset class.