The fact that the cryptocurrency field is bloated in our day and age shows that the world is increasingly digital. However, the dominant offering is still mostly associated with Bitcoin – the first and most popular cryptocurrency. While it’s benign to keep the vantage point from a layman’s perspective, as an investor, it’s an opinion that limits insight and practically drains the entire portfolio.
Join Crypto Insights for only €9 per month
Since many investors are starting to allocate funds to this asset class, this article may guide you to basic knowledge about the crypto world. However, keep in mind that the market is decentralized and highly volatile. Therefore, while the basic principles will apply regardless of the time frame, some assessments may differ drastically over a period.
For real-time prices and market value:
What is Blockchain? And what exactly is decentralized finance?
The majority of investors are still confused about the difference between blockchain technology and decentralized finance. Both terms are related but differ in scope of application in the real world. Blockchain technology is a system that acts as a digital record to facilitate distributed transactions across a diverse network of computers. It is essentially a digital encryption system and the recording of redundant information over an extended network: making it impossible to hack, alter or destroy data while it is being processed or stored. The technology is widely used in logistics, allowing users to track their packages in real time around the world. The most famous application of blockchain technology is Crypto Financial Services.
Colloquially referred to as “DeFi,” the decentralized finance sector is spread across a complex array of digital products: from cryptocurrencies to NFTs. DeFi includes a blockchain technology architecture to power a massive network of shared ledgers. With no central authority to verify transactions and manage supply, this area of finance uses complex algorithms to distribute the verification and warehousing process among the users themselves. Due to the huge number of operators, forging the system became almost impossible. Thus, DeFi has become one of the leading transformations in traditional financial services in the modern era.
Bitcoin is perhaps the best known example of this vast field of decentralized finance and mass implementation of blockchain technology across countries.
What is bitcoin? How is it different from the blockchain?
Arguably the most common misconception shared among the new class of crypto enthusiasts is that both blockchain and bitcoin are the same. As mentioned earlier, the blockchain is the broadest technology used by various industries. One such application in the financial industry (specifically the financial services industry) is Bitcoin: a digital code that is exchanged as a means of value via a system of shared ledgers called blocks. Created in the aftermath of the 2008 financial crisis by an unknown entity – under the pseudonym “Satoshi Nakamoto” – the crypto token operates as a free appraised pseudo-currency. Traded via a complex platform coherently organized as a shared ledger system, the value of bitcoin is (by default) impossible to control and dictate.
The participants who verify transactions – known as “miners” – use sophisticated computer programs to solve complex hash functions to add blocks of transactions to the bitcoin blockchain. In return, they earn a lump sum of 6.25 BTC. This PoW mechanism proved impenetrable to outside influence due to this distributed functionality and the huge amounts of power required to solve functions and add blocks of transactional data. However, it is subject to speculation which ultimately fuels the volatility that investors fear. Many ask the question, then: is it worth the risk?
Is it really risky to invest in Bitcoin? How do you avoid this danger?
The truth is rooted in the word investment itself: the greater the uncertainty, the greater the reward. This quality is not specific to Bitcoin but all risky assets in general. Take traditional investors, for example. These investors — with an appetite for risk — invest in junk bonds: to earn above-average returns against the unpredictable nature of a potential default. What makes Bitcoin so unique, however, is the on/off volatility in the mainstream debate: making a take-off in value as likely as a fall. When I first started trading in 2009, price volatility was limited because adoption was gradual, and information was sparse during the early days. However, in recent years, both adoption and information have skyrocketed. Bitcoin’s market cap crossed the $2 trillion mark last year: making it the first non-institutional entity to hold such an exorbitant valuation. Governments began to adopt currency as an official means of exchanging value. Even popular investment banks and hedge funds offer services in the form of digital tokens.
Although down 40% from the record high of $69,000 in November, Bitcoin is currently trading at the support line at $42,000 – still up nearly 500% since the end of 2019. Is that too risky? It certainly is! Compared to other assets in the market, a store of value is more risky: contrary to the common perception of crypto-fanatics. However, when comparing the risk-adjusted returns, Bitcoin shows an outperformance compared to other assets. For example, the risk-adjusted return of Bitcoin since September 2020 has more than doubled the performance of the S&P 500 Index. Over the same term, Treasuries have posted negative returns while commodities have fared much worse. The same trend holds for multiple periods – both in the beginning of 2015 and the beginning of 2020 – where Bitcoin completely outperformed traditional investment flows.
However, astronomical returns flocked to investors who bore the momentum of the massive drop that preceded the surge in value. Whether it’s about the crash of 2017 – when Bitcoin plummeted 80%. Or a 2021 recession — when China’s crackdown on mining spurred billions of dollars in liquidity pressures to drive the market to a halt.
In short, it is the scheme of time, mood and excitement of greater risk that keeps the bets alive. Therefore, to get greater returns, time loss should force long trades rather than stripping.
So what is the best crypto investment strategy? And when should it be implemented?
2021 was the most turbulent year in the cryptocurrency world. Non-Foldable Tokens (NFTs) have seen a sharp increase in popularity while a large group of cryptocurrencies have lost more than half their value prior to the rally. However, 2022 is about to change the dynamic to an even greater extent. As the US Federal Reserve prepares for its hawkish tilt with talks about dwindling bonds and raising interest rates, the valuation of cryptocurrencies – especially bitcoin – is expected to decline in the following months. According to Crypto educators, cryptocurrencies will remain under pressure as the Federal Reserve reduces its injection of liquidity. Moreover, with the tightening of regulations by the Securities and Exchange Commission, popularity may also be affected.
Hence, my advice is to wait until the end of 2022 as Bitcoin will likely end up in 2022 below the 2022 dollar level. However, if your investment is geared towards the wider world of cryptocurrencies in general, my advice will differ. My approach would be to include bitcoin while diversifying your allocations. My advice is to allocate weighted portions of your wallet to similar coins like Ethereum and Solana. While these coins move in tandem with the price fluctuations of Bitcoin, their work has not reached such a meteoric level of scale in the investor community. Instead, its adoption has been limited compared to bitcoin. Thus, they provide more upside in terms of growth without sharp price swings. Ethereum, for example, is currently trading at around $3,000 and generally drifting in the $500-$1,000 window in the medium term.
If you’re looking for more solid diversification, I’d recommend putting some money into the metaverse: more related to the revolutionary aspect of NFTs. Buyable tokens such as Sandbox (SAND) and Decentraland (MANA) will be a profitable option in the wallet. NFTs are available on most crypto platforms and have delivered great returns over a long period of time. Moreover, along with a variety of cryptocurrencies (appropriately weighted), these can also act as a hedge for bets in bitcoin due to the high liquidity and profitability: which makes the wallet ideal in terms of long-term technical bets.
Join Crypto Insights for only €9 per month
Ultimately, as an investor starting to invest in this asset class, you need a long-term approach, prepared to risk over a long period of time, and an intelligent eye for market regulations and advertisements to reap tangible gains. Remember, there is no magic or free lunch when investing. Shows have been innovated, platforms have gone digital, but the basics are the same – patience and diversification.