Cryptocurrencies have turned out to be the most valuable investment vehicle of the last decade. Even though different experts and investment market reports continue ranking them among the most speculative and high-risk investments, they have still found their way into most investor portfolios.
Ideally, blockchains and cryptocurrencies were supposed to solve different social-economic challenges and serve as an inflation-proof alternative to fiat currencies. Today, however, cryptos are popularly used as a store of value.
But what are cryptocurrencies? More importantly, are they a good investment – both in the short and long term? We answer these and more questions in the following guide when we look at the different investment methods and reasons to invest in crypto in 2021.
We also look at how cryptocurrency investments have performed in comparison with other traditional investments and possible reservations for crypto investing.
What are Cryptocurrencies?
Simply put, Cryptocurrency refers to digital money or virtual currency. Some of the defining features of cryptocurrencies include the fact that they are not issued or controlled by a central authority, are inflation-proof, and are immune to sanctions or other forms of manipulation by governments and higher authorities.
The use of the term cryptocurrency started gathering pace around 2010 after the publication of the Bitcoin blockchain whitepaper and the launch of the Bitcoin digital currency. The legacy cryptocurrency was specifically designed to offer a better solution to traditional fiat currency in facilitating cash transactions and cross-border cash transfers.
In the years that followed, multiple blockchains that seek to solve different social, economic, and even political challenges cropped up. And each sought to introduce a cryptocurrency, referred to as altcoins or tokens, that served as the native currency for their specific blockchain.
Ether coins are, for instance, the native cryptocurrency for the Ethereum blockchain, while Ripple coins are the native cryptocurrencies for the Ripple network.
As the value for the different cryptocurrencies soared, they made their way into the global investment industry. Exchanges, brokerages, and different investment platforms were established to facilitating online trading and investments in this new financial instrument.
How Have Cryptocurrency Investments Performed in Relation to Traditional Investments
What makes cryptocurrency investments appealing? Their volatility. The fact that ten years after establishment, cryptocurrencies had posted a return on investment (ROI) higher than that of any other investment.
Let us look at the performance of top crypto – Bitcoin – against popular traditional investments within the last decade:
Bitcoin vs stock markets:
Throughout the last decade, the world was in recovery mode (healing from the 2007/8 global economic meltdown). It, therefore, came as no surprise that most industries, especially the stock markets, recorded tremendous growth.
The S&P 500 index, for instance, reported a 330% value increase between 2010 and 2020. Dow Jon’s Industrial Average surpassed the 28,000 level, and 2019 was ranked among the best ten financial years in the US economic history. Individual stocks would also go on to record exponential growth, with some like Netflix recording a 6000% value gain during the period. However, these accomplishments fade compared to Bitcoin, which has reported an ROI higher than 60,000% since 2010. Its value short from $1 in 2010 to peak above $61,000 in March 2021.
Real estate vs Bitcoin:
The property market is not just one of the most popular but is also ranked among one of the most lucrative investment platforms. Between 2010 and 2020, the values of the property markets across the United States rose by 49%. Some states like Nevada would, however, go on and report ROIs that were more than double the national average – at 106%.
Gold Vs. Bitcoin
There is a raging debate online among economists and investors on which is the better hedge for the fiat currency and virtually all other investments – Bitcoin or Gold. While we won’t attempt to answer this in this article, we will reveal to you that the value of gold rose by about 160% for the periods between 2010 and 2020, while bitcoin’s ROI for the period was more than 60,000%.
The Different Ways You Can Invest in Cryptocurrencies Today
There are several strategies to investing in cryptocurrencies in 2021. Here are four of the most popular direct and indirect forms of cryptocurrency investments:
Direct cryptocurrency buying
Direct investment is arguably the most common and probably the ‘easiest’ form of cryptocurrency investment. It involves buying physical cryptocurrencies like Bitcoin and altcoins like Ether or tokens. It may then involve holding onto these digital assets for the long haul or selling them as soon their value rises and waiting to buy in the next dip.
With the introduction and popularisation of crypto exchanges came a new form of crypto investing – derivatives. The most popular are crypto CFDs and crypto futures/options. They are trade contracts and usually don’t involve the exchange of actual cryptocurrencies. Ideally, they are best suited for crypto traders and have the added advantage of allowing for leveraged trades.
Crypto trusts, ETFs, and ETPs
The first crypto trust – Bitcoin Investment Trust – was developed by Grayscale Investments in 2013. It is an investment product that you can buy and sell within the brokerage.
Most recently, 21Shares launched the Bitcoin ETP, an investment product backed by actual bitcoins and traded within the Swiss stock exchange. Speculation is rife that a Bitcoin ETF would be introduced in the US by the end of 2021. These are all viable and highly profitable crypto investments.
It involves investing in companies that deal with cryptos or are in one way or another tied to the crypto industry. For instance, you may consider investing in listed crypto exchanges (Coinbase is looking to go public before the end of the year). You may also invest in companies that make mining products like Graphics cards for the crypto industry.
Reasons Why Cryptocurrency Is a Good Investment
1. High ROI
It is no secret that cryptocurrencies like Bitcoin have reported a higher Return on Investment (ROI) than virtually any other investment vehicle in the last decade. Experts believe that this uptrend will continue going into the future and that crypto investment will continue outperforming other investment vehicles.
2. Cryptocurrency still in the infancy stages
The cryptocurrency niche only started a decade ago and blew up after 2017. This is unlike equally popular investment vehicles like stocks and real estate that have been around for decades.
But even in this infancy stage, cryptocurrency investments have to be proved to be quite promising. Experts believe that cryptos are well on their way to providing the greatest upset in the investment industry.
3. Easy investment processes
The establishment of numerous cryptocurrency exchanges and investment platforms have oversimplified the process of investing in digital assets.
Today, you only need to create an investment account on a crypto exchange, verify your identity, and start trading/investing. The entire process takes a few minutes, and you can also invest in cryptocurrencies with as low as $10.
You don’t even need to be an accredited investor to start buying cryptocurrencies. This, however, cannot be said of other investment vehicles that have a complicated investment process, require significant investment minimums, or both.
4. Cryptocurrencies are liquid
Cryptocurrencies have positioned themselves as highly liquid investments. Unlike popular investments like real estate that often take days or months to sell, there is a ready market for popular cryptocurrencies. Rarely will a crypto trade remain open for days when priced right.
5. Massive adoption
Though cryptocurrencies are still used predominantly as a store of value, different institutions have started processing crypto payments. Tesla, for instance, started accepting Bitcoin payments for their electric vehicles.
Online retailers like Microsoft and in-store merchants like Burger King have also embraced the crypto wave and are processing crypto payments.
Importantly, traditional payment service providers like PayPal and CashApp have started processing Bitcoin payments – in a move that is closely attributed to the ongoing crypto market rally. Moving forward, VISA and MasterCard have expressed interest in processing crypto transactions, further driving up crypto adoption.
6. Hedge against other investments
Today, Cryptocurrencies like Bitcoin are viewed as investment hedges. Both individual and institutional investors have turned to Bitcoins and other digital assets and are now using them to hedge against other investments, inflation, and economic meltdowns.
For instance, Tahinis – the self-proclaimed best middle-eastern hotel in the world – recently converted 100% of their cash reserves to Bitcoin. A UK-listed firm- MODE – also converted 10% of their cash reveres into BTC. MicroStrategy Inc., a US-Listed company, has also converted over $1 Billion of its federal reserves into BTC, with its CEO saying that he would consider increasing debt levels to buy more BTC.
The push by these and more companies to use crypto-as-hedge gained momentum at the height of the Pandemic in 2020 when governments started printing cash – a move that most brands believe will dilute the value of their cash reserves held in banks.
Major Cryptocurrencies: Meet the Most Trusted Crypto Assets
When the crypto community believes in an altcoin and the usefulness of its underlying blockchain technology, its value and market capitalization tend to go up. The major coins can, therefore, be considered the most trusted cryptocurrencies. Here are some and their biggest attribute:
Bitcoin (BTC): Crypto pioneer and largest digital store of value
Bitcoin is often referred to as the ‘father of cryptocurrency’ as it was the first to launch. It is also the most valuable and widely used digital currency whose market capitalization just surpassed the $1 Trillion mark. It is currently trading at $59,000 – a small dip from its all-time price of $61,683.
It was designed to serve as an alternative currency but has received a wider reception as a trading instrument and store of value. Its proponents are especially confident that it will eventually replace gold as the standard store of value.
The last few years have, however, seen most merchants – both online and offline –start to process Bitcoin payments. The coin is therefore expected to drive the shift from the money markets to the finance and retail industries, where it will serve as a medium of exchange.
Ethereum (ETH): Powering the biggest and fastest-growing blockchain
Ethereum has consistently trailed Bitcoin and is now the second most trusted cryptocurrency. It was launched in 2015 and was originally designed to power what has gone on to become the biggest and the fastest growing blockchain – Ethereum blockchain network.
Today, Ethereum trades around the $1900 price level, a modest dip from its all-time high of $2036 a month ago. It also has the second-highest market capitalization of about $277 billion (around a quarter of Bitcoin’s market cap).
While Bitcoin may be the most valuable digital currency, Ethereu has toppled it to become the most used blockchain. Several developments like the launch of the Ethereum 2.0, the speedy growth of the DeFi network, and the popularisation of the Chainlink network seek to expand this lead and rejuvenate the future of the Ethereum digital asset price.
Litecoin (LTC): The best Bitcoin alternative
Litecoin was Bitcoin’s first fork created in 2015 to solve the legacy digital coin’s biggest problem – scalability. It was specially designed to serve individuals and merchants that were looking to benefit from all of Bitcoin’s features like security and fungibility while keeping the transaction processing fees and transaction time low.
Litecoin blockchain borrows heavily from the Bitcoin blockchain. Like bitcoin, it too was designed to offer an alternative to the inflation-prone and government-controlled fiat currencies. It has, however, been welcomed more by speculative investors than by online and in-store businesses.
Today, one LTC coin sells for $202, a significant drop from its all-time high record of $375 set in December 2017. It is currently ranked position 9th on the list of top 100 cryptocurrencies and has a market capitalization of $13.5 billion.
The value of Litecoins is nevertheless expected to continue soaring going forward. Experts are confident that the primary use of cryptocurrencies will ultimately shift from the money markets to the retail industry and the banking industry in facilitating cash transactions and cross-border cash transfer. When this happens, Litecoin will be one of the biggest beneficiaries as crypto users will be biased towards its low transaction costs and fast transaction processing.
Cardano (ADA): Fastest transaction speeds – up to 1 million per second
Cardano is winning the trust of the crypto community fast. In the first 50 days of 2021, for instance, its value shot up by more than 800% - a move that helped it dethrone Tether (USDT) and Binance Coin (BNB) and rank as the third most trusted coin – albeit temporarily.
Today, Cardano holds position five on the list of top 100 cryptocurrencies with a market capitalization of $38.16 billion. It is currently trading at around $1.20 – a few cents below its all-time high price of $1.48 hit on 20th Feb.
The current Cardano price rally was informed by several upgrades made to this blockchain technology. The most significant as it intends to scale the number of transactions that can be processed by the blockchain to more than a million per second.
The Cardano development team are also reportedly working on an upgrade that intends to decentralize the Cardano blockchain by up to 100 more time the average blockchain. Moving forward, these upgrades are expected to continue driving Cardano prices up.
Reasons Not to Invest in Cryptocurrency
Cryptocurrencies have also had their fair share of critics. Here are some of the reasons they believe you should never consider investing in cryptocurrencies:
Since their inception, cryptocurrencies have faced a lot of both direct and silent resistance from governments around the world. In September 2017, for example, China – one of the biggest crypto markets, banned the purchase and sale of cryptocurrencies within its borders.
Currently, the huge opposition mounted against Facebook’s Libra project by both the USA and European countries has threatened to cripple the blockchain long before its launch. And given most countries haven’t come up with regulations expressly authorising the use of crypto within their borders, critics fear that governments may soon ban cryptos, especially if they continue to threaten the role of central banks and the global financial system.
Lack of fundamentals to forecast accurately
Critics also believe that cryptocurrencies are overpriced. They are, therefore, against investing in cryptos today based on the belief that the markets will soon rebalance – a move that they expert will crash the price records set by different digital currencies.
Crypto scams: Fraudulent activities and illegitimate investment opportunities are also rife within the cryptocurrency industry.
In October 2017, in what has become one of the biggest crypto heists of modern times, OneCoin promoter Dr Ruja Ignatova (dubbed Crypto-Queen) disappeared with over $4 billion. She had successfully convincing thousands of crypto-enthusiasts from all over the world to invest in her crypto start-up that turned out to be a hoax.
More recently, popular exchanges like Huobi have been accused of committing client funds in risky investments without their knowledge. The increase in the number and magnitude of these crypto scams may make you reconsider crypto investments.
Tips for Responsible Crypto Investing
- Diversify your cryptocurrency investments by splitting your capital and dedicating a portion to different digital assets and indirect crypto investments.
- Research widely and consult exhaustively about different crypto assets and investment platforms before making an investment decision.
- Find trusted crypto investors and independent reviewers whose opinions and analysis reports you can follow and act on: But also vet them rigorously and regularly to ensure that they aren’t pump and dump schemes.
- Learn when to stop flogging a dead horse: Given the volatility of most cryptocurrencies, you need to learn when to pull back and exit a non-performing crypto investment. Here is an example, ZCash was valued at $5000+ in 2016, but for the past two years, its price has hardly gone above $200.
- Invest in a good wallet: Importantly, learn when to use a cold wallet and where a reliable hot wallet would suffice.
Are Crypto Investments Safe?
Cryptocurrency investments are as promising as they are risky. And some of the inherent risks associated with these financial instruments include untamed volatility and uncertainty about the government approach towards the coins in the future. Lack of sufficient data to aid in fundamental analysis and persistent cases of crypto scams have also made it an unattractive investment.
The cryptocurrency industry players; crypto exchanges, governments, and investors have tried to come up with solutions to these challenges and make crypto investments safe.
Governments have come up with legislations that are aimed at regulating crypto-to-crypto interactions in addition to licensing these platforms.
Exchanges and popular investors have, on the other hand, engineered crypto education campaigns aimed at educating the masses about crypto investments.
Bottom Line: Is Now a Good Time to Start Investing?
In this crypto investment guide, we have gone over all the factors that make digital assets the best investment. We have also looked at others that would want to make you want to reconsider cryptocurrencies as a viable investment vehicle.
The guide has also gone over the performance of cryptos like Bitcoin in the last decade compared to other investment vehicles. It has gone over the different ways of investing in crypto and tips for crypto investing.
Go over it one more time, complement it with your own research, and weigh the rewards for crypto investing against possible risks. These should help you decide if cryptocurrency investing is for you.
eToro – The Best Platform to Buy Cryptos
eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.
Virtual currencies are highly volatile. Your capital is at risk.
Is it safe to invest in cryptocurrencies?
All investments carry their fair share of risk. Multiple studies and opinions from financial industry experts have nevertheless listed cryptocurrencies atop the list of the riskiest investments. To a large extent, this has to do with the volatility of cryptocurrencies, plus the fact that digital assets aren’t regulated.
How can I make money from cryptocurrencies?
There are multiple ways of making money from cryptocurrencies. Much like stock investments, you can choose to buy cryptocurrencies at a dip and sell at a profit when their value rises. Experienced traders may also choose to day trade digital currencies by taking advantage of their volatile price movements. Alternatively, you may choose to invest in mining crypto assets hardware mining equipment that you can use to mine different coins.
How much should you invest in cryptocurrencies?
How much you should invest in cryptocurrencies is largely dependent on such factors as your risk averseness. Nevertheless, the rule of thumb when approaching any investment is that you should never invest more than you are willing to lose. More importantly, you are advised to never invest more than 10% of your portfolio in a single asset, especially the highly volatile cryptocurrencies.
What are the risks of investing in/trading cryptocurrencies?
The biggest risk associated with cryptocurrency investments is their highly volatile prices. It is, therefore, important that you first understand your risk level and come up with a commensurate trading strategy that takes into account this risk tolerance level.
Will cryptocurrencies ever be regulated?
The decentralized nature of most cryptocurrencies ensures that they are free of government and any other central authority. Crypto industry experts, however, believe that governments will at one point come up with legislation aimed at taming the spread and the impact of the decentralized currency on the global financial system.
How do I start cryptocurrency investing?
You first need to acquire a cryptocurrency wallet. Then register an investment account with a reputable crypto exchange that supports fiat to crypto exchanges. Fund the account with fiat currency using bank transfer, PayPal, Apple Pay, Credit/debit cards, or any of the supported payment methods. Use this balance to buy your preferred digital asset and have it transferred to your crypto wallet.