Cryptocurrency: Risk Or Opportunity? The Good, The Bad, & The Ugly

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For financial advisors, family offices and investors, 2021 will go down in the history books as one of the most significant with regards to cryptocurrencies. Many cryptocurrencies have reached all-time highs and were the first ever bitcoin ETF approved by the SEC in the United States. At the same time, the Chinese government banned mining and trade in September. Also, a famous meme, Dogecoin, was created by Tesla.
TSLA
CEO, Elon Musk. If that wasn’t enough, non-fungible tokens (NFTs) have been one of the major trends in 2021. However, the proportion of retail investors or individuals who have invested in, traded or used cryptocurrencies is no higher than the investment itself. in equity. According to the Pew Research Center, Only 16% of Americans have invested in, traded or used cryptocurrency, With regard to stock, 56% of Americans own stocks From Gallup’s research. Compared to crypto with stocks, it has a low ratio. To put things in perspective, as of September 30, 2021, the total market capitalization of the US stock market is currently $48 million, However, as of November 2021, the total cryptocurrency market capitalization broke $3 trillion, This data suggests that there is a clear momentum for cryptocurrencies to grow in the future. When analyzing the pros and cons of investing in cryptocurrency, we also explore the tensions referred to as the good, the bad and the ugly. Furthermore, we believe that most investors will use CEX (centralized exchange) such as coinbase, Gemini And Binance To trade cryptocurrencies.

Total cryptocurrency market cap from CoinMarketCap

Pros and Cons of Investing in Crypto

Cryptocurrencies allow for a number of positive externalities such as: providing an opportunity to achieve significant returns in a short period of time. Rapid growth and it is expected to continue into 2022. The initial investment amount is very flexible (for example, Coinbase allows users to start trading with as little as $2.) – CEX offers reasonable APY (Annual Percentage Yield) that ranges from 0.15. % – 8% meaning credit cards can be used to invest in crypto. Metaverse will have a positive impact on the crypto space – High volatility – The regulatory environment will have a huge impact on the crypto space. For example, having some technical knowledge to understand the value of projects can help in making more informed decisions about investing in crypto. Certain influencers have a huge impact on volatility/price swings in cryptocurrencies. The cryptocurrency market is constantly evolving and changing 24/7, which means that some people may need to invest money to use the technology to trade. Investors need to get used to the new tools/platforms which are used by many crypto projects such as Twitter, discord And WireThe pros and cons of crypto can actually be two sides of the same coin. Meaning, investors can earn good returns in a short period of time but it also means that they can also lose a lot of money in a short period of time. In terms of inflation, the credibility of crypto as a hedge against inflation is not as good as gold as cryptocurrencies are still relatively new as an asset class, and thus the jury is still out on this. With regard to volatility, there are several cryptocurrencies that have proven to be relatively stable over time, while the overall global crypto market has declined. This means that technically investors can build a portfolio that minimizes volatility risk. In terms of the crypto regulatory environment, it is likely that the SEC’s new regulations will have an impact on the cryptocurrency market, however, it is important to note that the regulatory environment from the US will be more significant and influential than that of countries. Like China. China Cryptocurrencies have been banned 20 times. However, for the first time, China’s 10 regulatory agencies, including The People’s Bank of China (PBOC), jointly announced in September of 2021 that Sanctions All crypto and mining in an effort to root out “illegal” cryptocurrency activity. Multiple exchanges, wallets and other cryptocurrency companies has announced that they will cease to provide services For users in mainland China And implemented a comprehensive block of all Chinese IP addresses on their services. Judging by the wording of the official document, which clearly distinguishes foreign exchanges catering to Chinese residents, the industry seems to have taken an overly cautious approach. “How much of a threat the new level of enforcement will pose to individual citizens remains to be seen,” says Luisa Kinzius, a director at China-focused consultancy Sinolytics. ,[But] Announcement is also targeting someone Chinese citizens Working for crypto-related companies overseas, declaring their work illegal and putting them at risk of legal scrutiny.”

Often times when China announces that it is banning cryptocurrencies again, it has the short-term effect of sending the price of bitcoin and ethereum down. Beijing’s absolute disdain for cryptocurrency is because it threatens to provide an alternative to the Chinese government’s top-down centralized currency controls. In addition, it is also related to the development of Chinese governments but also to promote its own digital yuan And central bank digital currency,

In terms of technical knowledge, it would be great if investors have knowledge of blockchain, but CEXs provide useful information to investors and cryptocurrencies on CEXs are carefully scrutinized. The most recent popular metaverse will bring a positive impact on the crypto space as NFTs will be used as an identity in the metaverse and the metaverse includes economic activity and will be backed by cryptocurrencies so that more people can start using them. Finally, let’s consider the worst-case scenario for investors using CEX. It could be closed/banned by the government, but that would be highly unlikely. In fact, Binance has some issues with the authorities of some countries but it holds the largest trading volume. as well Coinbase to spend $785K on lobbying in 2021 From data from OpenSecrets. Therefore, the probability of a worst case scenario is quite small. Given these factors, investing in cryptocurrencies can be a good option for many investors, but it is important that you do your due diligence.

Photo by Scott Graham Feather unsplash

Due diligence on crypto projects

Most cryptocurrencies have a project that solves a specific problem with blockchain technology except for meme coins i.e. Dogecoin, Shibu, etc. It is important to keep the following in mind before investing in crypto:

team composition

Every crypto project has a core team and understanding the team is important, but as I mentioned, a listed cryptocurrency is carefully scrutinized by CEX, so you won’t need to spend an excessive amount of time on it. Other important considerations are: * Total funds raised by the company? * Do investors include any well-known celebrity investors in the crypto space? * Who are the key partners in the company and what key competitive prices do they bring?

the product

It’s the same as when you invest in stocks.* Is there consistency in the company’s long-term strategy?* What kind of problem will the product solve?* Who are the product’s competitors?* What’s the difference between a company and its competitors? ?* How long has the company developed its product?* Does the company show milestones (long term/short term)? * Does the company conduct smart contract audits? * Does the company have a clear plan for scalability?

Marketing

Many crypto projects use Telegram and Discord to communicate with investors/developers and use Twitter for official announcements. So the information in these accounts is one of the criteria to measure the expected value of the projects. * Is the company Telegram group active? (if the company has)* Does the company’s Twitter account have many followers?* Does the company post information regularly?* Does the company update the official website regularly?* Is the company’s Discord server active? (if the company has)* Does any high profile personality support this project?

Conclusion

Whether you are a financial advisor, family office, institutional investor, or a recent high school graduate, investing in cryptocurrencies requires understanding of the various objectives as well as risk tolerance. As with any investment, one must clearly figure out the risk versus reward and opportunity cost. At the present time, when evaluating the pros and cons, the risk in more mainstream cryptocurrencies such as bitcoin and ethereum can be volatile at times, while at the same time diversifying investors’ portfolios in certain situations as well as growth. Is. , If you have historically chosen to ignore investing in cryptocurrency because of its high volatility or the complexity of blockchain technology, it may be a good time to reconsider if it fits your short, mid or long term goals and risk tolerance. As crypto becomes more mainstream with both retail and institutional investors.

special thanks to koji kanao, software engineers who have technical, editorial and research skills, have contributed significantly to this article. I also thank Quison Adams for reading the draft and providing comments.

Earl Carr is Chief Global Strategist at Breakthrough Advisors based in New York City. His responsibilities include working closely with the firm’s CEO and President to manage the global research team and develop and execute the firm’s global thought leadership and cross-border business development mandate. Earl is editor of the recent book “From Trump to Biden and Beyond: Reimagining US-China Relations.”

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