The general adoption of crypto has been gaining traction for years and has been accelerated by the pandemic. Cryptocurrencies, especially Bitcoin, are increasingly viewed as investments to hedge against inflation in times of economic uncertainty, much like gold. And Covid-19 stimulus checks meant some Americans had additional funds to invest. In 2020, the market of potential Bitcoin investors in the US grew to 32 million people, an increase of 52% over the previous year. This is according to a survey by Digital Currency Asset management company Grayscale Investments, published in October. Of those surveyed who bought Bitcoin in the past four months, 63% said the pandemic had influenced their investment decision.
“Because it’s been around longer, people are starting to accept it,” Gavin Smith, group CEO of crypto investment firm Panxora, told CNN Business. “That has led to professional engagement because they now understand a little better how to manage risk,” Gavin Smith, group CEO of crypto investment firm Panxora, told CNN Business. That creates more trust in the public, he added.
However, experts say that caution and education are required for new investors in this area.
“Crypto is not for the faint of heart,” said RA Farrokhnia, professor at Columbia Business School and executive director of the Columbia Fintech Initiative. For investors looking to invest in cryptocurrency, “you have to be very conscientious and disciplined,” he said.
Which cryptocurrency should I buy?
There are a multitude of digital tokens and other crypto-related projects to invest in – with more popping up as the so-called decentralized financial movement (or “DeFi”) gains momentum.
“Many digital currencies have different use cases and you should understand the value proposition of any potential investment before you tie up capital,” said Michael Sonnenshein, CEO of Grayscale Investments, in an email.
For inexperienced crypto investors, it’s probably best to start with the larger, more established options like Bitcoin and Ethereum. Although they are still very volatile, the regulatory framework around them is clearer than other tokens, which could help mitigate future risk.
Bitcoin is also the most liquid cryptocurrency, which should make it relatively easy for investors to buy and sell with relative ease compared to smaller, niche coins with lower demand, Farrokhnia said.
After starting with the usual suspects, Panxoras Smith said, investors should do some research “and then maybe focus on some of the other tokens that have certain use cases in decentralized finance … there are some tokens that are really exciting and calm are small at the moment. ”
How do you buy it
Keep it simple
Stick to well-known, regulated exchanges like Coinbase, Kraken, or Binance to buy and hold crypto investments – at least initially.
Digital wallets that allow a person to hold crypto without the involvement of an intermediary are often associated with crypto and viewed as an advantage of the decentralized financial space. However, these “non-custody” wallets come with unique security risks, such as: B. the possibility of losing your password and losing access to your money with no hope of regaining it (read for a cautionary story about those potential Bitcoin millionaires who lost their fortunes this way).
“With Bitcoin, you’re pretty much safe while it’s in the market,” said Smith. “Until you are familiar with the technology, I wouldn’t recommend keeping your own wallet.”
One thing to note: crypto exchanges often have higher transaction fees than many stock trading apps, Farrokhnia said.
As for when to invest, experts advise against timing the market or buying a particular token just because the internet is buzzing about it. (FOMO is not a good investment strategy). Instead, many recommend the dollar cost averaging tactic, which involves buying smaller amounts at regular intervals over a set period of time.
“Averaging the dollar cost is a great tactic for investors looking to invest in and hold onto digital currencies for the long term,” said Smith.
How risky is it really?
Cryptocurrency is still quite risky compared to most other asset classes.
“For the average investor with a few thousand dollars in savings, this may not be the best domain to invest your money in,” said Farrokhnia.
The price of most popular cryptocurrencies is not tied to anything specific and observable, just as stock prices usually fluctuate with a company’s fundamental performance. This can make it difficult to understand or predict the current or future trajectory of a digital coin.
For this reason, experts recommend allocating only a small portion of your total investment portfolio (if any) to crypto.
However, for some, the higher risk might be attractive as it can mean a higher reward.
“The inherent volatility of the asset class makes crypto a riskier asset than most stocks, but it has more upside potential. Many digital currencies, including Bitcoin, offer superior risk-adjusted returns over time,” Grayscale’s Sonnenshein said. He added, “Bitcoin may not be for everyone, but everyone should at least consider it.”