Cryptocurrencies: The case for investing

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Cryptocurrencies have had quite the ride over the past two and a half years. Bitcoin hit $1000 in January of 2017, and spent the next 12 months in an upward trajectory of unprecedented proportions. When the price peaked in December of that year, Bitcoin was just under $20,000, representing simply phenomenal 20X growth in a single year. The broader market experienced even more massive growth, going from $17 billion to over $800 billion over the course of the year. But just when it seemed that cryptocurrency could do no wrong, the market started to turn and retract. Slowly at first, the downturn quickly built momentum and became both prolonged and severe. By December of 2018, Bitcoin bottomed out at just over $3000, a remarkable drop of over 80% from its high only a year earlier, with the broader market falling all the way to just over $100 billion. Of course, more recently, we have seen what appears to be the beginning of the next major wave up, with Bitcoin bouncing around the $8000 to $9000 mark, and the broader market at around $280 billion.

So what to make of such extreme volatility? Many investors would simply say, “stay away”, and this is good advice for people who are risk averse or who might need to liquidate their holdings in the short term. However, for most investors, cryptocurrencies represent a legitimate investment vehicle that should absolutely form part of their long-term investing goals. So the question is, how to take advantage of a tremendous growth opportunity while mitigating some of the inherent risk?

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The first thing to do is prepare yourself mentally for the rigors of cryptocurrency-investing. Practically speaking, you have to understand that this is going to be a roller-coaster ride with a lot of ups and downs. But even more importantly, you have to be able to separate short-term market fluctuations from long-term technical viability. Even during the year-long downturn in valuation, every indicator other than price was pointing up; institutional interest and investment, research and development, adoption by Fortune 500 companies, numbers of wallets registered, social media prominence. Every one showed not just positive but accelerating growth. So despite valuations falling quite dramatically, the underlying fundamentals never abandoned their growth curve, which meant that it was only a matter of time before the cryptocurrency market experienced a return to glory.

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The other critical component to successful cryptocurrency investing is, unsurprisingly, research. With thousands of coins trading on exchanges, the only way to whittle down the list and decide where to put your money is to do as much due diligence as possible. So-called ‘alt coins’ bring the opportunity for tremendous returns, but with that comes the risk of an unregulated market. Unfortunately, many projects disappear, for a variety of reasons, but the end result for investors is the same. Thus, there is simply no substitute for researching the projects and teams as thoroughly as possible.

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For investors just dipping their toes in the cryptocurrency pool, the focus should be on the ‘blue chips’ near the top of the market valuation rankings. In fact, you would do just fine by just buying some Bitcoin, if you didn’t want to think about it too much. Bitcoin is the oldest and largest cryptocurrency, both in terms of market cap and community. In its brief, 10-year history, it has demonstrated a remarkable resilience to existential threats. Time and again, whether due to technological innovation, community infighting, or attempted government intervention, Bitcoin has faced threats to its existence, and time and again, Bitcoin has persevered, much to the chagrin of its many naysayers on Wall Street and elsewhere. The reason for this is quite clear.

Bitcoin, and cryptocurrencies in general, represent immense transformation potential in terms of how value is transferred and stored. Their ability to move financial control from central banks and governments to individuals, cannot be overstated. Because of this, their mass adoption is quite simply, inevitable. This is still a few years off, so the growth potential when investing today is enormous. Clear strategies for mitigating risk, and solid research, are a must, but the potential for phenomenal returns is there. Cryptocurrencies should definitely make up a small portion of most investors’ portfolios.

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