Benefits of Investing in Cryptocurrencies

08 February 2019 | Fri

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Introduction

Confused whether to invest your hard earned dollars into Cryptocurrency or not? Then this article will help you understand why investing some of your dollars into cryptocurrency can help you to diversify your investment portfolio. Diversifying is all about putting your funds in multiple places to minimize risk. By allocating your money across different stocks, for instance, you spread the risk around, so that if one stock’s price goes down, you won’t lose all your money at once. You can also diversify across different industries. If you only invest in oil companies and the price of oil drops dramatically, chances are good your portfolio is going to take a hit. But if your money is spread across multiple industries, you’re in a much safer position. Therefore investing some of your dollars in cryptocurrencies will help in diversifying your investment.

Mitigating risk with the help of Cryptocurrency Investment

My proposition is that, if you have 100 dollars, investing 5 dollars in cryptocurrency will help you diversify your investment portfolio. It is a well-known principle that the risk of any investment portfolio can be reduced with the help of diversification.

In the above formula, ?p is the variance of the portfolio. Higher ?p implies higher risk.

Cryptocurrency investment as an asset has zero correlation(This implies Covariance is zero) with bond and equity market, this means that if you add cryptocurrency as an asset into your investment portfolio you are effectively diversifying your investment portfolio and thereby reducing the overall risk of your investment portfolio.

Some will not agree with the above proposition because they say that cryptocurrency is volatile and therefore considered a risky investment. Some also say that investment in cryptocurrencies is risky compared with an investment in bonds or stocks. It is not always correct to say that bonds and stocks are ‘less risky’ than cryptocurrency investments. Now with the help of below information, we will understand whether bonds and equity investments are really ‘risk-free’ when compared with investing in cryptocurrencies.

Are we getting closer to a bond market bubble burst?

After the financial crisis in 2008, a dangerous bubble has been forming under-the-radar in the corporate bond market. Interestingly, this corporate bond bubble is one of the main reasons why the stock market has been consistently pushing to new highs.

The main reason for the increase in corporate debt after the 2008 crisis is because of the Low-interest rates. Central banks across the world have reduced interest rates to push their economies after the 2008 crisis. Low corporate bond yields after the 2008 crisis have encouraged corporations to borrow heavily from the public in the bond market. For example, US corporate debt has increased by 40% (by about 2.5 trillion US dollars) after the 2008 financial crisis. This huge upscale in borrowing from the bond market led to a boost in stock prices of companies.

From the below figure, we can see the growth of the S&P index after the 2008 crisis.

Above information indicates us that we are very close to the next crisis and it is therefore imperative to look at alternative investments to bonds and equities. This is where investing in cryptocurrencies can save you, converting some of your bond and stock investments into cryptocurrencies will help you hedge the risk from the impending bond market crisis.

Perceive Cryptocurrency as a long-term investment

From the above information, we can conclude that investing some of your money into cryptocurrency can be a good investment. But it is also important that you perceive this investment as a long-term investment.

Most of the people who lost their money by buying cryptocurrencies are speculators, therefore it is very important to invest in cryptocurrencies with the idea of holding the investment long-term(like 3–5 years). For example, if you buy 10 bitcoins for 65,500( based on exchange rate on 16th October 2018) and hold these 10 bitcoins with you for 3–5 years then you can be sure that you can make a profit. But instead, if you continuously buy and sell bitcoins, there is a high chance that you will make losses because of high volatility in the Bitcoin market now. Therefore you should perceive Bitcoin as a long-term investment.

Conclusion

The main aim of this article is to explain why investing your money into cryptocurrencies can help you hedge the risk from the impending financial crisis. I am not advising you to put all your investments in cryptocurrencies. Instead, you can diversify your portfolio by adding cryptocurrency as an asset to your investment portfolio. You can invest in cryptocurrencies based on your individual risk profile. If you are risk lover, invest 30% of your investments into cryptocurrencies. If you are risk-neutral, invest 15–20% of your investments into cryptocurrencies. If you are risk averse, then invest at least 10% of your investments into cryptocurrencies.

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