Why are Cryptocurrencies considered risky?
Unlike stock markets which are centuries old, cryptocurrencies are merely a decade and a half old. This makes the asset fairly new to investors and analysts. As the concept of cryptocurrencies is relatively recent, it is difficult to predict whether it will stick around for the upcoming centuries.
This is the primary reason, some investors avoid this asset altogether is due to its uncertainty. On the flip side, early adopters are the ones rewarded the most.
Let’s take the example of Bitcoin which is the largest cryptocurrency by market cap. It was introduced in 2009 at a price of nearly 0.10 dollars or Rs 7. From there it has turned out to give multi-bagger returns of more than 200% CAGR (Compound Annual Growth Rate) in a 10-year period, which is exceptional.
No other asset class provides such returns in the world. The current price of Bitcoin is around $61,000 or Rs 48,00,000 in October 2021.
In the present circumstances, this doesn’t mean that you should put all your money into Bitcoin and so that you can become a crypto millionaire overnight!
There are multiple risks associated with cryptocurrencies, let us look at some of them.
As Cryptocurrencies are in their initial stages, there lies a risk of adoption. Any asset will increase in value only if there are valid use cases in society. Cryptocurrencies are already being used in multiple avenues but mainstream adoption is still pending. Countries like El-Salvador have accepted Bitcoin as a legal tender, whereas countries like China have completely banned the asset. India hasn’t provided any regulation on this front by a total ban of cryptocurrencies is extremely unlikely to happen.
Being in its initial phases, the market cap of most of the crypto tokens is small. This makes them very sensitive to buying and selling. A group of big investors or speculators can easily manipulate the prices of these assets. This leads to huge volatility and swings in the prices of cryptocurrencies. Frequently price drops and rallies are the outcomes of this phenomenon.
How to Protect your Cryptocurrencies from Hacking? There are various ways by which you can protect your cryptocurrencies from being hacked.
Cryptocurrencies are currently unregulated by both governments and central banks. However, once regulations are constituted for these assets, they might be either pleasant or harmful for investors. Central Banks can also restrict the use of cryptos which can further lead to a decrease in its value.
Similarly, if more countries decide to prohibit them, it might be negative for crypto investors. This uncertainty about the regulations makes it even riskier as the upcoming course of action by the central banks and governments is unknown.
Will the risk of cryptos ever reduce?
Now that you have gone through the risks and possible threats about cryptos, the question arises, “Will crypto investing ever become a low-risk investment?”
The brief answer to this question is, Cryptocurrencies will become relatively less volatile and risky but they will nevertheless remain in the high-risk high-reward category.
The main hindrance to cryptocurrencies is their mainstream adoption. Unless it is exercised by the masses, it will be forced to shrink and be bound. Regulations will also play a significant role in the industry moving forward.
But as more companies like Facebook, Square, PayPal, Tesla, Twitter, etc, venture and embrace cryptocurrencies, the adoption risk reduces.
The best method to reduce the risk in crypto investing is
Investing in the right assets
More than hundreds of cryptocurrencies appear on the market on a daily basis, out of which more than 99% are flawed or useless. Hence, it is important to choose the best currencies for investment. In terms of market cap, Bitcoin, Ethereum and Cardano are the top three currencies. Investors investing in the top cryptocurrencies like Bitcoin and Ethereum will have a better probability of gaining when compared to other Crypto.
Having a long-term approach
The best way to reduce the overall risk in cryptocurrencies is to follow the ‘Buy and Hold’ strategy. By buying and holding Crypto assets for the long term, you can overcome the short-term volatility and get better returns. Traders should also not try to time the market and invest in the asset regularly to receive a dollar-cost average price.
While investing in cryptocurrencies, you should always have a long-term approach and hold on to their investments. You should start small into cryptocurrencies and invest only what you feel comfortable with. You should never put more than 20-30% of your overall portfolio into cryptocurrencies or try to trade cryptos with leverage.
Although the volatility of cryptos is high, the best way to reduce your risk is to invest in the top counters like Bitcoin(BTC), Ethereum(ETH), Ripple(XRP), etc, and invest at regular intervals and continue to do it for the long term.
So to summarize, investing in cryptos will offer high returns in the long run. Provided you conduct adequate research and pick the right cryptocurrency.