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Is It Time To Include Cryptocurrencies In Your Portfolio?
Cryptocurrencies have been one such investment class that has surged exponentially in terms of popularity in the last couple of years.
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The collapse of the Lehman Brothers, unleashed a host of chaos with huge losses across equity and job markets. The global crisis of 2008 paved the way for several financial reforms, and demystified debates around financial markets. However, one of the key takeaways was -- diversifying your investment is important for perseverance and long-term returns. Traditionally, investors have looked to equities, bonds and cash instruments as places to put their money with the expectation of generating returns. However rising volatility of the equity markets, extended periods of low interest rates and assets failing to offer intended results are driving investors, especially the long-term ones in deploying their funds in alternative assets.
The alternative asset class is therefore primarily defined as those that do not fall under the typical classes of financial assets, such as stocks, bonds and cash. While these assets can play a crucial part in improving portfolio returns when equity markets are under performing, through sufficient diversification they also reduce portfolio risks – reducing the potential negative impact of market shocks. This is more so since many of these alternative assets perform in ways that are low-correlated with traditional instruments like the stock market. Thus in case of a market crash, they tend to remain unaffected – adding a much needed insulation layer to portfolio diversification.
Cryptocurrencies have been one such investment class that has surged exponentially in terms of popularity in the last couple of years. The Supreme Court quashing the RBI order and lifting the banking ban on cryptocurrency in India has helped multiple start-ups in the space to gain ground in the country. Even during the ban, people continued to trade with the help of peer-to-peer (P2P) networks but the RBI’s approval is expected to act as a catalyst to the growth momentum. Besides, with the favourable court order multiple platforms in the space have now experienced a sharp rise in both its users and the trading volumes. Two key factors have been fuelling the trading volumes recently. Firstly many traders have now returned to the market after the SC decision and secondly, Indians staying back home with the ongoing pandemic are now finding time to trade on their devices.
What are cryptocurrencies?
Cryptocurrencies are a store of value that is powered by sets of code unique to each token. The transactional data of cryptocurrencies are immutable — meaning that the record of its movements cannot be changed/edited — and decentralized — meaning that the token is not controlled by a single entity, such as a central bank.
There are many different types of tokens with different use cases, ranging from payments, to private transactions, to stablecoins, to incentivizing a network of players. What gives cryptocurrencies their value are their use cases and the number of people trading a cryptocurrency, giving it demand and liquidity.
Blockchain, the technology framework under which the current cryptocurrencies are formed and transacted uses decentralized technologies thereby allowing users to make secure payments and even store funds without using logo or personal names. The decentralization thus allows the block technology to offer increased capacity, better security and faster settlements which some of the traditional financial systems lack thus resulting in low risk of fraud or theft.
Cryptocurrencies operate on a certain set of fundamental characteristics which have radically defined their use cases. Bitcoin, the first and one of the most liquid cryptocurrencies was intended to be a digital currency or a store of value and was designed to act as a secure peer to peer decentralized payment system. Whereas, Ethereum, a deal- changer that some of the biggest brands in the world, including Intel and Microsoft adopted was intended to be a kind of decentralized supercomputer that can be used to create ‘contracts’ and where all the applications, systems are programmed as per ethereum’s protocol.
Cryptocurrencies which emerged with the purpose to be used as a digital currency offered to serve a variety of purposes. Some of the prominent use cases include -- form of payment, internal pricing mechanism, investments funding among others. Today there are numerous merchants accepting different cryptocurrencies, with Bitcoin being the most widely accepted one.
Cryptocurrencies as an asset class
Since cryptocurrencies are created digitally and supplies are limited, they behave differently from, and have low correlation to, fiat currencies. The latest market volatility has demonstrated this. While traditional markets and assets saw volatility in the last few months, cryptocurrencies were able to maintain their stores of value.
Different types of tokens have different uses - from payments to providing incentives to a network to stablecoins. Much like you would do research on a stock in the stock market, it is important to research and understand the underlying value of cryptocurrencies and what their potential is in the future before investing in a cryptocurrency.
Cryptocurrencies can be purchased on exchanges that are 24/7, not limited by trading hours.
Cryptos no longer just a high-risk speculative asset
A lot of countries like China, Iraq are now adapting to blockchain technology and cryptocurrency, mostly because of the ease of security. In another news piece recently, the Bank of England’s governor Mark Carney has announced a digital Synthetic Hegemonic Currency, similar to Facebook’s Libra crypto coin, as an alternative to the dollar. These facts and numbers also portray that crypto will re-define the new age investments in India.
Billionaire investor Paul Tudor Jones made a prescient call on bullion in 2019; now he’s betting big on bitcoin, addressing it as the best hedge against inflation in the age of coronavirus. The famed hedge-fund investor, in a recent research note, cited unprecedented money-printing and stimulus measures by the Federal Reserve and the U.S. government amid the COVID-19 pandemic as key reasons for his newfound appetite for the world’s most prominent cryptocurrency.
Cryptocurrency as an asset class has been attracting a flood of investors recently and now with big institutional players slowly entering the ecosystem, the cryptocurrency market is all set for a huge inflection
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.