Investing in Cryptocurrencies
Investing money into anything new and unfamiliar makes many people cautious and uneasy-- rightfully so. How could you feel comfortable taking risks in something you don't understand? This is not a new concept and should be no different with cryptocurrencies. The smart answer has always been to educate yourself before you buy, trust but verify, and of course do your own research.
Castle Cardano is here to help educate so that you can have the information to make decisions you believe in. If you haven't already, a great place to start is understanding the basics through an Intro to Cryptocurrency & Blockchain.
There are many, many reasons of why cryptocurrency is worth investing in but here are some of the big ones:
Diversify your Portfolio
Diversification has always been a guiding principle for financial advisors. Putting your money in different asset classes helps reduce your risk while also exposing you to new potential profits over time. Cryptocurrencies are generally considered "risky" investments but it is not uncommon for financial advisors to suggest 5-10% of your portfolio allocated to riskier and potentially higher rewarding investments. This of course depends on your level of risk appetite.
The growth of the crypto market in the last 5 years has been massive. The total market cap has increased by 176x (17,592%). In comparison the S&P 500 has grown 2x (104%) over the same time period. Market cap is a common metric in traditional finance used to measure the value of a company or industry. In the context of the crypto market it is calculated by multiplying the number of coins currently in circulation by the price of each coin. Currently, the total market cap is around $2 trillion dollars. This is about the same market cap of the company Apple. With the value of an entire ecosystem of innovative technology being the same as one company, the growth potential is huge.
Total Cryptocurrency Market
Traditional Currencies are Inflationary
As much as some governments try to persuade us that the current level of inflation is not an issue it is most certainly a fact that they can print more money whenever they want. Factually, this means that not only does your money not gain any value sitting in your bank it also loses value. How much value you lose is up for debate but cryptocurrencies are considered a hedge on inflation as they are not tied directly to government currencies and most have a fixed supply meaning no more can be printed (depends on the cryptocurrency).
If we recall, price is determined by supply x demand. If the supply is limited (such as with cryptocurrencies) the price will only rise as demand increases. This is not the case for USD for example where the supply is constantly increasing.
Supply & Demand
Earn Interest on Your Investment
There are two ways you can earn interest on your cryptocurrencies. Through something called "mining", rewards can be earned through participating in the mining process. As described in our Intro to Cryptocurrency & Blockchain article there are many different cryptocurrencies and many different blockchains. Some blockchains, such as Bitcoin, make it very difficult to participate in the mining process. You must own powerful computers that allow you to earn the rewards. This process is known as Proof of Work (PoW). However, there are other blockchains that use Proof of Stake (PoS) that allow you to earn rewards just by owning the cryptocurrency that runs on that blockchain. A great example of this is the blockchain Cardano that makes it very easy for you to earn 5% return on the ADA you own safely and securely (ADA is the cryptocurrency of the Cardano blockchain). This process is also known as staking which you can read more about here. Not only are you earning interest but it is compounding as the price of the cryptocurrency asset increases as well.
Not every currency can be mined and some make it difficult. Another alternative is to use the cryptocurrency you own to provide liquidity to a decentralized exchange (DEX) or a digital asset institution. In exchange you receive interest for you loaning the use of your funds. In the traditional finance world this is something that is only available to wealthy people and institutions such as hedge funds.
Cryptocurrencies will Revolutionize Global Finance
Traditional finance was built and is primarily controlled by the wealthy. Any money that moves through this system is controlled by a few organizations in power. Because of this, they are able to manipulate and take advantage of the system for profit. A lot of people are either unable or uneducated on how to participate in order to increase their wealth.
This all changes with Decentralized Finance (DeFi). Instead of having exchanges, brokerage firms and banks being the control points of the flow of money, we will have decentralized, autonomous exchanges that run 24/7 securely on blockchains automatically execute buy and sell transactions instantly (no more waiting days for transactions to clear your bank). These decentralized exchanges (DEX) are global and span all borders allowing anyone with access to the internet to participate - no matter their country, status, or circumstance. Anyone can receive an over-collateralized loan no matter their credit. Digital identities (DID), where you own your data, can be used for Know Your Customer (KYC) processes to allow governments to still regulate if they want. This makes it possible to integrate DeFi into our current systems. Furthermore, when you buy cryptocurrency you own it (unless you choose to store it on an exchange). You essentially become your own bank and are in full control of your money.
You can see below how using a bank is different than owning cryptocurrency and the advantages it has for everyone - not just the wealthy.
Institutions are starting to buy in...
Institutional investors are starting to invest - mostly in Bitcoin as they generally tend to be more risk adverse but some are buying other cryptocurrencies as well. Not only will this bring more stability to the market but it's a sign of adoption and acceptance by society. It is likely this trend will continue as institutions feel the pressure to join.
You can read some news articles of institutional investments here:
Furthermore, many big-named companies are bringing cryptocurrencies to their platform:
Why Some Say Not to Invest
Governments Will Ban It
Only time will tell how governments react. Countries such as Turkey, Nigeria, and Bolivia have already put a ban on cryptocurrency exchanges whereas countries such as El Salvador has just made Bitcoin legal tender. However, even if countries do ban it, cryptocurrencies are borderless and decentralized. There is no single authority than can shut it down or take your money. Governments can make it difficult to buy it from exchanges but cannot shutdown the blockchains.
The more likely response, which is what we are already seeing, is more government regulation. Despite what some may think this is a good thing. More regulation means more official recognition and traditional companies will have more clarity into how to do business in this new environment.
No Intrinsic Value
A common response from a lot of banks is that cryptocurrencies have no intrinsic value and are therefore worthless (remember crypto threatens their industry). Intrinsic value means that something has value inherit to itself without any additional source. Fiat currencies (such as the US dollar) have value because the government says it does and the people trust it (no intrinsic value).
As there are many cryptocurrencies with different characteristics lets use Bitcoin as an example The intrinsic value of Bitcoin is:
Incorruptible and trustworthy
This is something that traditional fiat currencies do not provide.
It's Too Volatile
One of the first fears some have with investing in cryptocurrencies is that it is too volatile. News reports of market dips of 10% or more in a single day is certainly more common than in the traditional markets. This is mainly because cryptocurrencies are still new and the total market volume is not that large. Big news announcements (whether they are accurate or misled) can cause mass fear and trigger the selling of assets. The infancy and size of the market makes it easier for whales (people with large amounts of crypto) to move large amounts and noticeably impact the price of some assets. Often times this is a technique used to scare people to sell thereby dropping the price and allowing the whales to buy back cheaper.
Most of the time these big dips are temporary. Being steadfast and not panic selling can be hard to do at times but it is necessary in markets such as these. The best way to offset volatile markets is to have a long term strategy to negate the effects of large, temporary dips along the way (known as HODLing). In the long run the price has generally risen (see market cap chart above).
Dollar cost averaging is a very common investment strategy where you buy small amounts at a set interval (ex: every month) over a long period of time. The price at which you bought the asset then averages out over time and helps hedge against market dips.
It Has No Utility
Another very common argument is that crypto has no utility or that it doesn't solve any problems. Up till now cryptocurrencies haven't had much impact on society other than the creation of a decentralized, borderless, and global currency (Bitcoin). Where many argue this is a major invention it can still be difficult for some to appreciate. However, blockchain technologies promise much more. Some are currently used to streamline supply chain management, music royalties, art marketplaces (NFTs), gift card fraud, and insurance. Still, a noticeable impact on society has yet to occur due to the fact that the industry is still so young and existing issues are holding it back. Blockchain technology is very complicated and it has taken time for developer teams to innovate and improve the systems in such a way where they are able to integrate efficiently into modern society. One blockchain bringing new technology with the promise of change is Cardano. After 5 years of academic-driven research to build a blockchain that solves the issues preventing mass adoption, it is starting to come to fruition. You can read more about Cardano here.
At its core, blockchain technology solves the issue of trust. It can remove the middle man of any process making it faster, incorruptible and transparent. It may be hard to envision but the possibilities of how to apply this technology are endless. For some real-world examples take a look at our upcoming learning series: Quest 4 - Use Cases (Coming Soon)
Most investors look to invest in something that has potential, such as a startup - before it has reached its goals or developed a product. For example, investing in Amazon when it was a small bookstore is much more lucrative than investing in the current trillion dollar company. In the same way, waiting to invest in cryptocurrencies until they bring the transformation they promise will reduce your risk but also the potential profit.
It's Only For Criminals
This is completely false. There are millions of people (not criminals) using cryptocurrencies today for all of the reasons discussed previously in this article (cryptocurrency community sizes can be measured by the amount of wallets created which is publicly available information). Furthermore, there was $800 million - $2 trillion of illegal money transferred through our current global, financial system last year.
There are some blockchains that offer privacy features but lots of blockchains such as Bitcoin are completely transparent and have public records of every transaction. Once KYC processes exist for digital identities (DIDs), cryptocurrency markets can be regulated just like traditional markets. Users on blockchains that use privacy features (such as Monero) will be required to present their DID to move onto a regulated blockchain before they can interact with traditional markets.
What to Invest In?
As we have mentioned there are thousands of cryptocurrencies and many more that are continuously being created. How do you decide which one to buy?
Bitcoin is the name brand cryptocurrency and has the advantage of being the first one. It has also withstood the test of time (over 10 years). Its lack of evolution is actually its greatest strength in that it has proven to be trustworthy and immutable (this is its utility). This is not something that should be overlooked.
However, when looking at other cryptocurrencies there are a few things to keep in mind when making a decision:
Does the project have an experienced, transparent team behind it?
What is their plan for sustainability? How will they still be here in 10, 20, 30 years?
Does their roadmap include utility that will bring value to the ecosystem?
Cryptocurrencies with lower market cap are higher risk but potentially have more reward. You can see a list of cryptocurrencies by market cap here.
Also it is important to be careful about cryptocurrencies that have lots of hype and are rapidly increasing in value. As Warren Buffet said:
Be Fearful When Others Are Greedy And Greedy When Others Are Fearful
Do your own research first to make sure you believe in what you are investing in. The future will exist of many blockchain projects fulfilling different needs. It will be a diverse ecosystem innovating together.
We have done our research on Cardano and truly believe in the project and the vision. Our goal is to clearly share our years of research following and participating in the project so that you can make your own decisions.
Read more about Cardano here.
Learn how to buy and stake ADA (the cryptocurrency of Cardano) here.
How to Invest
Even though the utility comes from the blockchain technology, the best way to invest in a project is to buy their cryptocurrency. This can be done by using USD (or other fiat currency) to buy the cryptocurrency on an exchange. Generally, to buy a cryptocurrency you must do the following:
Create an account on an exchange that trades the currency you want to buy
Complete any required KYC needed (typically involves sending them a screenshot of your license or passport)
Connect your bank account to transfer your money to the exchange
Trade your money for the cryptocurrency
Transfer your newly bought cryptocurrency off of the exchange to a local wallet you own. This way you don't have to trust an exchange to keep it safe. (recommended)
There are many exchanges you can choose from. Be aware not all of them do business in every state and every country so you will need to find one that is available in your region and supports the currency you want to buy. Some of the popular exchanges are:
Coinbase - US based exchange with higher fees than most but available everywhere in the US (including New York)
Gemini - Located in New York City and owned by the Winklevoss twins
eToro - Israeli social trading platform
The last thing to be aware of is what trading pairs are. A trading pair is two cryptocurrencies that can be exchanged for each other. For example, you may be able to buy ADA with BTC or you can buy ADA with ETH. Those are two possible trading pairs (ADA/BTC & ADA/ETH).
When you put your money on an exchange, USD for example, there may not be a trading pair available to buy the cryptocurrency you want with USD. Let's say you want to buy ADA with USD but the ADA/USD trading pair does not exist. You would have to do something like this:
Use the USD/BTC trading pair to buy BTC
Then use that BTC to buy ADA with the ADA/BTC trading pair
Recommended Reading to Continue your Crypto Journey
What is a Blockchain (Coming Soon)