Namrata Sen Chanda, Author at The Motley Fool Australia

Six things investors need to know before investing in cryptocurrencies

Namrata Sen Chanda — Thu, 24 Jun 2021 01:35:00 +0000

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Cryptocurrency investing is seen as one of the most lucrative strategies in 2021. As institutional investors and famous personalities have expressed their love for cryptos, demand for these digital currencies is skyrocketing, and so are their prices. The crypto bull run in the past year has tempted many new investors. However, cryptocurrencies are highly volatile assets with a fair share of risks. Here are the six things you should understand as a new investor before investing your hard-earned money into these digital assets.

1. Don't take large bets.

I agree that the spectacular returns generated by some cryptos are too enticing. You may want to invest all your money to earn maximum profit in this winning phase. But hold on because crypto markets are no less than a roller-coaster ride. No one knows if -- or when -- the market will crash. Unlike stock investing, there is no Securities Investor Protection Corporation (SPIC) or Federal Deposit Insurance Corporation (FDIC) coverage that comes as a savior. Hence, the gyrations of the crypto markets can be damaging if you take large bets. It's wise only to invest a portion that you can afford to lose.

2. Research well at the outset

With a new altcoin seemingly launched every other day, you must know to separate the quality investments from the equivalent to penny stocks. It's crucial to invest in projects that have been around for a while and have credible backing. Research the authenticity of the developers or teams backing them. Examine initial coin offering (ICO) whitepapers or prospectuses. And watch out for scammers that most certainly abound during the peak periods. If a proposition is too good to be true, it probably is. Due diligence is critical here. Whenever you plan to invest in crypto in an initial coin offering, you must read the prospectus thoroughly. It's an uphill task for sure, but something worth the effort. In addition to the coins, choosing crypto exchanges also require judgment, especially the ones that offer over 100x leverage. All's well if a currency gains value, but you could end up losing all your money if it sees a correction.

3. Invest time in learning about value proposition

Investors buying a particular cryptocurrency for its rising price doesn't necessarily make a good argument for its value proposition. Unlike equities, the value of cryptos isn't determined by metrics, cash flows, or profits. Instead, you need to understand the primary objective of each cryptocurrency. Identify the gap they aim to address and the factors that make them unique. For instance, replacing gold as the store of value and a hedge against inflation is the best use case for Bitcoin. Ethereum blockchain serves as the base for the majority of the DeFi (decentralized finance) projects. Similarly, Cardano aims to create an open financial system for inclusive banking. Researching the use cases of each coin is the best way to understand what the future holds for them.

4. Diversify your crypto portfolio

Bitcoin is the most-talked-about cryptocurrency. It has had a bull-run for a long time but has plummeted since April. So never put all your trust in one single crypto. Instead, you need to diversify your crypto basket to spread the risks evenly. A smart diversification across multiple coins ensures that if one coin goes through a rough patch, the other coins can help you to recover the losses. For example, some crypto investors like to follow a 6:3:1 strategy which implies investing 60% in Bitcoin, 30% in Ether, and 10% in other altcoins. This ratio varies across investors, though.

5. Don't get swayed by emotions

Investing in cryptos should be based on research and not gut feeling. If fear of missing out is driving your crypto investments, you could miss out on safeguarding your wealth. I understand that the hype around crypto, the constant barrage of news, and the social media sentiments can be overwhelming. You may just want to follow every trend out there. However, this can be extremely dangerous, and you could fall prey to fly by-the-night scams. Don't just go by what others tell you, whether they are promoters or detractors. Evaluate the merits of the investment case yourself and plan your moves based on the research.

6. Don't ignore other expenses

Seeing multiple price changes in cryptocurrency prices within a single day or an hour is not uncommon. Naturally, you may want to take advantage of these changes, but you must consider the transaction fees for that. Another factor you need to check is your taxes. In the U.S. and Canada, you need to pay capital gains taxes on each transaction. So if you are involved in excessive trading, a significant portion of your gains can get wiped off if you don't do the math for fees and taxes.

Be prepared for the risk and volatility.

Investing in cryptocurrency is exciting and rewarding. But these profit opportunities come with high risks. You could end up making losses if you aren't sure of what you're doing and why you're doing it. Before you take the plunge into cryptocurrency, you must have a high-risk tolerance because volatility is a permanent element here.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Six things investors need to know before investing in cryptocurrencies appeared first on The Motley Fool Australia.

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Namrata Sen does not own any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Bitcoin crashed nearly 50% last weekend — Should you worry?

Namrata Sen Chanda — Wed, 16 Jun 2021 23:49:00 +0000

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bitcoin (CRYPTO: BTC) is going through a rough patch as it has plunged nearly 50% since its previous high in April 2021. The flagship cryptocurrency lost $1 trillion in market cap last month, and this downward spiral has a mix of factors at play. In May, Elon Musk's tweet about Tesla not accepting Bitcoins wiped off 10% of its value. Later that month, China's crackdown on cryptocurrencies pushed Bitcoin below $30,000. And the IRS calling for stringent reporting on large crypto transfers added to the woes.

So, has the tide turned against Bitcoin permanently? The situation might be rattling for new investors, but if you have traced the journey of Bitcoin, this is nothing new. According to analysts, investors who owned Bitcoin for one to six months spurred the sell-off. Nevertheless, institutional investors, big corporations, and analysts are still pretty confident of Bitcoin's price rebound.

Here are three main reasons to explain that the current Bitcoin crash is nothing to worry about.

Institutional investors are still stocking up on Bitcoin

Institutional investors include large public and private companies as well as fund houses that invest in Bitcoin-related products.

Jack Dorsey-led Square invested an additional $170 million in Bitcoin in February 2021. In the same month, Microstrategy spent more than $1 billion in high-yield debt to acquire additional bitcoins. In March 2021, Morgan Stanley became the first big U.S. bank to offer access to Bitcoin funds to its high net worth clients.

Institutional investors aren't just hooked on Bitcoin for the price appreciation. They view the currency as a credible store of value and a hedge against economic instability. The continued influx of large corporations can single-handedly push Bitcoin into the mainstream. Bloomberg claims rapid bitcoin adoption indicates a bullish growth phase. The media giant also predicted bitcoin's price to reach $400,000 by the end of Q4 2021.

Bitcoin sees increased acceptance from countries

Besides institutional investors, many governments are also viewing cryptocurrencies in a new light. El Salvador recently declared Bitcoin as a legal tender alongside the U.S. dollar. Speculation is rife that India might also recognize Bitcoin as an asset class. Moreover, the U.S., UK, Finland, Canada, and Germany already have a positive stance over Bitcoin. These initiatives could perpetually alter the way investors and regulators view Bitcoin or other cryptocurrencies and make them mainstream.

Bitcoin has seen a bull run after halving events

50% of Bitcoins were mined by January 2009, but the remaining 50% will be mined in more than 120 years. This is because of a unique event called 'halving' that Bitcoin undergoes every four years. The miners' reward is reduced to half every four years or after mining every 210,000 blocks. Thus, the supply of Bitcoin relative to the demand declines, and the price climbs. Historically, Bitcoin has always experienced an upward spiral after a halving event. After the first halving in 2012, the price of Bitcoin surged 90x.

The next event is due in 2024, and we can expect the cryptocurrency to see a bull run after that. However, the market has now matured since 2012, and the impact might not be too pronounced this time. Also, it could take four to six months for the price appreciation to fructify. Hence, you may buy Bitcoin before the halving event, but only if you plan to hold it over the long term.

A word of caution

Though the current scenario suggests otherwise, the game is not over for Bitcoin. It has an inherent value, and a few tweets cannot shake it.

As for the regulatory landscape, I would say that stricter laws are indeed awaiting the cryptocurrencies. But better regulation will only enhance the credibility and prompt investors to pick Bitcoin with more conviction.

Bitcoin price movements are a simple play of supply and demand. Unlike stocks, there aren't any fundamentals at play. So when investors are optimistic about the future of cryptocurrency, they buy more of it, and the price climbs. On the contrary, when their belief in the currency begins to shake, they sell-off.

There is no doubt that Bitcoin has come under pressure, and it could take some time to recover due to regulatory headwinds and global macro risk. However, further declines below this point, if any, will be transient.

Bitcoin is a highly volatile asset, and you can hold them as a part of a diversified portfolio over the long term. However, don't be surprised to see such dramatic price fluctuations periodically because that's very typical of cryptocurrencies. So, be sure to invest money only to the extent that you are OK to lose. Also, don't try to time the markets because, with an asset so volatile, timing can bring a rude shock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Bitcoin crashed nearly 50% last weekend — Should you worry? appeared first on The Motley Fool Australia.

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Namrate Sen doesn’t own any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin, Square, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended MicroStrategy. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.