Cryptocurrency: risk or opportunity? The good, the bad and the ugly

For financial advisers, family offices and investors, 2021 will go down in the history books as one of the most important when it comes to cryptocurrency. Many cryptocurrencies have reached all-time highs and the very first Bitcoin ETF has been approved by the SEC in the United States. At the same time, the Chinese government banned mining and trading in September. Additionally, a famous meme, Dogecoin was backed by Tesla

TSLA
CEO, Elon Musk. If that weren’t enough, non-fungible tokens (NFTs) have been one of the main trends in 2021. However, the ratio of retail investors or individuals who have invested, traded or used cryptocurrency is not not high compared to investments. in actions. According to the Pew Research Center, only 16% of Americans have invested, traded, or used cryptocurrency. In terms of stocks, 56% of Americans own stocks from Gallup research. Compared to crypto with stock, its ratio is rather low. To put it in perspective, as of September 30, 2021, the total market capitalization of the U.S. stock market is currently $ 48 million. However, in November 2021, the total market cap of the cryptocurrency exceeded $ 3 trillion. These data suggest that there is a clear momentum for the cryptocurrency to grow in the future. When analyzing the pros and cons of investing in cryptocurrency, we also explain the tensions in what we call the good, the bad, and the ugly. Additionally, we assume that the vast majority of investors will use a CEX (centralized exchange) such as Coinbase, Gemini, and Binance to trade cryptocurrencies.

Total market capitalization of CoinMarketCap’s cryptocurrency

Pros and Cons of Investing in Crypto

Cryptocurrencies allow a number of positive externalities such as offering an opportunity to earn significant return in a short period of time. Growing fast and this is expected to continue into 2022. The initial investment amount is very flexible (e.g. Coinbase allows users to start trading from as low as $ 2.) – CEXs offer APY (annual return in percentage) reasonable which is 0.15% – 8% which means that credit cards can be used to invest in Crypto. The metaverse will have positive impacts on the crypto space – High volatility – The regulatory environment will have a huge impact on the crypto space. For example, having technical knowledge to understand the value of projects can help make more informed decisions about investing in crypto. Some influencers have a huge impact on the volatility / price fluctuations of cryptocurrencies. The cryptocurrency market is constantly evolving and changing 24/7, which means that some people may need to invest money to use technology for trading purposes. Investors need to get used to the new tools / platforms used by many crypto projects, such as Twitter, Discord and Telegram. The pros and cons of cryptography can actually be two sides of the same coin. This means that investors can earn a large return in a short period of time, but it also means that they can also lose a lot of money in a short period of time. In terms of inflation, the reliability of Crypto as an inflation hedge is not as good as gold because cryptocurrencies are still relatively new as an asset class, and therefore the jury is out. ‘s still not on it. When it comes to volatility, many cryptocurrencies have proven to be relatively stable over time as the global crypto market has shrunk. This technically means that investors can build a portfolio that reduces the risk of volatility. When it comes to the regulatory environment for crypto, it is possible that the new SEC regulations will have an impact on the cryptocurrency market, however, it is important to note that the regulatory environment in the United States will be. more important and impactful than that of countries. like China. China has banned cryptocurrency 20 times. However, for the first time, all 10 Chinese regulatory agencies, including the People’s Bank of China (PBOC), jointly announced in September 2021 to ban all crypto and mining in an effort to root out crypto activity. “illegal” currency. Several exchanges, wallets and other cryptocurrency companies have announced that they will stop providing services to users in mainland China and have imposed a complete block of all Chinese IP addresses on their services. Given the wording of the official document, which explicitly distinguishes foreign trade aimed at Chinese residents, the industry appears to have taken an overly cautious approach. “It remains to be seen to what extent individual citizens will be threatened by the new level of enforcement,” said Luisa Kinzius, director of China-focused consultancy Sinolytics. “[But] The announcement is also aimed at any Chinese citizen working for crypto-related companies overseas, declaring their work illegal and putting them at risk of legal investigation.

Often times when China announces that it is banning cryptocurrency again, it has the short term effect of pushing down the price of Bitcoin and Ethereum. Beijing’s utter disregard for cryptocurrency is due to the fact that it threatens to provide an alternative to the Chinese government’s centralized currency control. In addition, this is also related to the development of the Chinese government to promote its own digital yuan and its own central bank digital currency instead.

In terms of technical knowledge, if investors know about blockchain that would be great, but CEXs offer useful information to investors and cryptocurrencies on CEXs are scrutinized. The most recent popular metaverse will have positive impacts on the crypto space, as NFTs will be used as identification in the metaverse and the metaverse understands economic activity and will be supported by cryptocurrencies so that more people get started. to use them. Finally, consider the worst-case scenario for investors who use CEXs. It could be closed / banned by a government, but that would be extremely unlikely. Indeed, Binance has some issues with the authorities in some countries, but it keeps the highest volume of transactions. Coinbase also spent $ 785,000 on lobbying in 2021 using data from OpenSecrets. Therefore, the worst-case scenario is quite unlikely. Judging by these factors, investing in cryptocurrencies might be a good option for many investors, but doing your due diligence is essential.

Photo by Scott Graham on Unsplash

Due diligence on crypto projects

Most cryptocurrencies have a project that solves a specific problem with blockchain technology except for meme coins i.e. Dogecoin, Shibu, etc. Before investing in crypto, it is essential to take into account the following:

Line-up

Every crypto project has a core team, and understanding the team is crucial, but as I mentioned, a listed cryptocurrency is carefully vetted by a CEX, so you won’t need to spend any time. exorbitant on it. Other important considerations are: * Total funds that the company has raised? * Do investors include famous celebrities in the crypto field? * Who are the key partners of the company and what competitive value of base do they bring?

Product

It’s the same as when you invest in stocks. * Is the company’s long-term strategy consistent? * What type of problem will the product solve? * Who are the product’s competitors? * What is the difference between the company and the competitors? * How long has the company developed its product? * Does the company have milestones (long term / short term)? * Does the company perform smart contract audits? * Does the company have a clear plan for scalability?

Marketing

Many crypto projects use Telegram and Discord to communicate with investors / developers and use Twitter for official announcements. Information from these accounts is therefore one of the criteria for measuring the expected value of the projects. * Is the Telegram group company active? (If the company has one) * Does the company’s Twitter account have many followers? * Does the company publish information regularly? * Does the company regularly update a site Official Web? * Is the company’s Discord server active? (If the company did) * Are there any prominent celebrities supporting the project?

Conclusion

Whether you are a financial advisor, family office, institutional investor, or recent high school graduate, there are different goals as well as risk tolerances for investing in cryptocurrencies that must be understood. As with any investment, it is important to clearly determine the risk / reward ratio and the opportunity cost. Right now, when weighing the pros and cons, the risk in more common cryptocurrencies like Bitcoin and Ethereum can be volatile at times, while in some situations providing a level of diversity and growth for portfolios. investors. . If you have historically chosen to ignore investing in cryptocurrency due to its high volatility or the complexity of blockchain technology, this might be a good time to reconsider whether this fits your goals in the short, medium, or long term. long term and your risk tolerance as crypto becomes more mainstream with retail and institutional investors.

Special thanks to Koji Kanao, software engineer, whose technical, editorial and research skills contributed significantly to this article. I am also grateful to Quisan Adams for reviewing the drafts and providing comments.

Earl Carr is the Chief Global Strategist at New York-based Pivotal Advisors. His responsibilities include working closely with the CEO and President of the company to manage the global research team and to develop and execute the mandate of global thought leadership and cross-border business development of the company. Earl is the editor of the recent book, “From Trump to Biden and Beyond: Reimagining US-China Relations” Palgrave-Macmillan Press, September 2021.

From Trump to BidenBook | From Trump to Biden and beyond

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