There has been a recent frenzy amongst investors making quick bucks and exiting. That brings in a lot of questions. Is Cryptocurrency only a speculative instrument to invest in? Does it have a potential to become a long-term investment product or an asset class as good as equities or debt instruments? If you look at the way cryptocurrencies and blockchains are getting recognized it seems like these are here to stay. While the blockchain will enable a lot of businesses, here lies a question of how one as an investor can benefit from investing in cryptocurrencies. Short-term investing is definitely an option but what can one do to make these virtual currencies a wealth builder? How can one build a portfolio of them?
Let us first understand the wide categories of virtual currencies instruments that we have which one can invest in
- The first type is the Bitcoin and its forks. This type of cryptocurrencies has the only function, transfer of value from one wallet to another. That’s pretty much it.
- The second type of cryptocurrencies is distributed computing cryptos. Ethereum is an example #1 here. With the help of Ethereum cybernetic machine, you can create smart contracts that will forever change the way our economy works in the near future. Other examples include Golem, Storj, SONM, and other interesting projects.
- The third type of cryptocurrencies, privacy coins. That’s where it gets really fascinating. The days when Bitcoin blockchain was unidentified are long gone, that’s why now we need much more fundamental cryptocurrencies that will be truly anonymous. DASH, ZCASH, and Monero were born because people understood the requirement of this kind of coins. Administration tries to regulate and stifle cryptocurrencies. Crypto fanatics look for other ways to keep government off their digital money. That’s where demand is.
Long-term Cryptocurrency portfolio not only would have built wealth over the period of time but could have other advantages as well that may interest investor to built one for them. The could be
- Statistical History proves it: Historical Data of equity markets generally tend to trend upwards over a period of time, so with this in mind, long-term investing does have its merits.
- Lower operational fees: A long-term investor does not trade every day; therefore, they do not have to worry about trading fees. Hence with a long-term investment strategy, all the investor has to do is select a few cryptocurrencies, and then wait.
- Less Risky: Market does have a tendency of falling and recovering. Moving your investment in and out of the market could mean that you miss days in which significant gains are made. You don’t have to worry about this with a long-term investment
With advantages in place, one would require understanding the key indicators of long-term value. The same can be picked up from the equity markets and be applied to the cryptocurrency world
- Market Share: Market Share can be defined as the proportion of market capitalization that a cryptocurrency has. A large market share typically indicates dominance.
- Utility value: When determining if a cryptocurrency will be here in a few years from now one needs to ask and find answers to questions like- Is the cryptocurrency useful? Does it have a users’ market? These questions are important because they are the most useful cryptocurrencies that are likely to be widely adopted
- Transaction volume: In order to determine whether a cryptocurrency is actually being used, one can take a look at its transaction volume. This indicator also speaks about the long-term usage of the currency
- Market News: Market news does affect the price of one's cryptocurrency and would have a retrospective effect on the portfolio, so it is imperative that you should be ready to react. Overall, one has to stay up-to-date with market news involving cryptocurrencies so that one can make informed investment decisions.
With the growth in place, an investor has to consider the risk associated as well. Currently, with limited understanding, a lot of technology to be proven and government clearances and adaptabilities one must expose itself to cryptocurrencies to the level of his risk appetite. Hence, ideally one has to begin with currencies that are less likely to fail which means it has all growth indicators in its favor and slowly move towards the risker once that fall slightly lower on all parameters
Considering the Indicators, the risk associated with the currencies and surely the investors time horizon and goal one can draw a long-term cryptocurrency portfolio. Ideal (in personal opinion) would be having
- 50 % in Bitcoin and its forks
- 25% in Litecoins and Ethereum
- 15 % in anonymous coins like Dodgcoins, Monero and may be Zcash
- 10 % the investor can choose to invest in new interesting and top rated ICO’s.
To conclude, investing long term in cryptocurrency is exciting, but it is also important to make sure your cryptocurrency is secure; as there are a lot of FOMO’s and FUD’s around. Also there is a constant threat of hackers stealing it. One has to keep patience and also be alert to react to actually make wealth out of this newest kid on the block. For this one needs to have a good strategy in place. Not having an investment plan for cryptocurrency investing, or any other market for that matter, can result in heavy loss of funds. The most important thing is to have a plan for each scenario that might happen.