Things to know when investing in cryptocurrencies

When it comes to cryptocurrencies, everyone thinks about Bitcoin. In fact, Bitcoin is much more widely known than the term cryptocurrency itself. Since its inception, the concept of a decentralized financial system has surprised everyone. So far, despite being in development for just over a decade, a lot of extraordinary things have happened in this space.

As the understanding of cryptocurrencies increased and more people joined, hundreds and thousands of new cryptocurrencies began to form. Some of them failed miserably while many others succeeded and became one of the top digital assets today. Naturally, with such rapid development, people quickly jumped into investing in these digital assets, forming a new type of investment vehicle.

But there are always a few lingering questions on the subject of crypto: Are Bitcoin and a handful of altcoins the only investment options? Is DeFi Really Worth It?

To answer this question, the article will show why Bitcoin and altcoins are not the only and last option. Instead, they are the beginning of a new world of investing.

Cryptocurrencies

If you want to know where you should invest, it is important to evaluate every digital currency available and of course to analyze the top coins. The main reason people are flocking to invest in crypto is because of the high ROI that these assets offer.

Over the past year, Bitcoin price is up nearly 77%, with 1-year ROI at around 161% at press time. Meanwhile, the market plunge on December 4 certainly caused the king of crypto, as well as other altcoins, to drop significantly. In fact, Bitcoin even hit a low of $43,000.

However, if you are wondering why the ROI of BTC is so low, it is because Bitcoin is still trading at a high price at $49,000. Its upward and downward moves continue to maintain a tight structure, keeping volatility relatively small.

Bitcoin price chart year-to-date | Source: TradingView

In contrast, altcoins that do not have high prices have grown rapidly this year. ETH performs really well as the price is up 501.8% and has a 620% ROI at the time of writing. However, that is still nothing compared to the strongest coin of 2021 – SOL.

SOL made a breakthrough in this year’s market after the price surged 13,292%, from $1.50 to its current level of $188.

SOL price chart from the beginning of the year to now | Source: TradingView

The ROI of this altcoin is at a staggering 10.976%, making it the most profitable asset of the year.

Coins like ADA and XRP also did not disappoint, with gains of 793% and 290% respectively, and a return of 789% and 32.8%.

1 year ROI comparison | Source: Coinmetrics

Explosive DeFi also plays an important role in driving their increase in value.

On the other hand, these cryptocurrencies have also received a lot of criticism, largely due to their volatile nature, which many organizations vehemently oppose. The lawsuit between the US Securities and Exchange Commission (SEC) and Ripple Labs is a prime example.

After that, the ban on cryptocurrency mining and trading in China also caused many waves. It hit the entire market hard and it took several weeks to recover. Next, the FUD (fear, uncertainty, doubt) of India’s proposed cryptocurrency bill and its contents also caused a stir in the country’s massive digital currency community.

Besides, volatility is also a concern of many investors.

According to a recent CoinShares survey, the biggest problem investors face is volatility, rather than regulation and accessibility.

Investors’ biggest concerns about cryptocurrency investment | Source: CoinShares

Plus, most crypto investments are still born out of a mindset of wanting quick returns, rather than actually embracing the use cases of the underlying technology that underpins them.

This has led people to consider other forms of crypto investments.

Cryptocurrency companies

There are many blockchain companies that focus on mining for income generation, and also trading on traditional stock exchanges, but backed by cryptocurrencies. Some famous examples are HIVE Blockchain Technologies Ltd., Galaxy Digital, Bitfarms… all of which are mining cryptocurrencies. As a result, their stock successfully grew during the year.

That increase is even comparable to most of the growth of the top cryptocurrencies. HIVE offers 1575% ROI, BITF (Bitfarms) promises 1,166% return, and Galaxy Digital’s GLXY offers 369% return on investment.

ROI of HIVE Blockchain Technologies Ltd. | Source: Blockchain

In addition to established companies, there are also cases of crypto-based companies that use the SPAC (special purpose acquisition company) approach to planning and raising capital as well as becoming public company. Prime Blockchain has over 10,300 BTC mining rigs and 2,600 ETH mining rigs as a recent example. They merged with 10X Capital Venture, with a combined post-merger value of nearly $1.5 billion.

However, people still want to feel the heat of cryptocurrency, but must have the security of the traditional investment path. This has led to demand for a crypto-based exchange-traded product (ETP).

Cryptocurrency-based exchange-traded products

ETPs including exchange-traded funds (ETFs), ETN securities… have always attracted the attention of investors over the years. This year, the demand for ETFs peaked and investors really got what they wanted when the ProShares Bitcoin ETF (BITO) was launched on October 19 amid a spate of litigation between the SEC and Ripple.

Currently, the reason ETFs are so popular is that a) they are approved by the SEC and therefore not prohibited by law, b) it is easier to buy an ETF than an actual cryptocurrency, and c) the policies tax refund. In fact, ETFs only create a taxable event when they are sold.

Furthermore, based on holding period, these ETFs generate long-term capital gains (if held for more than one year) or short-term capital gains (if held for less than one year).

In terms of ease of purchase and tax benefits, GBTC is equally important due to its 401k tax advantage. However, GBTC does not qualify as an ETF. Since it is trust-based, it qualifies as a regulated company. This resulted in GBTC having a limited amount of shares. With a value of $37 billion in assets under management (AUM), it is undoubtedly the largest crypto-backed investment vehicle on the market.

Grayscale Bitcoin AUM | Source: Grayscale

However, even the ETF hype has subsided as the entire market experienced November underperforming. In the first week of BITO’s launch, ETFs brought in nearly $1.46 billion worth of inflows. That number is down 79% to $305 million this week.

Capital inflows into ETFs every week (as of 11/26) | Source: CoinShares

Traditional investment vehicles have been drawing on the hype of cryptocurrencies to propel themselves. Famous companies like Tesla, Square Inc. and MicroStrategy are constantly accumulating Bitcoin and other altcoins to attract investors to their stocks.

Surprisingly, they paid off. All of these companies have had incredible growth this year. In fact, currently, MicroStrategy is the largest Bitcoin holder in the world, accumulating 121,044 BTC in almost a year.

The Real Purpose of Cryptocurrency

However, it should be remembered that the real purpose of cryptocurrencies is decentralization. Bitcoin was created with a mission to decentralize money and the progress over the past 13 years is slowly making it a reality. Cryptocurrency companies, ETPs, and traditional investment vehicles based on crypto hype are proof that we are still a long way from getting there.

Even today, when DeFi is being pushed forward, people still choose the centralized destination. Despite the existence of decentralized exchanges (DEXs), many people prefer centralized exchanges (CEX).

The leading DEX in the market, PancakeSwap, currently processes $4.3 billion worth of transactions per day. On the other hand, the leading CEX, Binance, operates a trading volume of nearly $29 billion in 24 hours.

24-hour Binance Volume at press time | Source: CoinMarketCap

The consistent demand for centralized investment options demonstrated by the sky-high demand for ETPs and CEXs is testament to the age-old mentality of trusting centralized systems only because of their presence. .

Choose the right cryptocurrency

There is no better fit. Each investment option has its own advantages and disadvantages. Traditional and relatively safe options typically have limited growth, while digital assets can skyrocket more than 100% in a single day.

But then, they are susceptible to sudden liquidation, reduced demand, and excessive volatility that causes investors to lose or even lose their capital.

Besides, even as confidence in the decentralized system grows, centralized options will never go out of fashion. Because people always want to have a clearly based system in which to put their money. This is why even investing through a bank is preferred by some.

Thus, to put it simply, risk takers can pursue traditional crypto investment options i.e. cryptocurrencies, NFTs, crypto-based companies.

Safe players who want to get into crypto without taking undue risks can use safer investments like ETFs, GBTC, crypto related companies.

Leave a Reply