In speculative investment, what matters more than returns is sustainability in the long term. The need to strike the right balance between risk and reward is highly relevant these days, given the growing acceptance of cryptocurrencies and the lure of quick returns.
Bitcoin, the king of cryptocurrencies, made phenomenal gains in recent weeks raising valuation fears that triggered a major selloff. The digital currency’s outstanding performance in the last couple of years made it one of the fastest-growing assets ever. Currently valued above $50,000, many prospective investors would find bitcoin unaffordable. It reached an all-time high of about $56,400 last week, representing a market cap of more than $1 trillion.
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Growing Acceptance
Interestingly, the crypto giant has come a long way from the days when it was viewed with suspicion in financial markets. Bitcoin got a major boost, in terms of acceptance, after Tesla, Inc. (TSLA) chief Elon Musk vouched for it recently and revealed his investment in it. Other leading Wall Street entities supporting the digital currency include Mastercard Inc. (MA) and PayPal Holdings Inc. (PYPL). Naturally, their endorsement contributed significantly to the recent rally.
The upturn is not limited to bitcoin – its cheaper counterparts Ethereum and Binance gained in double-digits in the latest session.
So, what should be the ideal investment strategy? The amount of space digital currencies can occupy in a balanced portfolio depends on the latter’s overall performance and the investor’s goals. That means strong, diversified portfolios can have a relatively high crypto representation. But there are no clear-cut rules because the market is unpredictable and no investment is fully risk-free. Of course, those looking for diversity in their portfolios can go for bitcoin and its peers without giving it much thought.
Higher Risk
But the risks of subdued growth and dividend-cut, like in the case of stock, are not as severe as becoming penniless after crypto exposure. Since the equity market is highly regulated, investors can get access to reliable guidance on individual stocks, which is not the case with cryptocurrencies that hardly follow any trend that is useful to investors. In the past, even companies that represent the worst-performing stocks have survived and in many cases, their stocks bounced back. So, stock investors can always be hopeful of recovery after major downturns.
Also, there are several parameters to gauge the financial health of a company before investing in its stock, such as earnings and the P/E ratio. On the other hand, decisions on investing in digital currencies are taken based on speculation alone. Whenever there is a major stock movement, in most cases, the triggering factor would be evident, while it is difficult to trace the reasons behind fluctuations in crypto. In short, a close analysis of cryptocurrencies, from an investment perspective, shows that the disadvantages outweigh the advantages.
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Conclusion
When it comes to investing in financial markets, digital currencies can be an alternative to stock but not a substitute. The good news is that cryptos are rapidly emerging and becoming mainstream, though there are lingering regulatory issues. If the positive momentum continues and cryptos achieve the desired level of transparency, the time is not far off when they start giving tough competition to stocks. For investors, it will all depend on evaluating the risk accurately.