Bitcoin ETFs: an instrument to be reckoned with
The very fact that the crypto-sphere is all the rage these days shows that the world is increasingly going digital. Yet the mainstream view is still primarily associated with Bitcoin – the first and most popular cryptocurrency. While it’s benign to have such a view from a layman’s perspective, as an investor it’s an opinion that limits insight and drains virtually the entire portfolio.
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As many investors are starting to allocate funds to this asset class, this article might guide you through the fundamental knowledge about the crypto world. However, keep in mind that the market is decentralized and highly volatile. Therefore, while the basic principles would apply regardless of time period, some valuations could differ significantly over a period.
For real-time prices and market capitalization:
What is a Blockchain? And what exactly is decentralized finance?
A majority of investors are still confused about the difference between blockchain technology and decentralized finance. The two terms are interrelated but differ in real-world application. Blockchain technology is a system that acts as a digital ledger to facilitate transactions distributed across a diverse network of computers. It is essentially a system for digitally encrypting and recording duplicate information over a large network: data cannot be hacked, altered or corrupted while it is being processed or stored. The technology is widely used in logistics services, allowing users to track their parcels around the world in real time. The best-known implementation of blockchain technology is in Crypto Financial Services.
Colloquially referred to as “DeFi,” the decentralized finance industry spans a complex range of digital products: from cryptocurrencies to NFTs. DeFi involves a backbone of blockchain technology to operate a colossal network of shared ledgers. Without a centralized authority to verify transactions and manage procurement, this area of finance uses complex algorithms to distribute the verification and storage process among the users themselves. Due to the excessive number of operators, rigging the system is made almost impossible. Thus, making DeFi one of the pioneering shifts in traditional financial services in modern times.
Bitcoin is probably the most well-known example of this vast field of decentralized finance and the massive implementation of blockchain technology in all countries.
What is bitcoin? How is it different from blockchain?
Arguably the most common misconception among the new class of crypto enthusiasts is that blockchain and bitcoin are alike. As mentioned above, blockchain is the broader technology used by various industries. One such implementation in the financial industry (specifically the financial services industry) is Bitcoin: a digital token traded as a means of value on a system of shared ledgers called blocks. Created in the aftermath of the 2008 financial crisis by an anonymous entity – under the pseudonym “Satoshi Nakamoto” – the crypto token acts as a pseudo-currency with a floating valuation. Traded on a complex platform consistently structured like a shared ledger system, bitcoin’s value is impossible (by default) to control and dictate.
Participants verifying transactions – often referred to as “miners” – use sophisticated computer programs to solve complex hash functions to add blocks of transactions to the bitcoin blockchain. In exchange, they earn a lump sum of 6.25 BTC. This proof-of-work (PoW) mechanism has proven to be impervious to outside influences due to this distributed functionality and the large amounts of energy required to resolve functions and add blocks of transaction data. However, it is susceptible to speculation which ends up fueling the volatility feared by investors. Many then raise a question: is it worth the risk?
Is it really risky to invest in Bitcoin? How to avoid this risk?
A fact is inherent in the word investment itself: the greater the uncertainty, the greater the reward. This quality is not specific to bitcoin but to any risky asset in general. Take traditional investors, for example. These investors – with an appetite for risk – invest in junk bonds: to obtain above-average returns in exchange for the unpredictable nature of a possible default. What makes Bitcoin so unique, however, is its on/off hesitation in the mainstream debate: making a takeoff in value as likely as a drop. When it started trading in 2009, price fluctuations were limited as adoption was gradual and information was scarce at first. However, in recent years, adoption and information have exploded. Bitcoin’s market capitalization crossed the $2 trillion mark last year, making it the first unincorporated entity to hold such a prohibitive valuation. Governments began to adopt the coin as an official means of exchanging value. And even well-known investment banks and hedge funds offer digital token services.
Despite falling 40% from the all-time high of $69,000 in November, bitcoin is currently trading at a support level of $42,000 – still up almost 500% since the end of 2019. So is- this risk? Absolutely it is! Compared to other assets in the market, it is a riskier store of value: contrary to the popular notion of crypto fanatics. However, when comparing risk-adjusted returns, bitcoin shows an outperformance compared to other assets. For example, bitcoin’s risk-adjusted return since September 2020 has been more than double the performance of the S&P 500 index. Over the same period, treasury bills have posted negative returns while commodities have much less well resisted. The same trend applies to several time periods – whether early 2015 or early 2020 – where bitcoin has outright beaten traditional investment flows.
However, the astronomical returns went to investors who bore the rolling of the massive decline preceding the surge in value. Let it be the crash of 2017 – when bitcoin fell 80%. Or the crisis of 2021 – when the mining crackdown in China resulted in billions of dollars of liquidity squeeze to immobilize the market.
In short, it’s the pattern of time, temper, and thrill for greater risk that keeps betting alive. Therefore, for larger returns, a temporary loss should force long positions instead of a divestment.
So what is the optimal strategy for investing in the crypto-sphere? And when should it be implemented?
2021 has been the most unstable year for the crypto world. Non-Fungible Tokens (NFTs) saw a surge in popularity while a slew of cryptocurrencies lost more than half of their valuation before surging. However, 2022 is about to change the dynamic even more. As the US Fed braces for its hawkish bent with talk of bond cuts and rate hikes, the valuation of cryptocurrencies – especially bitcoin – is set to plunge in the coming months. According to crypto gurus, cryptocurrencies will remain under pressure as the Fed reduces its liquidity injections. Additionally, as regulations are tightened by the SEC, popularity may also take a hit.
Thus, my advice is to wait until the year 2022 because bitcoin would probably end 2022 below the $20,000 mark. If, however, your investment is geared towards the broader world of cryptocurrencies in general, my view would be different. My approach would be to include bitcoin but diversify your allocations. My advice would be to allocate weighted portions of your portfolio to similar tokens like Ethereum and Solana. Although these tokens move in tandem with the price swings of bitcoin, their operation has not reached such a meteoric level of scale in the investment community. Instead, their adoption has been limited compared to bitcoin. And therefore, they offer more potential in terms of growth without strong price fluctuations. Ethereum, for example, is currently trading around $3,000 and typically deviates into a mid-term $500-$1,000 window.
If you’re looking for more ingrained diversification, I’d recommend a metaverse fund allocation: more closely tied to the game-changing side of NFTs. Buyable tokens like Sandbox (SAND) and Decentraland (MANA) would be a lucrative option in the wallet. These NFTs are available on most crypto platforms and have offered high returns over a long period of time. Moreover, besides a large number of (appropriately weighted) cryptocurrencies, these could also work as a hedge against bitcoin bets due to their high liquidity and profitability: making the portfolio optimal in terms of longer-term technical bets.
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Ultimately, as an investor starting out in this asset stratum, you need to have a long-term view, a long-term appetite for risk, and a keen eye for market regulations and announcements. to make significant gains. Remember that there is no magic or free lunch when investing. The offers have innovated, the platforms have gone digital, but the fundamentals are the same: patience and diversification.