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Is Cryptocurrency a Good Investment for You?
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Firstly, we need to make the distinction between investing and trading – the biggest difference being the time horizon. With trading in any asset, the time horizon tends to be short-term and often more speculative. It is not rare for traders to execute dozens of trades a day to take advantage of intra-day price fluctuations. Trading is approached with discipline as those who are most successful carefully manage their exposures. On the other hand, investing is also a disciplined plan that meets specific financial goals over a longer period, usually five years or more. Investors may build a strategy to save for college, purchase a house, or plan for retirement.
Next, you need to examine your risk tolerance. As cryptocurrencies experience volatility, whether cryptos is a good investment depends on how much risk you can bear. If even small swings in prices keep you up at night, higher volatility investments may not be the suitable investment for you. With crypto assets experiencing levels of price volatility that aren’t too different from those experienced by other asset classes, such as growth stocks or high-yield bonds, they are risky assets. You need to be prepared to face fairly significant price swings or potential losses.
One further consideration is the liquidity constraints that face certain crypto assets. Liquidity is simply the relative ease or difficulty that which one can buy or sell a certain asset when they want to without moving the price significantly. As an example, if you are looking to buy a rare automobile, there are that many of those around and if you can find one, the price you will pay is effectively the seller commands. If you buy it, the next seller will certainly command a higher price for the next buyer – making the market very illiquid.
However, if you are looking to buy something more generic, say some Japanese yen in exchange for your U.S. dollars, there is ample liquidity so the price you pay for the yen will be wherever the market lies. The next buyer of the yen will also likely purchase the yen at or near the same price you transacted as there is abundant liquidity in sellers of JPY who will accept UD in return. Certain cryptocurrencies are more liquid than others, which means that to invest in such cryptos, you must be prepared to deal with the illiquidity when you buy and potentially when you sell. A worst-case scenario would be the inability to sell your crypto investment when you need to, due to a lack of liquidity in that particular cryptocurrency.