“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value… Lots of people will build businesses on top of that.” – Eric Schmidt, Executive Chairman of Google
There is no doubt that cryptocurrency, especially Bitcoin, has been a major global economic disruptor in the last year. Additionally, this trend is set to continue in 2018 and into the foreseeable future. Ergo, the question that begs is whether you should include cryptocurrency investments in your wealth portfolio or not?
At the outset of this article, it should be noted that the terminology “cryptocurrency” and “Bitcoin” tend to be used interchangeably. Bitcoin is the most successful (and most popular) cryptocurrency. Although, other currencies such as Etherereum and Litecoin are gaining in popularity. Therefore, when this content talks about cryptocurrency in broad terms, it applies to the coins that form part and parcel of the global cryptocurrency definition.
It would seem as though reactions to the mainstream adoption of cryptocurrency are divided between love and hate. Traditional investors like Warren Buffet are vocal about the fact that they see no value in diversifying their investment portfolios to include cryptocurrency. In fact, Warren Buffet is quoted as saying on CNBC: “In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending,”
On the other hand, David Z. Morris’s article titled “Bitcoin Is Not a Systemic Financial Risk, Say Top Economists” notes that a current study by the London-based Centre for Macroeconomics has shown that, “nearly 75% of a pool of top European economists do not think cryptocurrencies such as Bitcoin are, or will become, a threat to the stability of the financial system.” Furthermore, the study found that 73% were of the opinion that cryptocurrencies currently do not (and will not) hurt the current global economic system.
Pointers to take note of when investing in cryptocurrencies
Therefore, when considering whether it is a good idea to trade in one or more of the known cryptocurrencies, it’s vital to take note of the following:
Make sure that you trade with a reputable broker
This tip seems overstated, and overrated to no small extent. However, it is crucial to ensure that the online trading brokerage that you choose is indeed a bona fide company.
How do you determine whether you are trading with a fraudulent broker or not?
The good news is that there are several things to look for on the broker’s website. These include:
- Does the broker’s website clearly state that cryptocurrency trading is a high-risk venture?
- Are you required to submit what is commonly known as the “Know Your Customer (KYC) documentation?
- Is the broker’s website well-designed and easy to use?
- Does the company provide comprehensive education materials and a demo trading platform that allows you to practice successful trading before you move onto the live trading platform?
- Does the broker’s trading platform include statistical and analytical tools such as oscillators and technical indicators?
Appreciate the level of risk involved
Investing in cryptocurrencies is a high-risk venture. However, risk is not always negative. High-risk investments can return high rewards; however, they also can yield significant losses. Therefore, it is vital to invest in cryptocurrencies knowing the level of risk involved as well as your limits regarding your exposure to risk.
In other words, if you are young and are starting to invest and grow your wealth portfolio, you can tolerate a high exposure to risk. On the other hand, if you are nearing retirement age, your risk appetite should be low. You can’t afford to lose money in high-risk ventures.
Plan your strategy and stick to it
There are mainly three basic trading strategies: long-term, medium-term, and short-term investment strategies. And each strategy’s exposure to risk is rated based on the length of time involved with a trading strategy.
Typically, a long-term trading strategy has the lowest exposure to risk. Investors purchase cryptocurrencies like Bitcoin (or part of a Bitcoin) when the price is low with the intention of allowing the investment to increase in value over many years. The long-term trading strategy ignores short- to medium-term market volatility.
On the other hand, the short-term strategy has the highest risk and investors should make sure that, when trading in cryptocurrencies, they have researched the historical, current, and forecast price movements of their chosen currency thoroughly before opening and closing a trading position. The short-term trading strategy utilises financial market volatility to increase wealth.
Finally, a medium-term trading strategy falls somewhere in between the short- and long-term trading strategy and has medium exposure to risk.
Cryptocurrencies are not going to disappear off the scene. As noted above by Eric Schmidt, Executive Chairman of Google, the foundation upon which cryptocurrencies are built has immense value for the modern business world.
Therefore, the only question left to ask is whether you are going to diversify your wealth portfolio and invest in cryptocurrencies, or are you going to take the conservative route like Warren Buffet and ignore the long- medium- and short-term value of cryptocurrency trading and investments?
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