You can love it, you can hate it, you can be scared of it - but you just can’t ignore it. The crypto wave is here and unless you have been living under a rock, you would have at least heard about it. The concept of cryptocurrencies or even cryptocurrency investment may not be new, but the pace at which it is growing is thrilling. Speed always thrills, but it can also kill. So, if you are ready for the enthralling journey into the world of cryptocurrency prices and trading, let’s dive in.
When we talk about investment, we come across many terms like value investing, momentum investing, technical analysis and fundamental analysis, and so on. In the case of cryptocurrency investment, we have to mostly rely on momentum or technical analysis. The cryptocurrency price movement is so fast, that it is not easy for even seasoned analysts to understand it fully. So, how can a layman investor sleep at peace, while investing in cryptos? We will try to answer this exact question.
Recent trends in the crypto market
The cryptocurrency ecosystem is witnessing evolution at an unprecedented rate in recent times. Be it the advent of altcoins or stablecoins, the talks of regulations by central banks, the adoption of cryptos by large institutions, or NFTs – there are big changes coming, for sure. And these trends affect crypto prices in a big way. Let’s check them out one by one:
· Regulations: Initially, many central banks and governments all over the world, were not even willing to talk about cryptos. Then, they started to come up with regulations to control crypto trading, and now, all are interested to launch their own cryptocurrencies (CBDCs). The future seems very bright.
· Altcoins, Stablecoins, and NFTs: These are the new kids on the block. All the alternative coins (other than bitcoin and ether) account for 40 % of the cryptocurrency market. Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens. Ether, the most prominent stablecoin, is gaining rapid momentum, despite its own legal problems. NFT (non-fungible token) is a unique and non-interchangeable unit of data stored on a blockchain, a form of digital ledger.
· Institutional interest and money flow: As per an estimate, the total AUM in crypto at the end of 2021 was more than $60 billion versus less than $3 billion two years ago, a mind-boggling rise of 20X. Big institutions like PayPal, MassMutual, Square, MicroStrategy, etc. are now investing in cryptos and influencing crypto prices today.
· Defi, DEX, and DApps: The advent of DeFi (Decentralized Finance) Applications, DEXs (Decentralized Exchange) and DApps (Decentralized Applications) has helped the crypto tribe not only ease the investment process, it has also helped the whole system to be more formal and safe. More on this later.
Why is the crypto market booming?
The value of anything is determined by demand and supply. If demand is more than supply, the price goes up and vice versa. Understanding the core concepts behind the supply and demand of cryptocurrency and other influencing factors can help investors to make better cryptocurrency investment decisions.
On Crypto Supply
The supply of a cryptocurrency is almost always known beforehand. Some, such as Bitcoin, have a fixed maximum supply. Others, like Ether, have no cap on supply. Some others follow rules that "burn" existing tokens to prevent too many coins from circulating.
Each cryptocurrency type follows a different policy. Bitcoin system increases supply by a fixed amount with each new block mined on the blockchain. Ethereum offers a fixed reward per block mined, which means that the supply isn't as fixed. Some cryptocurrency supplies are decided entirely by the in-charge of that project, who can opt to release more of a token or burn tokens to manage the supply.
On Crypto Demand
As far as the demand is concerned, it can increase as a particular project gains awareness or it’s utility increases. The popularity of cryptocurrency investment amidst the larger community has also increased demand while limiting the circulating supply. E.g., with the institutions buying and holding Bitcoin in recent times, crypto prices started rising as demand surpassed the pace at which new coins were mined, effectively decreasing the total available supply of Bitcoin. The high transparency level of blockchain technology leaves the minimal scope of any fraudulent or unwanted transactions. All the parties involved in the transaction can view any alterations made during the transaction in real time. This offers added data security and immutability of the transactions, which is causing a high rate of adoption by large corporations thereby, increasing demand and cryptocurrency prices.
Likewise, as more DeFi projects choose the Ethereum blockchain for launch, the demand for Ether has increased. Irrespective of what cryptocurrency you are transacting in, Ether will be required to perform blockchain transactions. So, if a DeFi project takes off itself, its own token will become more useful, thereby increasing demand.
On Crypto Market Growth
The strong growth in the market can also be accredited to increasing digitization across industries. Easy accessibility and increasing penetration of high-speed internet are also facilitating the adoption of cryptocurrency. The market growth is also greatly driven by the legalization and regulation of the sale, purchase, and trading of these digital currencies in several developed countries.
Is this boom permanent or temporary?
Well, like any other investment option, the cryptocurrency price also fluctuates. However, the volatility visible in the cryptocurrency price chart is not for the weak hearts. There have been many months in last four years when the bitcoin prices dipped by more than 30%. This kind of extreme situation is normal in cryptocurrency investment. The rewards, however, are much greater. In the month of May-2019, the crypto prices boomed by more than 60%. So, even though the length of boom in crypto prices may not be known, the shear rate of returns of the last decade, is so mouthwatering, that almost everyone wants to take the risk. The investors need to allow for a few overarching tendencies of crypto and keep an eye on a few influencing factors as well if they want to make better investing decisions as the market continues to evolve. The most important of them are:
· Regulations by the central banks and governments all over the globe.
· Adoption of cryptocurrency as a payment mechanism by large corporations.
· Exchange-traded funds based on bitcoin and other cryptocurrencies.
· The trend of inflation, interest rates, and bond yield.
As these trends develop further, the future of cryptocurrency investment will crystalize and we may hope to see them sparkle in coming decades.
Investors need to closely study the cryptocurrency price chart along with the emerging trends. The price of bitcoin crashed more than 75% from Dec-2017 to Dec-2018 and it took nearly two years to reach new highs. However, when the price started falling in April last year and halved from its peak, it hardly took 5 months to recover fully. So, to gauge the full benefits of crypto investments, one needs to blend the technical study with emerging trends.
Is it too late for entering the crypto market?
We say - better late than never! If one had sold Amazon Stock during the dot-com bubble thinking, that it has run 20 times and it is too late to enter, he would have lost another 30 times gain from the same stock. For any investment, time is more important than timing. From Albert Einstein to Warren Buffet, many have sung the songs in praise of compounding. To reap full benefit of cryptocurrency boom, the investors need to stay invested for the long term.
The SEC regulations, the tweets of Elon Musk, the threats by Chinese Authorities may give temporary shocks to the investors, but one thing is for sure, that the digital currencies are here to stay. This is the future. With passage of time, it may take many avatars, but it is not going to die. The past returns are as lucrative as they are scary. It is more like a sci-fi thriller than a romcom. If you like the genre, you are most welcome to enter.
What should crypto investors be careful about?
Don’t put all your eggs in one basket. This old-age saying is most apt for crypto investors. If the history of the last 12 years of cryptocurrency showcases something - its volatility. And it is going to increase further. You should start with a minimum amount and keep a maximum of 20% of your investible surplus in cryptos.
Secondly, the Ponzi scammers are also ready to fool innocent investors in the name of cryptocurrency. Crypto investors also face the risk from unscrupulous promoters and shady outfits. It’s a landscape littered with stories of scams and frauds. Lack of credible information and dependence on social media may lead to a very high risk of price manipulation. Manipulation is also possible because many cryptos are not very widely held. There is a concentration risk if a few investors hold very large quantities of a certain coin.
Finally, if you are from a country where the regulations are not clear or are subject to sudden change, you have to take them with a pinch of salt.
Cryptocurrencies are risky, but if you are careful and understand the market, they can also be very rewarding. You should not invest due to FOMO (Fear of Missing out). Start low and build up only after careful analysis of cryptocurrency trends, the price charts and your own psychology.