Cryptocurrency and the top coins reached staggering highs in 2021 and dropped subsequently. The trend has remained upwards despite the drops and bumps in the inclining trend. Major companies and brands have joined the digital currency, and Bitcoin, and Ethereum have boomed in particular. With central banks and regulatory focus increasing and the latest Terra and Luna debacle, the future of cryptocurrency is in focus again.
Over $1 billion invested in cryptocurrency has been lost since 2021. This places a question mark on the charm of investing in cryptocurrency. Some people are interested in joining the crypto trend while prices are low, while others are hesitant to invest, considering the shaky future of the asset class. The risks associated with cryptocurrency are real, and the challenges are not over yet. There are several issues that we will discuss here:
The advantages of Crypto are unrealized so far
Putting aside all the hype and touting, there is little real advantage of investing in cryptocurrency except as an investment option. Cryptocurrency has shown minimal signs of being able to fight inflation or keep people’s capital secure. When the markets got volatile and the economy was affected by inflation, crypto collapsed correspondingly or earlier and deeper than the conventional markets. This inability to tolerate market pressures and trends worries those that are supporting crypto for its potential to be a store of value.
Crypto is Still Young (and Volatile)
Regardless of what people say, crypto is still new and finding its footing. It is primarily why every crypto high can be trailed by a drop. It is difficult to forecast where crypto will end up in the long-term institutional adoption will have an impact on its evolution.
Piecemeal Regulation is a Challenge
The lack of coherent and logical cryptocurrency regulation has led to a vacuum of control for investors and users of digital currency. Countries like the US are still unclear on whether a cryptocurrency will be categorized as an asset or commodity.
Issues like confusion over whether the Securities and Exchange Commission will be responsible for regulating the currency are also causing concern. Some countries have opted for the outright banning of the asset form. China is a prime example. It cited concerns over the numerous infrastructural issues with mining and trading crypto coins.
Problems with ESG
Cryptocurrencies have always been a problem from the environmental, social, and governance viewpoint. The issues remain in spite of the shift from proof-of-work to proof-of-stake that blockchain-based platforms have initiated. There is considerable energy usage involved in mining and validating crypto coins.
Stablecoins have not Performed
Stablecoins were launched to act as a support and stabilizing factor for cryptocurrencies. However, they have proven to be vulnerable to manipulation, as shown by the Luna and Terra crashes. Once central bank digital currencies (CBDCs) are launched, stablecoins could probably become unnecessary as they will offer better stability and hopefully no liquidity and credit risk.
So what Should Investors Do?
Put aside the hype around crypto and see beyond the volatility; you will see that nothing has changed. The need for caution is still there and has only increased. Cryptocurrency has reported a negligible rise in worth over time, which is more than offset by its volatility.
As an investor, if you are particularly risk-friendly and want to risk your capital for the prospect of gaining significant value, then you should opt for investing in cryptocurrency. Even then, analysts are advising investing no more than 5% of your capital in crypto. The markets are particularly volatile, and there is a lack of knowledge on how to value the asset.
Volatility is what makes it difficult to describe the “what” and “why” of a crypto strategy. Before investing in any crypto coin or any alternative asset for that matter, ask yourself what you want to achieve from participating in this particularly volatile market and why. That will help you stay focused.
Financial planners usually encourage investing in cryptocurrency as it is possible to reach investment goals without risking exposure to an option as volatile and erratic as crypto is.