Is This The Time To Invest In Crypto Currency?

More than 8.1 crore users had established unique Bitcoin wallets as of March 2022, with more than 2.7 lakh verified Bitcoin transactions every day. Does this imply that crypto currency is the way to go? The article dwells upon the gains and losses of this new financial entity [EasyDNNnews:PaidContentStart]

As time passes, new and innovative ideas emerge in the realm of finance and investment. Stock market trading used to take place on exchanges with a trading ring and pit. Then phone-based trading took its place, and soon after, computer and cloud-based trading entered the fray. Furthermore, algorithmic trading is gaining traction. Not only that, new means of investing are emerging, including crypto currencies and non-fungible token (NFT), which many see as a different asset class. Bitcoin is the first crypto currency, released in 2009, that acquired a lot of popularity with individuals investing in it, including many celebrities and business leaders such as Elon Musk. This gave rise to other crypto currencies, which quickly became popular. 

That said, it is critical to grasp or understand each new investment opportunity before making a decision. As a result, in this article, we will learn what crypto currencies are, compare the performance of prominent crypto currencies to equity and determine whether now is the ideal moment to explore and get involved in this new investment avenue. More than 8.1 crore users had established unique Bitcoin wallets on Blockchain.com as of March 2022, with more than 2.7 lakh verified Bitcoin transactions every day. This represents a 72 per cent increase over the previous year and a 237 per cent increase since 2018. Further, as of 2021, around 10.6 crore individuals worldwide used crypto currency. Blockchain.com is a website that allows you to purchase Bitcoin.

Defining Crypto Currency
Crypto currency is a digital payment mechanism that does not rely on banks for transaction verification. It is a peer-to-peer payment system that allows anybody, anywhere to send and receive money. Instead of tangible money carried around and traded in the real world, crypto currency payments exist solely as digital inputs to an online database identifying specific transactions. Transactions involving crypto currency funds are recorded in a public ledger. Digital wallets are where crypto currency is kept. The term crypto currency refers to the use of encryption to verify transactions. This means that specialised coding is required in order to store and transport Bitcoin data between wallets and to public ledgers. Encryption’s goal is to ensure security and safety. 

Working of Crypto Currency
Crypto currencies are based on blockchain, a distributed public ledger that keeps track of all transactions that are updated and maintained by currency holders. Mining is a technique that uses computer power to solve complex mathematical problems that earn coins to construct crypto currency units. Users may also purchase the currencies from brokers and store and spend them via encrypted wallets. You don't possess anything concrete if you hold Bitcoin. What you possess is a key that enables you to transfer a record or a unit of measurement from one person to another without the involvement of a trusted third party. Bitcoin is the most valuable and oldest crypto currency. It’s also the most common.

According to data from the financial website Finder, 66.7 per cent of crypto currency investors hold Bitcoin, 28.6 per cent own Dogecoin and 23.9 per cent invest in Ethereum. The Bitcoin price on June 1, 2022 was ₹ 2,450,368.16 for one Bitcoin. According to Coinbase’s data, there presently are 1.8 million Bitcoins (BTC) in circulation. Since 2009, nearly 7 trillion dollars in Bitcoin have been moved among Bitcoin traders, as of 2019. 

Performance
We chose the top two crypto currencies in order to better comprehend their performance. The table alongside compares crypto currency risk and return parameters to the Nifty 500 Total Returns Index. You may have observed that the returns on crypto currencies are mind-boggling and appear to be insurmountable at first sight. This is the primary reason why retail investors, particularly millennials, are becoming more interested in crypto currencies. In fact, crypto currencies outperform the Nifty 500 TRI in terms of risk-adjusted returns. However, most investors overlook the risk factor. When we look at risk in terms of standard deviation, downside deviation and maximum drawdown, it is crypto currencies that have shown dramatic swings in returns. Triple-digit gains are accompanied with triple-digit volatility.

As shown in the graph above, the maximum drawdown of crypto currencies is far too large. And there have been several cases where cryptos have wiped away practically all of your cash. However, out of 2,940 observations, crypto currencies fell below 50 per cent half of the time. Furthermore, 35 per cent of the time it was between negative 50 per cent and negative 75 per cent. This suggests that there is a 67 per cent chance that if the cryptos go below 50 per cent, they will fall even more. On the other hand, the greatest downside of the Nifty 500 TRI was roughly 40 per cent, yet it went below negative 15 per cent just 15 per cent of the time. 

Timing the Investment

If we look at Bitcoin’s long-term price trajectory, we can see that it is continuing on the rise. In the intermediate term, it is trading sideways in a range spanning from USD 25,300 to USD 69,000. And it has been dropping in the short term since November 2021. As a result, this short-term decline can be used to progressively collect them. It is prudent to have an asset allocation in place while investing, and when deciding on asset allocation, we must understand the correlation of all assets with one another. When we check the correlation between Bitcoin and the Nifty 500 TRI, we see that it is 0. 

The Crypto Billionaires
Forbes identified 10 crypto billionaires on its world’s billionaires list in 2021: 

✓  Sam Bankman-Fried : FTX, a derivatives exchange, and Alameda Research, a quantitative trading business, were both started by this MIT alumnus. His net worth is USD 8.7 billion. ✓  Brian Armstrong : Coinbase’s co-founder and CEO having net worth of USD 8.9 billion.
✓  Chris Larsen : Ripple’s chairman and co-founder having net worth of USD 3.4 billion. Ripple is a real-time currency exchange and gross settlement system.
✓  Cameron Winklevoss and Tyler Winklevoss : The twin brothers, who are former Olympic rowers, began buying Bitcoin in 2012 and are now worth over USD 3 billion each.
✓  Michael Saylor : Because of Bitcoin, the CEO of software business Micro Strategy is worth almost USD 2.3 billion.
✓  Jed McCaleb : Another Ripple co-founder, he is worth around USD 2 billion.
✓  Fred Ehrsam : The co-founder of Coinbase with Brian Armstrong, he is currently the CEO of Paradigm, a Bitcoin investment business. His net worth is USD 1.9 billion.
✓  Changpeng Zhao : This crypto currency exchange founder is worth USD 1.9 billion. He is the CEO of Binance.
✓  Matthew Roszak : Bloq’s chairman, who invested in Bitcoin in 2021, is worth around USD 1.5 billion. Bloq is in the blockchain infrastructure business.
✓  Tim Draper : When the United States Marshals dismantled the Silk Road crypto currency illicit market in 2014, one Silicon Valley venture entrepreneur purchased USD 18.7 million worth of Bitcoin, which is now worth USD 1.5 billion. 

This suggests there is no correlation between Bitcoin and the Nifty 500 TRI. As a result, this may appear to be an excellent diversification opportunity. However, the main issue with this is that because the maximum drawdown is fairly high, when Bitcoin falls, it makes your portfolio appear worse, and when it rises, it makes your portfolio look better. As a result, we do not recommend investing in them. This is due to the fact that it is very volatile and can collapse to such a degree that capital loss can be severe. If you still wish to invest in them, we recommend not allocating more than 5 per cent of your overall portfolio. Furthermore, do not include them in your core portfolio.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]