Cryptocurrencies have taken the world by storm and as of today Bitcoin makes up 45% of the total value of cryptocurrencies in terms of market capitalization.
Almost everyone has heard about Bitcoin, Ethereum or Dogecoin from the news. They are just three examples of digital currencies, also known as cryptocurrencies.
A cryptocurrency is a virtual currency (that is, there is no physical representation for it) that is created and traded exclusively online. There are more than 2000 of cryptocurrencies currently on the market, with more being created daily
Are they safe?
Cryptocurrencies are safely guarded with cryptographic algorithms, which makes them secure enough to be trade in the online environment by millions of people.
Formally, cryptocurrency uses a peer-to-peer technology called blockchain, that is based on a decentralized network to transact without any legal binding of governments or other central authorities.
To put it simply, it is a barter system that enables you to trade assets without any middleman. This is very convenient for fast and inexpensive transactions with very low turnaround times. No wonder that so many people are drawn to crypto.
Who is getting into crypto? And why?
Around 106 million people around the world have invested in cryptocurrencies so far, and the numbers are increasing daily. Cryptocurrencies have attracted and continue to attract people from all walks of life and all generations.
“Smart money” has tapped into cryptocurrencies, and investments are beginning to flow.
Some of the most renowned firms in the world have also invested in cryptocurrencies. For examples, Tesla has invested $1.5 billion in bitcoin and is interested in accepting bitcoin payments in the future. Micro-Strategy, a business analytics platform software company purchased $1 billion in Bitcoin.
Are the Aussies left behind or have they picked up on this exciting asset class? A Finder survey of 1,004 Australians conducted in January 2021 revealed that 1 in 4 people invest in or plan to invest in cryptocurrency. That’s equivalent to 5 million digital currency investors.
Why would you get into crypto?
Cryptocurrencies are volatile investments. So, people often see them as great or terrible. But what if you saw them as a diversification asset?
Many small business owners consider buying cryptocurrencies as a medium to diversify their investment strategy. With surveys showing that Aussie cryptocurrency owners are making a profit from their crypto investments in the past 12months, many more people are looking to get into crypto in the near future, including SMSFs.
Gaining a long-term advantage in the investment strategy is one of the other reasons why small businesses are interested in buying crypto. Unlike fiat currencies that are guaranteed and controlled by governments, government bodies cannot intervene in virtual currencies and cause inflation. At the same time, it is exactly the lack of control that may keep some investors away from crypto.
Just like the “big players”, whether you include cryptocurrency in your portfolio depends on the risk you’re prepared to take. First step is to know how risky your portfolio is now and how much risk other potential investments, including crypto, carry. If you know that, boosting your portfolio’s return potential with cryptocurrencies could be a great way to diversify your investments.
Make sure you keep an eye on our next articles where we get a bit more technical and tell you how to assess the risk of cryptocurrency as an investment avenue, and how to calculate how much of that risk you can take for the return you expect from your entire portfolio.
About the author:
Dr Laura Rusu is the Founder and CEO of LENSELL®, a Melbourne based Fintech that aims to democratise access to financial and non-financial corporate performance information, and help people make better decisions with data driven insights.
Diversiview® by LENSELL brings data science to Australian retail investors and allows them to design and validate diversified investment portfolios to suit their own risk and return expectations. All ASX listed investments (stocks, ETFs, bonds) and the top 15 cryptocurrencies can be included in the portfolio analyses.