Cryptocurrencies have come a long way. In only a decade, the number of digital currencies has risen to more than 3,000 and their total market valuation has soared to more than $360 billion. This means that they are more valuable than Goldman Sachs, Morgan Stanley, Wells Fargo, and Citigroup, combined. In this report, we will look at the 5 key reasons to invest in cryptocurrencies today.
Investing in cryptocurrencies
There are more than 3,000 cryptocurrencies in the world, with Bitcoin being the largest. It has a market cap of more than $209 billion. Other leading currencies are Ethereum, Tether, Ripple, and Bitcoin Cash.
The best approach to invest in these assets is through an online broker or exchange. These are companies that act as the intermediaries between miners, sellers, and buyers. Fortunately, there are several quality and safe companies that offer these services, including Coinbase, Kraken, and Binance. Alternatively, you can use traditional brokerage companies like Robinhood, Schwab, and Interactive Brokers to invest in assets tied to digital currencies.
However, it is worth noting that the cryptocurrency industry is relatively young and volatile. Indeed, it is common for the price of most currencies to add or lose more than 10% of their value in a day. Therefore, we recommend that you invest only a small part of your portfolio to the assets. Also, we recommend that you invest only in the big and well-known currencies like Bitcoin and Ethereum.
Cryptocurrencies have outperformed other assets
While cryptocurrencies are criticised, the reality is that they have outperformed all other assets in the past decade. For example, in the past five years, the price of Bitcoin and Ethereum have gone up by more than 4,000% and 3,000%, respectively. In the same period, gold and the S&P 500 index have risen by less than 100%. As such, a dollar invested in digital assets has made more money – by far – than that invested in the traditional assets.
The same trend is visible in each of the past few years. For example, this year alone, the price of Bitcoin and Ethereum has gone up by 60% and 180%, respectively. The S&P 500 and gold have gone up by less than 20%, respectively.
BTC, ETH, S&P 500, and Gold YTD
Therefore, while digital are risky assets, the reality is that they have outperformed other assets since the industry started slightly over a decade ago.
Disrupting the finance industry
In late 1990s, dot com companies were the real thing. Their founders wanted to disrupt most of the then traditional companies. Today, most of the firms that existed during that time have managed to change several industries. A company like Amazon has changed how people shop and led to the death of many traditional firms. Similarly, a company like PayPal has changed how people send money and do other transactions. Google has also changed how people find information and how they send messages.
Similarly, the cryptocurrency industry is changing the finance industry. For example, currencies like Bitcoin and Litecoin are created in a decentralised way, removing the need for a central bank. Also, it is possible to buy and sell items using these currencies.
Meanwhile, the Decentralised Finance (DeFi) industry is attempting to change the business model of the traditional financial industry. For starters, the industry allows people to create financial services using blockchain industry. For example, some companies in the DeFi ecosystem are lending money to people from around the world. Indeed, the value of funds locked in DeFi has grown from less than $1 billion early this year to more than $10 billion.
Increased user adoption
Another reason to invest in cryptocurrencies is that user adoption is growing, especially for big currencies like Bitcoin and Ripple. For example, a number of big companies in the US have moved some of their cash to digital assets. In the second quarter, MicroStrategy, a company that offers tech services to other firms announced that it was putting $250 million of its cash to Bitcoin.
A few months later, Square, one of the fastest-growing fintech companies in the world, announced that it had bought Bitcoins worth more than $50 million. Meanwhile, Fidelity, one of the biggest brokers and asset managers in the world have started a division focused on digital assets. Meanwhile, more Americans are using digital currencies. For example, in the second quarter of the year, Square’s Cash App delivered more than $875 billion of revenue.
Therefore, we expect that demand for the currencies will continue increasing, even as Bitcoin supply remain scarce.
Low interest rates for longer
Global central banks have slashed interest rates and adopted unconventional monetary policy strategies. In the United States, the Fed has brought rates to a record low and moved to implement an open-ended quantitative easing program. It is also buying corporate bonds worth billions of dollars.
Most importantly, the bank has committed to allow the rate of inflation to move above 2%. The same trend is happening in other countries like the UK, European Union, and in Japan.
Low interest rates and quantitative easing will likely lead to a devalued dollar and higher cryptocurrency prices. As shown in the chart below, Ethereum and Bitcoin prices have risen sharply this year because of the policies by the Fed.
In addition, it will be extremely difficult for central banks to unwind the current policies. Indeed, in the past, efforts by the Fed to tighten the monetary policy were met with significant resistance by the market.
BTC, ETH, and dollar index after Fed rate cuts
Diversification is a key aspect in investing. Its goal is to have different sources of income. In a diversified portfolio, a decline of one asset will be cushioned by an increase in the other. Therefore, having a small part of your portfolio in digital currencies can help you make money in an extended period of time.
Let’s take an example. Assume you had $50,000 to invest five years ago. You invested 35% of them in the S&P 500 index, 35% in the Nasdaq 100 index, and the rest in Bitcoin, you would now have more than $717,475. This is the power of diversification.
S&P 500, Nasdaq 100, and S&P 500 5-year performance
To be clear, investing in cryptocurrencies is a risky thing considering that they are a relatively new industry. They are also volatile, unlike other financial assets. As such, we recommend that you only allocate a small percentage of your funds to the assets. Even by doing that, as shown in the example above, the potential for making a substantial return is enormous.