Cryptocurrencies are digital currencies that use cryptography to secure transactions and control the creation of new units of currency. They can be sent directly from one party to another without the need of any intermediary, such as a bank or government. Investing in cryptocurrencies is not for the faint-hearted. It is a volatile asset class where you can make or lose money quickly. Due to the increasing number of cryptocurrencies and exchanges, it is important to do your research before you invest in any cryptocurrency.

Cryptocurrency adoption is growing around the world. Triple-A a leading crypto payments processor estimates as of 2022, crypto ownership rate is at an average of 4.2%, with over 320 million crypto users worldwide and predicts the cryptocurrency market to compound at 56.4% annually from 2019 to 2025.

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Things to consider even before you decide to invest in crypto:

1. Portfolio Diversification & Allocation

One thing you should think about before getting into cryptocurrencies is if your portfolio already allows for investment in it? Different assets suit different people, so it's worth thinking about this beforehand.  Your crypto investment is not a stand-alone investment, but an extension of your overall investment portfolio. While it’s standard practice to decide beforehand the amount you’re willing to put into an investment of regular instruments like stocks, bonds and real estate due to an abundance of historical data, crypto is different. On average stocks return ~6% more than bonds, but this information took us close to 100 years of studying the average returns on stocks and bonds. Crypto being new, we lack such concrete long-term data. If your portfolio allocation does not suit a particular cryptocurrency, then there are two ways that you can go about this:

1) Adjust your portfolio allocation so that it suits the new crypto investment

2) Invest in crypto trackers which will allow you to invest in a basket of cryptocurrencies and still maintain your current portfolio allocation.

Additionally, the general rule for investors is not to invest more than 5% of their total portfolio in a single asset. Investing in crypto is a good way to diversify your investments, but you will still need to diversify even within crypto. Invest in different cryptos and avoid putting all your eggs in one basket.

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2. Risk associated with crypto investment v/s other traditional assets

1. Volatility: A cursory glance on any cryptocurrency price chart for the last few years is enough to drive home the fact that volatility is easily one the biggest risk even for the coins with the highest market caps and adoption rates.
2. Regulatory uncertainties: Whether they are legal or illegal where you live. In some countries, trading or owning certain types of cryptocurrencies may be illegal and could result in fines, jail time or both. Exchanges around the world have to constantly be on their tiptoes. For example, Crypto currencies were banned in India for 2 years from 2018 to 2020 and in China Cryptocurrencies have been banned since 2019.
3. Insurance: Almost no government backed protection for crypto investors similar to a traditional FDIC insurance that comes standard with fiat money in most developed for customer deposits in registered banks. However not all hope is lost since you will have to resort to private insurance products. Breach Insurance offers crypto-insurance as a product called Crypto Shield, Coinbase also provides theft protection directly on its platform as an integrated product, Coincover insures against technology failures.
4. Crypto scams & Hackers: Hackers have already stolen ~2 billion USD worth crypto just in 2022 and scams like SquidGameCoin, Fake Ukraine donation to highly leveraged pyramid schemes that promise too good to be true returns on deposits, the landscape for crypto investment is unfortunately ripe to rip off people who don’t enter with sufficient research, security and privacy. Be wary of fake ICOs, coins, and tokens. It's easy for scammers to create a lookalike website to scam users. To avoid falling for such scams always do research on the company and its official social media channels before investing any money in an ICO. You should never invest in cryptocurrencies or ICOs based on social media hype.

Objectively considering these risks will help you in more ways than you’re away of. It will help you in choosing an exchange to invest with, the coins you buy, and then the ones you avoid.

3. Long term game

Bitcoin took 10 years to $50,000 that too in a very volatile manner. For any other token this will be the case and only the ones that research the most and are most dynamic in their investment decision with an ability to look beyond the curve will be making long term exponential gains. A good way to achieve this is to keep in mind the aforementioned guidelines and broad bull-bear market cycles as you look for projects to steadily accumulate over time. These projects should have a real-world use case, a welcoming community, and a committed development staff. A nice example is Pumpkittens' GameFi project on Fantom. The project has a tiny crew and no investors or VC support. But when the community began to participate after seeing the possibilities of the innovative ideas they presented. And as a result, it has become one of Fantom's greatest ventures. Thus, having a small team isn't always a bad thing; you just need to consider its long-term potential.

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4. Alternate ways to gain exposure to crypto, passively:

Maybe after your research you have come to the conclusion that your portfolio is better suited to handle exposure to cryptocurrencies passively. Here are some ways to do the same:

1. Buy shares of publicly traded crypto companies with big exposure to crypto directly. Some common ideas inclue – Coinbase, operates a crypto exchange platform, PayPal, also involved in crypto investing and transactions, Microstrategy, huge exposure to cryptocurrencies as part of its investment portfolio.
2. Buy shares of companies that make crypto-related hardware, such as Nvidia and AMD.
3. Invest in crypto ETFs or derivatives. Crypto ETFs track a single cryptocurrency or a basket of different digital tokens and currencies. They have low cost of ownership, are diversified, and saves you the stress of having to picking tokens to invest in.

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With decades of development ahead of them, cryptocurrencies and the widespread use of blockchain technology are still in their infancy. Therefore, to give yourself the best chance of long-term success, remember to unwind, reduce your FOMO, and adopt a more methodical approach to investing in the cryptocurrency market.

This is the second part in a crypto series, focused on crypto investment management. There's a part 1 that deals with crypto research and part 3 that discusses the concept of asset tokenization.

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‍Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. Nothing on this Blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorised to provide investment advice.

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