Last week we saw FTX collapse. Are cryptocurrencies still a smart move for investments?
Although the value of Bitcoin and other popular cryptocurrencies has drastically decreased since its sky-high peaks in late 2021—the price of Bitcoin fell from about 48 lakh rupees just a year ago to less than 14 lakh rupees today—they still attract a lot of attention and intrigue. There are still many investors who believe that taking advantage of the current crypto meltdown is a good opportunity to make money, despite the total collapse of FTX last week.
You should consider asset allocation prior to making any financial decisions. In order to deliver diversified returns over the long term, asset allocation simply refers to distributing your investments over a variety of products. The same is true for cryptocurrencies; to determine how much of your investment portfolio may be devoted to cryptocurrencies, you need to consider your risk tolerance, financial goals, and timescale. When considering a cryptocurrency or other digital asset, you should do your homework. Investing in digital assets simply on the basis of a mate’s tad of recommendation or out of FOMO is not encouraged (Fear of Missing Out). It would be smart to study the whitepaper prior to making any crypto-asset investments in order to gain a better understanding of the cryptocurrency’s goal, technology, and use case.
Numerous small investors who embraced the craze of cryptocurrencies in the previous five years believed that they served as an asset that was easy to buy and trade and could yield quick and fantastic returns. A limited fraction of them have achieved financial success, but the majority of them today have badly depleted portfolios. From a wider viewpoint, cryptocurrencies are much more than just a quick method to get rich. The assertions over how cryptocurrencies are an income sort or if they are a reliable store of value similar to traditional assets have received a lot of attention from economists and institutional investors over the past few years.
Sofiane Aboura, a professor of finance at the University of Paris, conducted a groundbreaking investigation into the potential influence of Federal Reserve policies on fluctuations in Bitcoin prices. His study, which was published earlier this year, provided evidence that the Fed Funds rate cut in March 2020 (in response to the coronavirus outbreak) had an effect on Bitcoin’s remarkable price run-up, which led it to surpass its previous all-time high. The study’s primary insight “supports the notion that the Federal Fund ratios exert delayed, threshold, higher order, and spillover influences on Bitcoins,” according to its report. Since there is a large negative correlation between the price movement of Bitcoin and US Fed fund rates over the past five years, we may claim that a cryptocurrency is a put option on interest rates. This implies that investing in cryptocurrencies today or at any other point in the future would only make sense if the investor anticipates a decline in US interest rates and a rise in the value of cryptocurrencies as a result. However, those who bet on the future of interest rates could do better to postpone their purchases of cryptocurrencies.
Furthermore, there are some strong justifications for not purchasing cryptocurrencies. First off, the growing global fascination with cryptocurrencies has led a number of central banks to voice their worry about potential abuse. In an effort to jump on board, some countries have decided to create Central Bank Digital Currencies (CBDCs). The Reserve Bank of India (RBI) plans to launch its own digital rupee during the fiscal year 2022-2023. Whether CBDCs will compete with virtual currencies like Bitcoin or Ether is currently difficult to predict. Although gains from trading cryptocurrencies are now taxed, the attitude towards cryptocurrencies in India is still expanding, and trading cryptocurrencies is still exceedingly risky due to the ongoing dangers of price swings, liquidity constraints, and fraud.