It’s no secret cryptocurrencies are having a renaissance moment in 2021. The total market cap in crypto reached $3 trillion for the first time ever on 9 November 2021, a 5x increase in capitalization since November 2020.
Given these impressive numbers, you would think everyone would be rushing into the industry, but that’s not the case. Some large institutional investors are staying away from the crypto-sphere and still making a kill. Therefore, the question is whether crypto investing is all it’s cracked up to be and how you should approach such an investment.
Who’s investing and who’s not?
The main group of investors behind the crypto rally are hedge funds and companies with an interest in crypto. For instance, BitInfoCharts reported that Huobi, Binance and Bitfinex have cold wallets holding roughly 3.03% of all coins valued at $34.7 billion as of October 2021. The next cadre of crypto investors are hedge funds. Hedge Fund Research data shows that hedge funds focused on crypto generated a 254% year-to-date return.
On the other hand, large institutional investors are not getting involved in the crypto-sphere. In a survey by Vidrio Financial including major investors with over $100 billion in AUM across Europe and the US, most of them had not invested in crypto. 50% of them had zero exposure to crypto and 33% were considering it. When asked about their decisions, they claimed that crypto seemed too risky for their portfolios and would not recommend it to their clients.
Weighing risk vs. reward
In all investments, you have to compare the risk involved compared to the potential reward from the investment. Clearly, in the view of major institutional investors, the risk seems too high compared to the reward.
Bloomberg recently reported that the biggest global investment banks made a total profit of over $170 billion in the second quarter of the year. JPMorgan Chase, for example, made $170 million in profit each day during that period. More recently, UBS reported strong third-quarter returns without having to touch crypto. Its shares are up 45% over the past year aided by record profits from its global wealth management arm where it was able to increase prime brokerage fees for equities.
With such returns relying solely on conventional investment tools, these institutions don’t see the need to diversify into risky cryptocurrencies. In fact, UBS CEO Ralph Hamers the bank has ‘ruled out’ crypto-related services. Further, he claimed that no one understands how to determine the value of crypto hence making it speculative.
Meanwhile, hedge funds, which can afford to take on more risk, have no qualms about investing in crypto to improve their performance. Then you have companies like MicroStrategy and Tesla that own massive amounts of crypto. The former, for example, has a stash worth $5.1 billion after acquiring 5,050 more BTC on 13 September.
What about individual investors?
Even individual investors must also determine if the risk involved in crypto is worth the potential rewards. This means that the investment won’t be worthwhile for everyone. To decide which side of the fence you lie, here are a few questions to ask yourself:
What’s the reason behind your interest in crypto?
There has been a lot of noise lately since Bitcoin hit a new all-time high of over $68,000 on 5 November. Other coins also surged during October and reached all-time high values too such as Ether and Dogecoin. Furthermore, the entire industry seems to be on the up-and-up and it’s natural to want to become a part of the movement.
However, FOMO is never a good reason to invest in anything. Despite widespread adoption and acceptance of crypto, it’s not guaranteed to keep going up. It’s possible that crypto is poised for a major correction leaving you with a huge loss. Therefore, you must understand what it entails before allocating any investments toward it.
Can you handle volatility?
Volatility and crypto go hand in hand. This is why you shouldn’t be surprised if the industry sheds off 10% or more in market cap within a few hours following some negative news from, say, China. Unless you’re ready to take this without panic selling, then crypto is not for you.
That is not to say that you have to hodl regardless, simply that you should be aware and prepared for this at some point.
How much do you want to allocate?
Diversification is always key but you have to be even warier when it comes to crypto. Imagine having 80% of your portfolio in crypto and the market tanks by 50% within a week? Instead, you should only allocate what your portfolio can handle without experiencing a massive drawdown.
Remember the 2018 crypto slump which lasted for over a year? Now imagine what damage that can do to your financial performance.
How should you invest in crypto?
After you have decided that crypto might be the right investment for you, now it’s time to decide how to go about it. For that, we have a few tips to help you make the most out of the crypto market and gain an edge:
Look at altcoins and DeFi
Bitcoin usually grabs all the headlines being the largest coin by market cap, but you can find plenty of opportunities to invest in crypto beyond BTC. In fact, some altcoins like Ethereum, Dogecoin, Solana, etc. have had a higher return compared to Bitcoin.
The key is to find a reliable source of information and to do your own extensive research to identify the most promising. DeFi has been particularly on a tear thanks to the introduction of the Binance Smart Chain (BSC) and the variety currently available.
Be prepared for the long-haul
Although some speculators prefer extreme volatility for intraday trading, it’s an especially stressful and unreliable strategy. Unless you want to spend hours every day only to break even or make a small profit, this is not the best way to go. What has been proven to work is a long-term strategy.
Like Warren Buffett identifies stocks, you too need to identify coins with the most potential in future and invest in them. Over time, the gains to be made from positional trades are a lot more compared to a strategy based on buying and selling within hours.
Invest in other crypto-related assets
Thanks to the creation of crypto ETFs and mutual funds, you now have access to different methods to invest in crypto. ETFs, for example, can even offer leverage allowing you to increase your performance, but you must also be wary of the potential risk in using leverage.
You can also invest in crypto mining companies and crypto stocks if you prefer, so there’s a multitude of options to choose from, all with specific benefits depending on your strategy and goal.