Cryptocurrencies: A Short Read

In the past few years, cryptocurrency (referred also as “cryptos”) investing and trading has gained momentum. The market is trying and expanding into the US derivatives space to cater to the increased demand from retail investors. Many countries, previously reluctant, have now allow investing in cryptos. Even some large companies and institutions have started investing in cryptos. These trends clearly indicate the acceptance of this new, unknown market of cryptocurrencies.

Unlike traditional money which was backed by some reserves, cryptos are 100% digital currencies getting their value from this “unknown” factor or notion attached to them. For some, investing in this market would be fascinating and some can even be comfortable with taking this risk. However, some of us may not be quite comfortable entering the “unknown” and lose money because of the high volatility that prevails in this market. It is important to understand that the current trends clearly indicate that cryptos are here to stay. So, how can we look at cryptos in a way other than something scary?

One way to look at them is by considering the crypto market as an indicator or benchmark for the traditional currency’s performance or even economic performance as a whole. Since the value of cryptos is derived from what the crypto investors (which now include not only retail but also institutional investors) expect out of the market, they can act as a benchmark to compare traditional market performance with. We also observe how cryptos react to specific economic events (such as oil price changes, Ukraine tensions, etc.) to know how much the market thinks an economic event must impact the economy.

Although cryptos are quite volatile, if we see them as benchmark or indicators, we not only free ourselves from the fear of the unknown but also look at them as a backup investment which does not outperform the market (because a benchmark investment is the minimum return you must expect out of an investment). Hence, by default, we stop looking at cryptos as quick, high-return generating investments (which are high risk). We invest a bit in cryptos (or maybe even not at all) but make our investment decisions by considering the crypto performance. This way, we may be reducing the overall risk of the portfolio and balance out our portfolio of investments.

This is just one narrative which makes sense to me. Feel free to add your comments on the topic and let me know too!