Explained: The good, bad and ugly of investing in cryptocurrencies

Investing in cryptocurrencies has become a subject of debate over the past few weeks, owing to the high level of volatility seen in the virtual coin trading space — several rounds of ups and downs have been witnessed in the crypto market in a matter of two weeks.

On Tuesday, cryptocurrency prices recovered after plunging sharply on Sunday. Bitcoin, the world’s most popular cryptocurrency, has bounced back after falling almost 12 per cent.

Earlier last week, another devastating bout of volatility hit cryptocurrencies and led to a sharp erosion in the market capitalisation of popular virtual coins. This was largely due to China’s tight crackdown on cryptocurrencies and Tesla CEO Elon Musk’s tweets about the environmental impact of mining the virtual coins.

But anyone who has been investing in cryptocurrencies will tell you that drastic price movements are normal in the cryptos and may increase as prices continue to rise.

Let’s take into account the rise and fall of Bitcoin over the years to understand the dynamics of crypto trade.

The market for cryptocurrencies was almost non-existent a decade ago when Bitcoin, the first virtual coin, emerged. In 2009, its value was $0 after it was introduced. It was only two years later that the value of Bitcoin touched $1 for the first time and in two more years, Bitcoin’s value surged to $1,000.

In 2017, it galloped to almost $20,000 but crashed to $3,300 levels in less than a year. While Bitcoin was hitting all these milestones, it faced severe periods of volatility. For instance, when the virtual coin jumped to $30 in June 2011 but plummeted to $2 in the same year by November.

Similarly, Bitcoin had slipped to $350 by April 2014 after hitting $1,000 for the first time in November 2013.

All of these instances indicate that volatility is high in the crypto market, not just in the case of Bitcoin but all the other ‘altcoins’ that have emerged after it.

CRYPTOCURRENCY TRADE

Analysts say that the cryptocurrency market has evolved drastically from a decade ago and is slowly finding space in the mainstream. Though it is far from replacing traditional currency, it has gained traction among younger investors over the past few years.

The year 2020 was particularly important for cryptocurrencies as valuations rose sharply in the middle of the coronavirus pandemic. One of the main reason why investors were lured towards virtual coins last year was weakness in traditional assets across the globe.

Some analysts even termed 2020 as the breakthrough year for cryptocurrencies, adding that the price boom observed last year is different from previous instances.

Though governments around the world remain hesitant about cryptocurrencies, analysts believe that cryptocurrencies are now closer to being accepted as mainstream assets.

EASIER TO INVEST, LOGICAL PRICE MOVEMENTS

While investing in cryptocurrency still remains a tricky space, the good part is that price movements are no longer unexplained or without logic.

For instance, wild price fluctuations that are frequent in the crypto trading space now have an underlying reason — be it a tweet from a big shot crypto backer or a country enforcing regulatory actions. Earlier, price movements in the crypto trading space were very hard to predict and mostly driven by factors that weren’t easily identifiable.

This is the reason why there is still no concrete explanation behind the insane rise in the price of Bitcoin in 2017 and the subsequent plunge within a year. However, a research report from 2018 suggests that much of Bitcoin’s surge in 2017 was due to market manipulation.

Another reason why cryptocurrency trading has become more accessible is the fact that there are more crypto exchanges around the world. People can easily create an account using their phone and start investing.

Some crypto-dedicated apps even allow investors to make portfolios, which helps in diversifying assets. This will help investors invest in a pool of cryptocurrencies, giving them a chance to maximise their earnings while reducing overall risk.

Another factor that has made cryptocurrency trade favourable is that more analysts are now offering insights on how to approach the market — something that was not available a few years ago.

Even with the advantages, the benefits of cryptocurrencies trade are outweighed by a few critical hurdles.

REGULATIONS ABSENT, CROWDING

From being a niche asset for mostly tech billionaires and coders, cryptocurrencies have come a long way, with millions now investing in virtual coins. However, there are some critical problems that prevent cryptocurrencies from becoming a favourable asset class.

One of the biggest problems is the absence of concrete regulations. The fact that governments around the world are still apprehensive about cryptocurrencies is the reason why there is little regulation to prevent the wealth of investors who invest in virtual coins.

Without any regulation, investors are unlikely to get their money back in the event of a scam or any other case of fraud. However, this is just one of the problems that cryptos face without regulation.

In the absence of government regulation, it is difficult to invest in cryptocurrencies even if they are legal. For instance, crypto exchanges in India face difficulties while dealing with banks.

Nischal Shetty, CEO and Founder, WazirX, told IndiaToday.in in an interview that most banks in India are not willing to work with crypto exchange platforms. Shetty said that UPI transactions still don’t work on these apps, adding that deposits and withdrawals are stopped often.

“Banks are not giving us the option to accept deposits in the right way and if the banking system doesn’t support crypto platforms, how they can work properly?” He asked.

It is worth mentioning that delays in important transactions can be a deciding factor in the world of crypto trade where price changes are rapid.

While cryptocurrency trade remains legal in India, the fact that it is unregulated has prompted a lot of interested traders to take a step back. The situation is the same in many other countries around the globe.

Another critical issue that cryptocurrency investors have to deal with is crowding. Simply put, there are now thousands of unregulated virtual coins in the market — some of which serve no purpose and were created just for fun or even to express hate.

The worrying factor is that many novice investors end up investing in low-value cryptos thinking they are valuable. Analysts, however, make it very clear that such coins have no long-term value and are likely to fall after a period of rapid surge.

Analysts said the next step of evolution in cryptocurrency trade involves creating awareness among investors.

Since it is an unregulated market, there are a lot of ways in which investors can be defrauded and staying cautious is the best way to approach cryptocurrency trade at the moment. Given the higher volatility involved, investors should learn to remain patient, informed and aware of evolving trends.