By the name of the cryptocurrency, you can imply that it is inherently cryptic, meaning that it has no physical existence. Unlike a traditional currency, it is online – you can’t hold or feel it. But you sure can carry out transactions using it. Since there is no formal authority backing it, it is a risky investment – there’s no ombudsman you can go to in the event of a grievance.
All these features of cryptocurrency have made a part of the population skeptical about putting their money in it. But there’s also another part of the population interested in gaining in-depth information about it. Warren Buffet said – Never invest in businesses you can’t understand.
It is highly ignorant of people who risk their money on something they don’t know. Unlike regular investments, crypto is made of mining.
However, we can’t help ignore the astounding performance of some currencies – for instance, the value of one bitcoin jumped from below $5,000 in March 2023 during the pandemic to more than $60,000 as of April 2023. The growing reputation of a virtual currency and Tesla CEO Elon Musk’s continuous with tweets about it, creating excitement among the investors.
But this excitement may have left some investors feeling like an outcast, wanting to join the rest of the group, but are too nervous. They are not entirely wrong in wanting to put their money in a more stable and less risky currency. Even financial advisors around the globe are wary of it. So, let’s learn what they have to say about it and why they are afraid of this currency?
Reasons Why Financial Advisors are Wary of Cryptocurrency:
It is hoped that someday cryptocurrency will become an asset class that financial advisors use in their client’s portfolios. But as for now, they are weight volatility risk and their value proposition.
Highly Volatile Nature
The perils associated with crypto are chiefly related to its unstable nature. The digital money market is leading to sharp and unexpected changes in its value due to alterations in its market segment. It is not surprising for the value of crypto to drop or rise by hundreds or thousands in an hour or a day. Thus, investors find it is risky and speculative.
The online money market is currently not regulated by the government or any financial body. But recently, the central banks have proposed launching their own virtual currency to attract investment and are considering classifying them as a legal commodity.
Susceptible to Risks
If you’re using the internet, you are likely to become a victim of cyberattacks. And since crypto is entirely online, the associated risks are even more. There is no solution for technical glitches, human errors, and hacking.
Can be Affected by Forks
The susceptibility of cryptocurrency to hard forks and discontinuation makes it risky for financial advisors. Before trading in the digital market, you might want to learn everything about it, including the associated perils.
In the event of a hard fork, the price of crypto might move vigorously, much more volatility than usual. The companies might suspend trading if they don’t find suitable value from the market. If you want to read more about the crypto market, please keep scrolling.
How to Lower the Risk Associated with Buying Crypto?
For investors who want to bet their money in crypto, but are skeptical, here are four ways to gain exposure without purchasing. And if you decide to buy, how to lower the associated risk.
Invest in Businesses with Crypto Holdings
When risking your cash in digital currency, make a list of businesses with crypto holdings. You can bet on the success of a publicly-traded company that has these holdings and a part of their balance sheet in crypto.
You can gather a lot of information from a company’s balance sheet. For instance, as of June 30, 2023, Tesla had invested around $1.31 billion in crypto, equating to merely 2.4% of its total worth. And if you’re wondering that those holdings might increase in value, keep in mind that Tesla stock value will too.
Invest in the Virtual Currency Infrastructure
You can also gain exposure to the crypto market through platforms like Coinbase, allowing investors to buy and sell digital money. It provides you an insight into all the companies having a stake in cryptocurrency. In the crypto market, you can either put money on the miners or the materials for mining.
Not many public companies operate in blockchain technology, it is challenging to figure out where to invest. Riot Blockchain Inc. is an exception as being a public company, it does mining and helps build the cryptocurrency structure, allowing investments.
Prepare Yourself for a Currency ETF
Although there are currently no ETFs (Exchange-Traded Funds) backing crypto, investors requested the Securities and Exchange Commission for setting up one. Crypto ETF will function like any other ETF. But instead of market exchange, it will track the virtual currency.
Be Cautious if Investing Directly
Despite all the risks involved, if you want to invest in virtual currency but are dubious, there are a few tricks to mitigate the perils:
- Reduce the amount of money you’re investing. If you invest less, you’re likely to lose less.
- As some credit cards offer digital currency rewards, you don’t need to put money from your pocket to show crypto in your portfolio.
- You may choose to invest in stablecoins, similar to crypto but are supported by real-world assets, making them significantly stable.
Although there are several risks in virtual currency dealing, there are many solutions as well. At the moment, financial advisors are suggesting not to add crypto to your investor’s portfolio because they are concerned about government regulation and limited supply. But they see the perks of using it as a commodity and legal tender.
We hope in the future, government and financial bodies work together to change the regulations of using this currency and amend its policy because crypto is here to stay.