Should you invest in crypto currencies? What risks?

 Should you invest in crypto currencies? What risks?

Should you invest in crypto currencies? What risks?

Crypto currencies are on the rise, and we keep hearing about this virtual currency. Bitcoin even became the official currency of El Salvador on September 7, 2021, in direct competition with the US dollar.

Between endless controversies, supporters and detractors of crypto currencies arouse many passions. So what exactly is cryptocurrency? The blockchain? Should you invest? And what financial risks do we take in doing so?

What is cryptocurrency?

Cryptocurrency is causing a lot of ink to flow and it is given different names: virtual currency, digital currency, cyber currency, cryptographic currency, etc. Cryptocurrency is an impalpable currency, entirely virtual, stored in a digital wallet specific to each user.

Concretely, this virtual digital currency uses the protocol of the block chain (see next paragraph) to secure and trace the transactions carried out. Virtual exchange platforms make it possible to buy and resell crypto currencies, like stock exchange platforms.

Because, as on the stock market, the owner of a cryptocurrency is in a way the holder of a payment title whose value can fluctuate according to supply and demand on the cryptographic market.

Designed more or less confidentially in the 2000s and known to only a few insiders, crypto currencies have become more democratic since the launch of the bit coin in 2009. They are now developing at high speed, reaching an increasingly large audience. Today there are more than 5,000 different crypto currencies around the world.

What is the blockchain?

Contrary to popular belief, the block chain is not specific to cryptocurrencies. In literal French translation, the block chain is a “chain of blocks”. It is actually a transparent and ultra-secure database, in which no data can be altered, modified or falsified.

It is made by users and for users, who register using a cryptographic process. The system is entirely decentralized since it does not depend on any central body or monopoly. Each data, each transaction is recorded there in the form of encrypted data, called the “block”.

In the end, this tamper-proof database grows chronologically with each transaction, no matter how small. And all users of the block chain have access to it in real time. A system of “nodes” allows everyone to have a copy of the database each time information is added.

This database, entirely managed by a computer protocol, makes it possible to increase productivity and efficiency at a lower cost, since it does not call on any intermediary, but on thousands of computers located all over the world.

If the block chain is well used in the world of crypto currencies, it is not limited to this sector alone, since banks, insurance companies, logistics and energy companies already use this secure protocol. The block chain could also extend in the future to many other areas, such as luxury, aeronautics, health, chemicals, real estate, etc.

Virtual currency, to invest or not, that is the question!

Without a doubt, if you are an adventurer at heart

All specialists in the world of finance will tell you that cryptocurrencies are by nature very volatile assets, that is to say, they present a high risk of loss of capital, or even bankruptcy.

However, any investor wishing to diversify his portfolio has a significant interest in taking cryptographic currencies into consideration. In a still immature market, it is advisable to invest in crypto assets provided you are not too greedy.

Here are the three rules for investing in bitcoin, and its counterparts, that you should follow:

  • Invest for the long term: time compensates for the decline in assets which often return to their original value or beyond, favor a horizon of 3 to 10 years minimum to take advantage of it
  • Invest sparingly: no need to put all your savings there at the risk of losing everything, a portfolio with 10% cryptocurrency is sufficient for balanced investor profiles
  • Favor the bit coin to other crypto currencies: when the bit coin falls, all the crypto currencies fall, and some disappear from the cryptographic landscape. On the other hand, the bit coin is still there, more than 12 years after it was put on the market

Finally, a last piece of advice, and not least, would probably be not to panic every time the market is in freefall. Admittedly, this is easier said than done, but it could make you rich. Indeed, you took a risk, assume it, because it could prove to be a winner in a few years!

From retro, if you’re somewhat risk averse

The bit coin and all crypto currencies in general represent a market full of opportunities, but also very fragile. They are too recent to bet on their future without admitting that a margin of error is possible.

The risks associated with digital currencies are numerous: risk of high volatility, liquidity risk, risk of data hacking, risk of fraudulent activities or risk of money laundering. Something to think about before investing.

Consequently, the most cautious investor profiles will prefer to ignore the virtual currency market. Or for the most tempted among them, devote only 5% of their savings to it, by shedding certain actions in which they no longer believe, for example.

But you who are resistant to risk, you have been warned: you could have a few cold sweats following the course of the bit coin, at the sight of sometimes dizzying falls… So inhale, exhale, blow out, and wait patiently!

Investing in crypto currencies is therefore recommended for balanced and dynamic investor profiles, who will have to find the right formula between stimulation and risk taking. The support of a wealth management advisor with an appetite for digital currencies is highly recommended.