Cryptocurrencies: are they still worth it?

Cryptocurrencies have reappeared on investors’ radar following the election of Donald Trump and his apparent support for the asset, with bitcoin topping $100,000 after hitting a low of $15,000 in mid-2022.

Indeed, throughout his election campaign, Trump had hinted at a number of measures to regulate these assets. Although it’s not exactly clear how he intends to do this, some of the key comments include the "firing of Gary Gensler”, the current chairman of the SEC ("Securities and Exchange Comission”), who has taken aggressive action to regulate the asset, the "creation of a presidential advisory council on bitcoin and cryptoassets”, and the intention to promote the "mining” of these assets in the US.

Despite the warnings about cryptoassets that have been circulating since the first bitcoin was mined, the narrative is increasingly that cryptoassets are here to stay, with many government bodies taking major steps to promote them. However, no revolution is without its setbacks, and just like the internet at the start of the millennium, cryptoassets will face hurdles before they are fully integrated into traditional markets.

Despite the speculation, this asset class has the potential to transform the financial landscape. In this article, we explore the pros and cons of investing in cryptocurrencies. 

What are cryptocurrencies?

Cryptocurrencies are digital assets that use cryptography to guarantee the security and authenticity of the transactions involving them. In most cases, these transactions are recorded in a distributed ledger (DL). A DL is simply a database shared across a network. Each participant has an identical copy of the DL, and new entries are verified by consensus. Blockchain is a technology that organises data into blocks, which are then chained together in a sequential format in order to update the information in these DLs.

To carry out transactions on these blockchains (networks), you need a private key and a public key. The private key is unique and exclusive to the user and represents the encrypted digital signature of each transaction made. The public key is visible to everyone on the network and is used to identify network users. Both are represented by an address. The digital wallet (e-wallet), where the cryptoassets are held, is simply a representation of these two digital keys, one to validate and one to identify the user. 

Unlike other assets, cryptocurrencies exist only as a virtual value. As such, they are not created by the government, nor do they depend on a financial entity to trade, but only on the parties directly involved. The stability of these digital assets is not tied to any authority. In theory, they are immune to government interference or manipulation.

Exposure to cryptocurrencies can be direct or indirect, for example, through Crypto Fx, which Banco Carregosa offers its clients. 

What are the benefits of investing in cryptocurrencies?

There are several reasons why investors around the world are considering cryptocurrencies as part of their capital appreciation strategy. The first is that it’s highly valued and volatile, which attracts the attention of more aggressive investors. Since the lows recorded in 2022 (around $15,000), the currency has reached a new high of over $100,000. Second, as a new asset class, it tends to be decoupled from financial markets. However, as investors add this asset to their portfolios, it is likely to become more correlated with the markets, as it is subject to the same conditions as other traditional assets. For example, the fall in 2022 was largely due to rising interest rates and fears of a recession. The idea that bitcoin would be the new "digital gold” was in tatters as it depreciated in line with the market. Third, cryptocurrencies are traded continuously, 24 hours a day, 7 days a week – unlike stocks, for example, which can only be traded during regular trading hours –, allowing for greater flexibility in placing orders and greater transparency of changes in the value of the asset.

Finally, despite the high level of speculation, there are a number of projects funded by the issuance of cryptocurrencies that resemble what is known as "venture investing”. This niche market focuses on companies in their early stages of their development, when they have the greatest potential for growth.

While these are the main benefits of these digital assets, it is important to see the other side of the coin. 

What are the risks in investing in cryptocurrencies?

Before investing in cryptocurrencies, it is important to understand the risks involved in order to assess whether they can be incorporated into your investment strategy. To begin with, as mentioned above, cryptocurrencies are extremely volatile assets, with BTC and Ethereum depreciating by 80-90% over the course of their cycles.

In addition, given the "nascent” nature of the industry, the lack of regulation and legislation (especially regarding investor protection) is allowing for the proliferation of scams and cryptocurrencies that add little or no value to the industry and are simply attempt to capture capital from less informed investors. One example is the millions of depositors who were defrauded in the FTX scandal, one of the main cryptocurrency exchanges before it collapsed. In addition, the lack of a track record for most cryptocurrencies limits the ability to assess the asset’s past behaviour under different market conditions.

In short, the short life of the industry is perhaps the biggest risk associated with the asset. However, with government interest and continued regulatory and legislative progress, as well as increased acceptance by new investors, we should see the volatility and risks associated with the asset reduced.

How to gain exposure to cryptocurrencies

There are several ways to invest in this ever-changing market. 

1. Buying cryptocurrencies directly

One of the most accessible ways to enter the market is to buy cryptocurrencies directly. By purchasing cryptocurrencies, the investor is essentially buying and owning a digital asset. This method gives you full control over your investment and you can store the cryptocurrencies in an e-wallet of your choice.

The main advantage of doing this is to benefit directly from the rising value of cryptocurrencies. However, it is important to be aware of the extreme volatility that characterises this market. Investors must therefore monitor market fluctuations and be prepared to act quickly if necessary.

2. Buying ETFs on indices that track cryptocurrencies

Exchange Traded Funds (ETFs) are an alternative for investors who want to offload the responsibility of managing digital portfolios while maintaining exposure to the cryptocurrency market. These ETFs can replicate the behaviour of one or more cryptocurrencies in a collective capital format, and the investor is exposed through investment units in these ETFs without directly owning the assets. Because they are traded on traditional stock exchanges such as the NYSE or LSE, they offer greater regulatory certainty. They are also managed by professionals. In the case of ETFs that track a number of cryptocurrencies, they can offer investors a diversification alternative.

3. Investing in funds/ETFs of companies exposed to cryptoassets

For those seeking a more conservative approach, investing in funds or ETFs that allocate capital to companies exposed to cryptoassets is a viable alternative. These products can include companies developing blockchain technology, as well as innovative start-ups in the sector, providing indirect exposure to the crypto market.

The main benefits are diversification and professional management. The investor benefits from the experience of the fund managers who actively or passively select the companies in which the fund invests. Investing in cryptocurrencies also tends to be less volatile than buying cryptocurrencies directly, as the fund tends to be diversified across multiple companies and sectors, diluting the impact of a falling crypto market.

4. Buying shares in cryptocurrency-related companies

Buying shares in companies directly involved in the cryptocurrency sector is another way to invest. Companies like Coinbase (one of the largest cryptocurrency exchanges), Riot Blockchain (focused on mining) and even technology giants like Nvidia, which supplies essential hardware for cryptocurrency mining, are examples of investment opportunities.

Investing in the shares of these companies allows investors to participate in the growth of the crypto industry without having to own cryptocurrencies. Listed companies are also subject to strict regulations and financial reporting, adding an extra layer of transparency.

5. Crypto FX 

Crypto FX are currency pairs that involve cryptocurrencies and fiat currencies, such as Bitcoin/Euro (BTC/EUR) or Ethereum/US Dollar (BTC/USD). In essence, it’s the cryptocurrency exchange market where you can trade based on your expectations of a cryptocurrency’s appreciation or depreciation against a traditional currency. 

This type of trading can be particularly attractive to those who are already familiar with the Forex market and want to explore new opportunities in the cryptocurrency world. However, as with any currency market, it is important to have a good understanding of timing and trends to avoid taking unnecessary risks.

Verdict: are cryptocurrencies worth it?

Investors in cryptocurrencies should carry out all due diligence that they would with any other type of investment. It is important not to get swept up in the hype that this or that currency is going to change the world, and to stay grounded.  

This means that it is possible to make very large profits by investing in cryptocurrencies, but this comes with a risk.

If investing in cryptocurrencies seems too risky, you may want to consider other less volatile alternatives. For example, you could buy shares in companies that invest in cryptocurrencies. Risk management is an integral part of the investment world, and Banco Carregosa excels in supporting informed and secure investment decisions.

Whatever you want to achieve, it is important to surround yourself with experienced and specialised professionals who have lived through the ups and downs of the market for decades, and who will guide you, taking into account your own risk profile. You can count on the Banco Carregosa team to help you choose the best strategy not only to protect your assets, but also to increase the value of your capital.