Representative | Image:Freepik
Crypto portfolio consideration: As traditional currencies face the threat of devaluation due to rising inflation and excessive issuance of fiat currency, investors are contemplating whether now is the time to incorporate cryptocurrency into their investment portfolios.
The volatile nature of cryptocurrency assets is well-known, characterised by sharp fluctuations in value.
Inflation has become a pressing issue in numerous countries, including India, driven by government spending surpassing revenues and leading to an overabundance of fiat currency. This has raised concerns about currency devaluation. Additionally, geopolitical tensions have prompted some nations to explore alternative currencies for trade settlements, bypassing the US dollar (USD). Given these circumstances, should investors start diversifying into cryptocurrencies?
Arguments in favour of cryptocurrency
Cryptocurrencies are gaining favour partly due to the perceived weaknesses of traditional fiat currencies. Many currencies are at risk of devaluation due to rising inflation rates. For instance, the USD is under strain due to substantial government debt resulting from fiscal deficits, escalating government spending, and increasing private and consumer debt burdens.
Another factor contributing to the USD’s vulnerability is the trend of de-dollarisation. The freezing of Russian assets totalling $300 billion globally following the Ukraine conflict has spurred countries to seek alternatives to the USD for trade settlements. Although this movement is still in its infancy, it could weaken the USD and drive capital into alternative assets such as global real estate, equities, gold, and cryptocurrencies. Given the relatively smaller market size of cryptocurrencies, they could experience appreciation amidst this capital reallocation.
Challenges associated with cryptocurrencies
Despite their appeal, cryptocurrencies pose several challenges. They lack tangible underlying assets and exist solely in digital form, which may unsettle some investors. Moreover, their creation and governance mechanisms are complex and difficult to understand.
Cryptocurrencies exhibit extreme volatility, exposing investors to significant fluctuations and risks. Additionally, their decentralised nature poses challenges to government regulation and control, prompting authorities to view them as a threat to traditional monetary systems.
Furthermore, cryptocurrencies have been linked to illicit activities on the dark web, raising concerns about their legitimacy and ethical implications. Regulatory ambiguity adds another layer of risk, leaving investors with limited recourse in case of malfeasance or loss.
Considering Investment in Cryptocurrencies
Investing in a Spot Bitcoin ETF may address some of the challenges associated with cryptocurrencies. These ETFs, which track the price of Bitcoin directly, offer professional oversight and management by institutional investors, mitigating concerns regarding storage, password management, and liquidity.
Despite the risks and challenges, the evolving financial landscape suggests that cryptocurrencies could be worth considering for investment portfolios. Their independence from government control and immunity to devaluation resulting from excessive money creation make them an attractive diversification option. However, prudent risk management entails allocating only a small portion of one’s overall assets, such as 1 per cent to 3 per cent, to cryptocurrencies like Spot Bitcoin ETFs, with further considerations as other Spot ETFs become available.
