Cryptocurrency has become an attractive instrument for investment, which is why many investors are interested in diversifying their investments. Unlike the conventional investment types like stocks and bonds, the cryptocurrencies have certain features that can help in the management of risks and returns.
1. Low Correlation with Traditional Assets: This paper seeks to identify the advantages of investing in cryptocurrencies as an asset class given their low correlation with other investments. Although stocks and bonds are usually correlated, cryptocurrencies can be quite volatile and operate independently of the stock market. It can also be useful in smoothing out the returns of the entire portfolio during periods of economic weakness.
2. High Growth Potential: Cryptocurrencies, especially Bitcoin and Ethereum, have been shown to have high price returns over the last ten years. Despite the fact that they are risky, they are an attractive investment for those who want to make a profit on the new technologies and tendencies in the blockchain.
3. Access to Innovative Technologies: Cryptocurrencies give you an opportunity to dive into new technologies and products such as DeFi and NFTs. These are new investment opportunities that are likely to produce high returns as they become more and more acceptable in the market.
4. Inflation Hedge: As the inflation risk increases, more investors treat cryptocurrencies as a store of value like gold. The fact that the supply of some of these cryptocurrencies is capped, for instance, Bitcoin, makes them attractive in the face of inflation.
5. Portfolio Flexibility: Cryptocurrencies are highly liquid and can be bought and sold on the various exchanges easily by the investors. This flexibility enables a change in the investment strategies in the market within a short time.
Therefore, adding cryptocurrency to an investment portfolio can help to diversify the portfolio, hedge risks, and tap into new financial products. But it is important that investors do not rush into this asset class, instead they should research and understand the risks involved.
