Elon Musk can shake things up, with just a tweet. You must have seen the recent doge-mania his tweets have created in the crypto space. On May 12, he had a change of heart when he tweeted about Tesla suspending vehicle purchases using the Bitcoin.
Is crypto investing a bubble or are there fundamental reasons behind it? And should you be investing in crypto in the first place?
A highly volatile asset as a currency?
We need to appreciate the fact that this is unlike other asset classes that are already established, verified and trusted by people. And we may need to start thinking about calling it an asset than a currency. Or, better still, crypto currency can be called a commodity, just as gold and silver are.
But can you trade your gold or silver coins to buy, say a laptop? No, you can’t, because they are not legal tender. Similarly, Bitcoin may or may not become a currency, but may remain an asset. Only time will tell. But in the meantime,
just as gold and silver prices rise or fall, a cryptocurrency’s price will also gyrate and will be tracked. What gold used to be for the older generation, cryptocurrency is for the new generation that believes in decentralisation.
Ok, but why is Bitcoin so volatile and speculative?
There are many reasons. Remember, unlike the global stock markets which work for a fixed time period, the crypto market never rests and works 24/7. To top it all, people across the world get on to these exchanges and trade. Imagine if our stock market is allowed to work 24/7 and find similar interest from people across the globe. Won't it also become highly volatile and speculative at times? A Bitcoin’s value comes from its scarcity, like gold.
So can I invest in it as a substitute for gold?
No. And especially not before you understand the pros and cons of investing in cryptocurrencies and whether they have the potential to surpass gold or any other asset class for that matter. In fact, this is a good time to start learning about it and know the reasons for major corporations embracing them, which further boosts its acceptability. You never invest your money blindly in any asset class. Similarly, you should not invest in any crypto before you verify it.
But Elon Musk’s tweet has shaken my confidence
If one tweet shakes your confidence, then your investment thesis is on a shaky wicket. Elon Musk’s flirting with cryptos should not impact your romance with them if you believe in them. One tweet from Warren Buffett or Rakeh Jhunjhunwala can make any stock dance to their tunes. Also factor this, Bitcoin commands the sixth largest market cap, ahead of Facebook, Walmart or Tesla.
Ok, so you are saying I should invest in cryptos!
No, I didn’t say that. In fact, what an investor needs to remember is his or her asset allocation and risk profile, because the basic principle remains the same. If you understand this space, your risk profile allows you to invest may be as low as 1-2 percent of your savings. You must not invest out of the fear-of-missing-out (FOMO) syndrome, but only after doing due diligence. Don’t rush. Start investing only once its regulatory picture is clear. The finance minister has said that the government would take a calibrated view on the crypto.Source : www.moneycontrol.com...