Top five reasons why cryptocurrency could be a good buy

Until recently, I was also averse to buying any form of cryptocurrency especially as a form of investment. So if you are hesitating at the current moment, I totally understand. This is exactly why I thought I’ll write a post stating my top five reasons why cryptocurrency could be a good buy if you aren’t owning it already.

I really like Bitcoin. I own Bitcoins. It’s a store of value, a distributed ledger. It’s a great place to put assets, especially in places like Argentina with 40 percent inflation, where $1 today is worth 60 cents in a year, and a government’s currency does not hold value. It’s also a good investment vehicle if you have an appetite for risk. But it won’t be a currency until volatility slows down.

David Marcus (Former President PayPal)

Background :

Lately, experienced investors have taken the plunge or at least they have admitted that they are invested in cryptocurrency. One of the investors whose philosophy and books I admire a lot, Robert Kiyosaki has recently made such an admission in a recent video on his youtube channel. Over the past week, I have been listening to his book Rich Dad’s guide to investing. It’s an intriguing read, I highly recommend it. You can find it here.
Tesla had also invested 1.3 Billion dollars in Bitcoins. This caused an initial surge in its prices. The prices tanked later on when Elon Musk declared on Twitter that Tesla will not be using Bitcoins for its transactions.

Bitcoin and cryptocurrency, in general, are feared in the investor community because of their volatility in the short term. Here are my top five reasons why cryptocurrency could be a great buy.

It is a global currency like Gold or Silver:

There is no central body that owns cryptocurrencies per se. They are completely decentralized and are built on the premise that no one can be trusted. Thus all transactions are verified by entities in the network(this process is called mining) and we don’t have a bank or government overlooking the transactions. These entities (called miners) themselves have an incentive to verify the transactions because as a reward for their efforts, the system pays them new cryptocurrency. This is the only way new cryptocurrency can enter this financial system. The algorithm is set up such that the more currency is in “circulation”, the harder it becomes to mine more. Though this also makes the mined currency more valuable. I hope you see the uncanny resemblance between Gold mining and cryptocurrency mining.

Inflation has little to no effect on it:

If you read the quote at the starting of the post, this point is summarised well over there. You can read my earlier post on “Why you should start investing ?” to get an idea of how money saved keeps losing its value to inflation. Again, Governments and Central Banks can control inflation by their activities. Commodities like Gold and Bitcoin remain unscathed by these activities and thus ensure their value doesn’t reduce. The financial jargon for this is that such commodities act as a “hedge” against inflation.

Long term growth:

In the short term, we might see wild swings in the value of bitcoin. But in the long term, there is net positive growth in the value of both Bitcoin and Ethereum. You can find the chart below :

As you can see, if you ignore the sudden abnormal spikes in May 2014 & late 2020, 1 bitcoin was worth roughly 600 USD in May 2014, and in early 2020, it had already crossed 1000 USD. This is an absolute growth rate of 66.66% and a compounded growth rate of 8.88%(Typical deposits in India compound around 6-7 % on average).
Indian Rupees to Bitcoin values are similar as we can see here and the calculations should also be similar.

Interestingly, Gold on the other hand has risen from 44 USD to 55 USD in early 2020. This means a compounded growth rate of 3.47%. Similar to Bitcoin, I have ignored the spikes in mid to late 2020. You can find historical Gold prices here. As I mentioned earlier since these are global commodities, a price hike in the global market means a price hike in India too.

Weak relationship with the Stock market and the economy:

One of the reasons, Bitcoin & Ethereum(& Gold, the similarity to Gold never ends, eh!) should be bought is simply because there is a “weak correlation” between the local economy, the stock market, and cryptocurrency. What this means in simple terms is if for some reason, the market and the economy are going low, your money invested in Bitcoin might be going in the opposite direction. Thus, it might help you offset the losses to some extent and keep your money stable.

Trade and book profits in the short term:

The violent swings in prices of cryptocurrencies over a shorter duration of time make it ideal for buying at lower prices and selling it when the prices start going down. This has already happened in 2021 itself. The prices hit an all-time high in Feb 2021 only for it to go down in the later months. You can refer to the graph earlier in this post.

My Two Cents :

• Stick to popular cryptocurrencies in the space. Bitcoin has been around since 2009 and Ethereum has been in circulation since 2015. Stay away from obscure cryptocurrencies, if possible.
• The current prices of cryptocurrencies are very high, it would be prudent to hold off any buying activity until the prices improve. The prices are already dropping from the peak that was hit in Feb 2021.

I am sure you can come up with more reasons to invest your money in cryptocurrency, but according to me, these are my top five reasons why cryptocurrency could be a great buy for you in accordance with your financial journey.

Mandatory Disclosure: Please don’t consider this as investment advice. But use it as a starting point for your own research. It’s your money, please invest responsibly.