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Should you invest in cryptocurrencies? Pros and cons of digital currency
Bitcoin’s star is on the rise again a dark crypto winter, But investing in cryptocurrencies still presents risks, Northeast economic experts say.
This week, the price of Bitcoin, the main cryptocurrency, temporarily reached an all-time high of $72,000.
Bitcoin’s valuation surge came after UK regulators gave the green light to recognised investment exchanges to create a listed market segment for cryptocurrency-backed exchange-traded notes, or ETNs. cryptocurrency trading publication Coin Desk reported.
The move opens the door for investment firms and other institutions in the UK to invest in “crypto-trading products”.
The UK is following in the footsteps of US regulators, he explains Ravi Sarathyprofessor of international business and strategy at Northeastern University and author of “Enterprise Strategy for Blockchain.”
In January, the U.S. Securities and Exchange Commission Green light in first place Bitcoin Exchange Traded Funds (ETF). ETFs are a strictly regulated type of investment financing. Essentially, by purchasing a Bitcoin ETF, an investor has the potential to earn money as the price of Bitcoin rises without some of the technical and security challenges that come with purchasing cryptocurrencies directly.
“This year, the big news is that the SEC finally accepted Bitcoin ETFs, or exchange-traded funds,” Sarathy says. “Once the SEC was pushed to accept Bitcoin and said, ‘It’s OK to have an exchange traded fund,’ it became possible for large numbers of people to suddenly say, ‘Hey, I’ve heard of Bitcoin. Maybe now that it’s so easy, I should do it.’”
These spot Bitcoin ETFs have been listed on the Nasdaq Stock Market, the New York Stock Exchange and the Chicago Board Options Exchange.
The SEC news has strengthened the crypto industry’s upward trajectory, Sarathy says.
From January 1 to March 11, the price of Bitcoin rose from $42,625 to $72,000, a jump of 69%. However, the price of Bitcoin continues to fluctuate. As of March 12, the price of Bitcoin was $71,805.
“Bitcoin ETFs are a quick and easy way to buy and even sell,” says Sarathy. “I just need to go to the exchange where the Bitcoin ETF is traded. I don’t have to go through a digital wallet and public and private keys. There is some legitimacy created by the Bitcoin ETF. Now that it’s available, JP Morgan, Fidelity and others have launched ETFs.”
This is a stark contrast from 2022 and early 2023, when interest in cryptocurrencies was at an all-time low while the industry was embroiled in controversy. FTX, one of the largest cryptocurrency exchanges, collapsed and its founder and CEO, Sam Bankman Fried, he was arrested on criminal charges.
“The biggest thing last year was the collapse of FTX and it was essentially a fraud,” Sarathy says. “Huge numbers of people have lost a lot of money and have therefore been forced to sell some of their financial assets to meet their debts. There has been a general loss of confidence in the market.
“At the same time, interest rates were very high. They had risen to the highest levels for many many years. It was expensive to hold assets that didn’t produce any income or if you borrowed money to keep them on margin, it was expensive to hold them,” he adds.
Despite the growing interest in cryptocurrencies, William Dickensprofessor of economic and public policy from the Northeast, says there are still many risks associated with investing in digital currency.
Bitcoin and other forms of cryptocurrency are called non-productive assets, meaning they do not earn money on their own through productivity. Gold and silver are also non-productive assets. Company stocks, on the other hand, are known as productive assets because their price rises and falls in relation to the performance of a company.
It’s useful to have non-performing assets in an investment portfolio because they can be used to offset losses or gains, he says. Bitcoin and other cryptocurrencies, however, they make bad non-productive assets given their correlation to the stock market.
“Bitcoin is not up to par,” he says. “What you want in a non-producing asset is a hedge. You want something that moves in the opposite direction of the stock market, or at least doesn’t move with it as much as other stock assets do.
He adds: “Bitcoin has what’s called beta, which is a correlation with the S&P 500 of about the 4 point, which is pretty low, but gold is actually negative or very close to zero.”
Even from an environmental perspective, cryptocurrencies are not exceptional, he explains.
“Bitcoin is particularly bad in this sense,” he says. “The proliferation of Bitcoin miners is causing power grid problems in several places. This is now in the past, but for a time Bitcoin mining significantly increased the cost of high-performance computers because supply couldn’t keep up with demand.”
Sarathy agrees that investing in these cryptocurrencies comes with risks, including price volatility, cybersecurity issues and a lack of regulation compared to traditional currency.
Ultimately, it is up to each individual user to decide how much risk they want to take.
“If you’re young, recently married, buying a house and may have a child or two, maybe you don’t want to take the risk right now,” he says. “But if you’re in a position where you can afford to take some risk, most financial advisors will tell you to decide how much risk you want to take.”
“Of your total assets of 100, you might decide to take 10 to 15 or 20 to 30 or even half of these assets and say ‘I’m going to invest in these risky assets and the rest in these less risky assets,’” he adds.
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