Should you invest in crypto? Benefits and risks to consider before investing (2024)

The rising attraction of cryptocurrency worldwide has similarly impacted Indians as well. According to Nasscom, cryptocurrency investors have witnessed a significant 1,100% growth between 2022 and 2023. This remarkable transformation is evidence of heightened interest in the sphere by the Indian populace, but it comes with a critical question - should individuals who were not part of the recent cryptocurrency growth contemplate investing in cryptocurrencies?

Potential investors must research the potential advantages and disadvantages associated with cryptocurrency investment before deciding to jump into it. Some of these assets intrigue the investors based on the developers’ mission statement, whereas alternative investors favour postulating over price action and volatility of their preferred digital assets. Investing in cryptocurrencies is often intricate, but all of these assets are highly dissimilar in nature. Beginners must always be prepared to lose their capital, which can be avoided with appropriate prior analysis and due diligence.

What are the potential benefits of investing in crypto?

The first benefit of crypto investments that comes to mind is the significant growth potential. Bitcoin, the largest cryptocurrency globally, highlights this potential by its remarkable returns over the years. Investors must keep in mind that previous returns do not guarantee future returns, but in 2021, the value of Bitcoin soared well over 60%, demonstrating the possibility of serious returns. Meanwhile, in 2022 it plummeted by more than 70%. Since then, the value of Bitcoin has increased almost 49.2% to 2024. This highlights the inherent volatility associated with this particular asset class.

Cryptocurrencies are part of decentralised networks, meaning they often offer autonomy and enhanced transparency. Transactions of these assets are recorded on blockchains which promote confidence and decrease the dependency on conventional financial tools. Crypto transactions are also faster and often cheaper than traditional bank transfers, especially when used internationally. This is made possible since cryptocurrencies lack intermediaries and the fees associated with them. According to the World Bank, international transactions on average were an astonishing 6.3% in 2022, which demonstrates the economic nature of crypto in binational transactions.

Many investors also point out cryptocurrencies like Bitcoin as a promising hedge against inflation because of its finite supply of 21 million coins. Theoretically, this allows Bitcoin to be impervious to inflation, which can take the value of conventional currencies over certain periods.

What are the potential risks associated with cryptocurrencies?

Volatility is synonymous with cryptocurrencies and market fluctuations are common. The significant volatility is often unsettling for investors and holds the potential to register complete loss without meticulous supervision. Furthermore, cryptocurrencies often fall victim to hacking and cyberattacks that can hand a significant blow to investors’ aspirations. Cyberattacks resulted in the theft of $2 billion worth of cryptocurrencies in 2022 throughout the world, highlighting the safety issues correlated with these assets.

Virtual digital assets (VDA) like cryptocurrencies do not have legal frameworks that regulate them presently. However, governments around the world are currently working towards establishing a global framework. This unpredictability holds the potential to create difficulties for investors and it's pivotal to remain vigilant about developments regarding regulations and be ready for changes that can affect the market.

Another challenge associated with cryptocurrencies is their slow adoption and limited usage in the real world. In countries like India, individuals cannot use cryptocurrencies to purchase products, which reduces their value proposition in comparison with conventional asset classes.

Crucial factors to consider before crypto investment

Before deciding to invest in cryptocurrencies, investors must contemplate several things. Understanding their risk tolerance, investment goals, duration of their investment and knowledge in the domain are of paramount importance before investing in VDAs. The fact that cryptocurrencies are a comparatively new mode of investment and come with unique advantages and risks should be considered before being influenced by public opinion. The Indian cryptocurrency market has been flourishing, which means beginning at a modest position and cautiously expanding the portfolio enables investors to become competent and discover the market dynamics with ease.

(Attributed to Roshan Aslam, CO-Founder & CEO of GoSats)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)