Making the right financial provisions is important. Younger generations in particular need to look at investing money and building wealth. In addition to fixed-interest investments, shares or real estate, cryptocurrencies are playing an increasingly important role in investment decisions.
Anyone who wants to build up assets must also observe some principles in the coming year. Particularly in times of zero interest rates, a sound financial knowledge is simply indispensable. However, investors who stick to the basic principles of investing money and invest a proportion of their assets in assets should enjoy good returns in the long term.
But while stocks and real estate are trading at peak prices despite the current economic crisis, investors should also consider new asset classes such as cryptocurrencies in their investment decisions.
The year 2020 in particular showed that decentralized approaches to finance can have a certain charm. Decentralized Finance (DeFi), for example, has seen a lot of hype. With DeFi, investors can generate interesting returns even in low-interest-rate periods.
Hype around Bitcoin puts cryptocurrencies in the spotlight
But before we get into whether investors should also buy cryptocurrencies such as Bitcoin or Ethereum for better diversification in their portfolios, let’s take a quick look at how the market has developed in recent months.
As recently as March, in the midst of the Corona crash, most digital currencies declined in value by more than 50 percent. For example, Bitcoin (BTC), the leading cryptocurrency, was trading at less than $4,000 between then and now. Currently, BTC is well on its way to replacing the former record of just under 20,000 US dollars.
However, there are also numerous interesting projects besides Bitcoin that offer a real use case for the economy. Bitcoin is generally considered more of a store of value and is referred to as digital gold in the crypto industry. In the whitepaper, Bitcoin was defined as the antithesis of traditional finance.
In contrast, Ethereum is the blockchain known for its programmable contracts. This allows users to automate entire business processes using blockchain applications. Chainlink, another blockchain protocol, allows data to be imported from established systems into the blockchain. This means that even large and established companies can benefit from the potential of smart contracts.
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Cryptocurrencies as a stake in a future trend
Basically, the use cases of blockchain applications can be compared to the business models of startups. Accordingly, an investment in a cryptocurrency, the native payment or governance unit of a blockchain, also means that an investor has confidence in the business model behind it.
Due to the low valuation with a comparatively high potential, cryptocurrencies are also subject to a certain degree of fluctuation. Returns of more than 100 percent per year are possible – at the same time, however, the investment can lose its entire value. Here, a broad diversification over several projects is recommended to minimize the personal risk.
In addition, an overweighting of cryptocurrencies as an asset class is not recommended. Rather, investors should continue to focus on long-term wealth accumulation and not on maximum returns within the shortest possible time.
In addition, investors should also take some time. Blockchain technology as such is still in its infancy. Accordingly, it may take several years until numerous companies adapt this solution and use it on a broad scale. However, there are already some banks offering cryptocurrency-related services or simply support the purchase of such.
Conclusion: Cryptocurrencies and wealth creation are not opposites
Anyone who sees cryptocurrencies as nothing more than a short-term speculation should take a closer look at the topic. A sound financial knowledge also includes a critical analysis of several investment approaches. Of course, there are numerous investors who see cryptocurrencies as a means to get rich quickly.
A low weighting of cryptocurrencies in the portfolio increases one’s return potential and reduces the risk of a total loss. Accordingly, a closer analysis of cryptocurrencies and blockchain projects in 2021 is not the worst investment decision from an objective point of view.