The economic crisis, sanctions, political instability, bank failures, devaluation risks – what should an ordinary investor do when a particular country faces serious financial problems? Is it true that cryptocurrency is a reliable defensive asset? Fintalk explains what you need to know before buying it.
Protective assets During recessions, crises and other economic upheavals, investors try to protect their savings from depreciation. Such a relatively safe haven for many financiers are conservative assets like precious metals, in particular gold and silver. With their help, they seek, if not to increase, then at least not to lose their hard-earned money. Although a lot of factors influence the market value of precious metals in our time (and not the fact that you will surely be able to save savings in them), the asset is still in demand in difficult times. Cryptocurrency bitcoin is in many ways similar to precious metals and is even considered “digital gold”. On the other hand, this is a rather complicated tool, so before you run out and buy bitcoin, you should understand some of its technical features.
Why is BTC in principle considered by someone as a defensive asset? The fact is that Bitcoin was originally created as a decentralized means of exchange between people. Exchange directly, bypassing banks, states and large companies.
The value of BTC is formed on the free market as a result of supply and demand. Therefore, neither central banks, nor other financial regulators, nor even big business can directly regulate the exchange rate (they can indirectly, by adopting different laws).
Another important feature of bitcoin is that its emission is programmatically limited to 21 million units. Simply put, in the future, 21 million will be mined (produced) and no more bitcoin. This was done on purpose to avoid such a phenomenon as inflation. Thus, the owners of the bitcoin are insured against depreciation, which is characteristic of ordinary paper (fiat) money. Volatility The main disadvantage (or rather, feature) of bitcoin is that, since the price for it is formed spontaneously as a result of supply and demand, the asset is quite volatile. Translated from the language of economists, this means that today you can buy 1 BTC for, say, $40,000, and tomorrow it will cost $30,000! In a week, it can grow by as much as 50% and cost all 60,000, and then collapse again for years to come.
But if the investor is still ready to take risks, there is something else you need to know before buying.
What you need to know before buying bitcoin
Due to the high volatility, NEVER buy cryptocurrency with your last money or money borrowed. Especially if you are not an expert. A loan always has a certain repayment period. If, after buying a crypto, the price of it goes down and this drawdown drags on, the investor runs the risk of selling it at a loss in order to at least partially pay off debts.
The same goes for buying with the last money. This cannot be done categorically, because unforeseen circumstances can arise in life at any moment, and if you get into a drawdown, you will have to close the position in the red. In short, if you buy cryptocurrency, you need to do it with relatively free money and be psychologically prepared to become a long-term investor.
And before buying, you should be puzzled by the issue of legislative regulation of the crypto market. In each country, the authorities set their own rules, and if in the same China the circulation of cryptocurrency is prohibited, then, for example, in El Salvador it is quite a legal means of payment. As for USA, everything is not so simple and unambiguous at the moment. On the one hand, quite recently the Central Bank of the USA advocated a complete ban on the circulation of cryptocurrencies, including their issuance. However, the Ministry of Finance spoke out against a complete ban, but for serious regulation of the industry. The government of the USA eventually supported the position of the Ministry of Finance and drew up a document on a “regulatory-restrictive regime” for cryptocurrencies.
With all this, cryptocurrency in USA is forbidden to be used as a means of payment. That is, in fact, for its intended purpose – being an instrument with the function of money, it is forbidden to use it as money. It also provides for liability for illegal trafficking. And further regulation provides for the identification of users …
What cryptocurrency to buy in a crisis
the whole crypt can be divided into several types:
- A “classic” cryptocurrency like bitcoin and its early forks (like litecoin). Decentralized and with limited emission. This also includes some super-anonymous coins. In the world of cryptocurrencies, Bitcoin has the largest capitalization, and investing in BTC is considered quite conservative. By the way, it is now growing in price against the background of the crisis.
- Memcoins. Yes, yes, these are the same dogecoin, shiba inu and many others. Very often, such coins are used in speculative schemes like pump and dump. Therefore, the volatility of individual meme tokens may be higher than that of the “classic” crypt. For short-term earnings (if you’re lucky) – a good option, but for long-term investments – risky.
- Cryptocurrency projects. Here we are talking not just about a means of payment, but about a whole ecosystem with a bunch of new technologies. The same ether can be attributed to this type. It uses smart contract technology and has a high network bandwidth. In short, to invest in such altcoins, you need to understand cryptocurrencies.
- Stablecoins. This is such a conditional cryptocurrency, which is provided by another financial asset. For example, the US dollar. The exchange rate of the well-known stablecoin USDT per dollar is 1 US dollar. fraudulent projects. Yes, yes, in the crypt, as elsewhere, there are scammers, they like to powder the brains of gullible people with clever words like “blockchain”, “decentralization”, “innovation”, “nanotechnology”. In fraudulent projects, you will not earn, but rather lose money.
Buying crypto: pros and cons
So, summing up, we can single out the following arguments for and against investing in cryptocurrency during an economic crisis (such, for example, as it is now):
- Cryptocurrency like bitcoin is decentralized, which means it is not controlled by banks and states. Its rate does not directly depend on the rates of national currencies.
- Cryptocurrency provides a technical possibility for exchange directly between users, which means that intermediaries in the form of the same banks are not needed.
- The same bitcoin has been growing in price for many years due to decentralization and limited emission. Limiting emissions is a way to fight inflation.
- If you store cryptocurrency correctly (for example, on a secure crypto wallet) and take precautions, it is quite difficult to steal or take it from the owner.
- Cryptocurrency is a rather volatile thing. The course can change literally at any moment. You can not invest the last or borrowed money. You need to be mentally prepared that the course will collapse for a long period. No guarantees, all at your own peril and risk.
- Bitcoin transactions are irreversible. This means that if you transfer bitcoins “to the wrong place”, you won’t be able to cancel the transfer.
- Before buying, you should properly prepare, study the issue and invest in reliable cryptocurrencies, avoiding scammers. Yes, and it is better to buy in proven and reliable places.
- Risks related to regulation. You need to know what to do with crypto is legal and what is illegal in the country where you are.