In about a decade, the blockchain industry has seen exponential growth. Today, there are more than 3,000 cryptocurrencies worth more than $300 billion. That is a bigger market value than IBM and Oracle, combined. At the same time, several countries have started exploring a transition from the modern currencies to digital currencies. For example, in Sweden, the central bank is creating a digital e-krona. In this analysis provided Invezz, we will look at some of the key reasons to invest in cryptocurrency assets in 2020.
Table of Contents
- Leading cryptocurrencies outperform the market
- Diversifying your portfolio
- Institutions are moving to digital assets
- Cryptocurrencies have survived the recession
- Low interest rates for longer
- Industry maturing
- Final thoughts
Leading cryptocurrencies outperform the market
Unknown to many is the fact that the leading digital assets tend to outperform the overall financial market. This year alone, Bitcoin has gained more than 45% of its value this year. In the same time, the S&P 500 and gold have risen by more than 4% and 25%, respectively. You can see the same trend when you look at longer periods. Therefore, owning the leading assets could be a good thing to give your portfolio a boost.
Diversifying your portfolio
A common rule of the thumb in investing is about having a diversified portfolio. This is the reason why some of the best-known investors own tens of companies in their portfolios. Digital assets are an excellent way to diversify the assets that you own. Indeed, as seen above, the currencies tend to outperform the broader market and other popular assets like precious metals and bonds.
However, digital assets are usually relatively volatile. It is not uncommon to see the price of Bitcoin and other assets rise and fall by more than 10% within a few days. Therefore, we recommend that you ensure that your portfolio is balanced. You can achieve this by having 60% of your investments in stocks, 20% in bonds, and the remaining 20% in precious metals and digital currencies.
Institutions are moving to digital assets
Another strong reason for investing in digital currencies is that big money has started flowing into the industry. Recently, a tech company known as MicroStrategy made news when it transferred a substantial amount of its assets to Bitcoin. Other companies have also started doing that.
At the same time, big American firms like Fidelity have also expressed their support for the currencies. The company now runs a big business that provides custody to large institutional investors. Other major companies like IBM have started to develop blockchain tools while CME is offering digital assets futures contracts.
Meanwhile, some of the best-known investors have started backing digital currencies. A few months ago, Paul Tudor Jones, a well-known hedge fund manager who predicted the financial crisis announced that he was moving 2% of his assets to digital assets.
Cryptocurrencies have survived the recession
A few years ago, a key concern among investors was whether the currencies can survive a major recession. They argued that the previous rally was in part because of the overall strength of the market. Today, digital assets have done well, even as the world goes through the worst economic crisis in decades. For example, Bitcoin and ethereum have gained by more than 120% and 265% since March, when the Covid-19 was declared a pandemic. Therefore, this means that there are high chances that they will do well even after the pandemic ends.
Low interest rates for longer
A key aspect about cryptocurrencies is that their growth is partly because of interest rates, especially in the United States. The low rates, coupled with other monetary policy tools, are mostly the reasons why cryptocurrencies have done well. Furthermore, with low rates, investors and retail investors are disincentivized to hold cash.
As such, with all major central banks pledging to keep rates low for longer, there is a likelihood that cryptocurrencies will continue doing well. In the United States, the Fed has signalled that it won’t raise rates for the next three years. In Europe and Asia, the European Central Bank (ECB) and the Bank of Japan (BoJ) have also sent that signal.
Buying cryptocurrencies is recommended because the industry is growing. Today, several companies in the industry have even gone public. For example, Huobi and Canaan are listed in Hong Kong while other service providers like Coinbase are worth billions of dollars. Also, as mentioned above, some large investors have also moved their assets to digital assets, which is a sign that the industry will continue to grow. At the same time, many regulators have started to support the industry. For example, in the US, the Office of Comptroller of Currency (OCC) is supporting the currencies.
Cryptocurrencies and the overall blockchain industry are changing the world. For example, Decentralised Finance (DeFi) is changing how the world of banking works. Similarly, currencies like Ripple are changing how companies and people send money abroad. Therefore, it makes sense to diversify your portfolio with some of these assets.