The Bitcoin ETFs: An instrument to be reckoned with – Archyde

Just the fact that the crypto sphere is being hyped these days shows that the world is becoming increasingly digital. However, the mainstream view is still overwhelmingly associated with Bitcoin – the first and most popular cryptocurrency. While it is benign from a layman’s perspective to take such a stance, as an investor it is an opinion that limits insight and virtually empties the entire portfolio.

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With many investors starting to put funds into this asset class, this article could guide you through the basic knowledge of the crypto world. However, keep in mind that the market is decentralized and very volatile. Therefore, while the basic principles would apply regardless of the time frame, some valuations could deviate drastically over a period of time.

For real-time prices and market capitalization:

What is a blockchain? And what exactly is Decentralized Finance?

A majority of investors are still confused about the difference between blockchain technology and decentralized finance. Both terms are related, but differ in scope of application in the real world. Blockchain technology is a system that acts as a digital ledger to facilitate transactions that are distributed across a diverse network of computers. It is basically a system of digitally encrypting and recording information, which is duplicated across an expansive network: making it impossible to hack, alter or corrupt data while it is being processed or stored. The technology is widely used in logistics services and allows users to track their packages around the globe in real-time. The most famous implementation of blockchain technology is in Crypto Financial Services.

Colloquially referred to as “DeFi”, the decentralized finance sector spans a complex range of digital products: from cryptocurrencies to NFTs. DeFi incorporates a skeleton blockchain technology to run a colossal network of shared ledgers. Since there is no centralized authority to verify transactions and manage the supply, this financial sector uses complex algorithms to distribute the verification and storage process among the users themselves. Due to the large number of operands, manipulation of the system is almost impossible. This makes DeFi one of the game-changing changes in traditional financial services of the modern era.

Bitcoin is probably the best-known example of this vast field of decentralized finance and mass implementation of blockchain technology across countries.

What is Bitcoin? How is it different from blockchain?

Arguably the most common misconception among the new class of crypto enthusiasts is that both blockchain and bitcoin are the same. As mentioned, blockchain is the broader technology used by various industries. One such implementation in the financial industry (particularly the financial services industry) is bitcoin: a digital token exchanged as a medium of value over a system of shared ledgers called blocks. The encrypted token, created in the wake of the 2008 financial crisis by an anonymous company – under the pseudonym “Satoshi Nakamoto” – acts as a pseudo-currency with a free float rating. The value of Bitcoin is traded across a complex platform cohesively structured as a shared ledger system and is (by default) impossible to control and dictate.

Participants who verify the transactions — often referred to as “miners” — use sophisticated computer programs to solve complicated hash functions to add blocks of transactions to the Bitcoin blockchain. For this they receive a flat rate of 6.25 BTC. This mechanism of Proof of Work (PoW) is proven to be impenetrable to external influences due to this distributed functionality and the enormous expenditure of energy required to solve functions and add blocks of transaction data. However, it is prone to speculation, which ultimately fuels the volatility that investors fear. Many then ask themselves: Is it worth the risk?

Is It Really Risky to Invest in Bitcoin? How can this risk be avoided?

One fact is inherent in the word investment itself: the greater the uncertainty, the greater the reward. This quality is not specific to Bitcoin but to any risky asset in general. Take traditional investors for example. These risk-taking investors invest in junk bonds: to earn superior returns in exchange for the unpredictability of a potential default. However, what makes Bitcoin so unique is its on/off vacillation in the mainstream debate: making an appreciation in value as likely as a decline. When it first started trading in 2009, price fluctuations were limited as the launch was gradual and information was sparse in the early days. In recent years, however, both acceptance and information have skyrocketed. Bitcoin’s market cap surpassed $2 trillion in the past year, becoming the first non-corporate entity with such an unaffordable valuation. Governments have started adopting the coin as an official means of exchanging value. And even reputable investment banks and hedge funds offer services in digital tokens.

Despite slipping 40% from November’s all-time high of $69,000, bitcoin is currently trading at $42,000 support – still up nearly 500% since late 2019. So is it risky? Absolutely it is! It is a riskier store of value compared to other assets on the market: contrary to the popular notion of crypto fanatics. However, when comparing risk-adjusted returns, Bitcoin is outperforming other assets. For example, since September 2020, Bitcoin’s risk-adjusted return has more than doubled the performance of the S&P 500 index. Along the same stretch, government bonds have posted negative returns, while commodities have fared worse. The same trend holds true for several periods — whether it was early 2015 or early 2020 — where bitcoin has completely supplanted traditional investment flows.

However, the astronomical returns flowed to those investors who had weathered the massive drop before the appreciation. Whether it was the crash of 2017 – when Bitcoin plummeted by 80%. Or the slump of 2021 – when China’s mining crackdown caused billions of dollars in liquidity shortages to shut down the market.

In short, it’s the scheme of time, temperament, and a thrill for greater risk that keeps the bets alive. Therefore, for higher yields, a temporary loss should dictate long positions rather than disposals.

So what is the optimal strategy to invest in the crypto sphere? And when should it be implemented?

The year 2021 was the most unstable year for the crypto world. Non-Fungible Tokens (NFTs) saw a surge in popularity, while a number of cryptocurrencies lost more than half of their rating before skyrocketing. However, 2022 will change the dynamics on a larger scale. As the Federal Reserve prepares for its hawkish stance with talks of tapering and rate hikes, the valuation of cryptocurrencies – particularly Bitcoin – is expected to decline in the coming months. According to crypto gurus, cryptocurrencies would remain under pressure as the Fed reduces its liquidity injections. As regulations are tightened by the SEC, popularity could suffer as well.

So my advice is to wait and see 2022 as Bitcoin would likely end 2022 below $20,000. However, if your investment is geared toward the broader world of cryptocurrencies in general, my advice would differ. My approach would be to include bitcoin but diversify your allocations. My advice would be to allocate weighted portions of your portfolio to similar tokens like Ethereum and Solana. While these tokens move in line with Bitcoin price fluctuations, their operation in the investor community has not reached such meteoric proportions. Instead, their acceptance has been limited compared to bitcoin. And as such, they offer more upside potential in terms of growth without sharp price swings. Ethereum, for example, is currently trading around $3,000 and is generally deviating within a $500-$1,000 window over the medium term.

If you’re looking for deep-rooted diversification, I recommend some metaverse allocation: more tied to the revolutionary side of NFTs. Purchasable tokens like Sandbox (SAND) and Decentraland (MANA) would serve as a lucrative option in the portfolio. These NFTs are available on most crypto platforms and have offered high returns over a long period of time. Furthermore, alongside a variety of cryptocurrencies (appropriately weighted), these could also serve as a hedge for bitcoin bets due to high liquidity and profitability: making the portfolio optimal in terms of longer-term technical bets.

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Ultimately, as an investor beginning to invest in these asset classes, you must have a long-term approach, an appetite for risk over an extended period of time, and a keen eye for market regulations and announcements in order to reap meaningful profits. Remember that there is no magic or free lunch in investing. Offerings have been renewed, platforms have gone digital, but the basics are the same – patience and diversification.

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