In cryptocurrencies, investors are traditionally especially attracted by the opportunity to invest in a completely new type of investment, as well as the unique technology of cryptocurrencies and the opportunities it offers. In addition to this, cryptocurrencies can act as part of a diversified investment portfolio that reduces risk alongside traditional assets such as stocks and real estate. This text explains why buying cryptocurrencies could make sense from an investor's point of view and what the underlying factors are.
Cryptocurrencies - an excellent diversification target for your own portfolio
A carefully diversified and versatile investment portfolio is an excellent way to reduce investment-related risks. Several investment experts emphasize that the most important way to diversify investments is to diversify them into different asset classes. This is called portfolio allocation. Research has shown that asset allocation has a huge impact on portfolio return and risk.
Cryptocurrencies offer investors the opportunity to diversify their investment portfolio beyond traditional asset classes such as stocks and real estate. In recent years, cryptocurrencies have found their place in the investment portfolio of more and more investors. Cryptocurrencies, such as Bitcoin and Ethereum, offer investors the opportunity to diversify their own investment portfolio and seek diversification benefits outside the traditional markets.
Cryptocurrencies allow investors diversification benefits in many ways. First, as an asset class, cryptocurrencies are completely different from traditional forms of investment such as stocks and bonds. Including cryptocurrencies in the investment portfolio helps the investor to improve portfolio diversification and manage risk. Second, cryptocurrencies have very little correlation with other assets. This means that their value may not move in parallel with other asset classes. This helps the investor to even out the portfolio value fluctuation and increase the stability of the portfolio. Finally, cryptocurrencies have proven throughout their history to have the potential for high returns, and adding them to a portfolio can offer the opportunity to achieve higher returns over the long term. Diversifying into cryptocurrencies not only helps manage risks, but also supports achieving long-term investment returns.
Digitalization
Digitization refers to the transformation of traditional processes and services into digital form. Digitization affects the way we communicate, work and manage information. Its effects can be seen to be extensive and affect different areas of society. With digitization, more and more familiar things from our everyday life can be found in digital form.
Cryptocurrency, on the other hand, is a digital form of property based on cryptography. Cryptocurrencies are based on blockchain technology, so they are completely digital. Cryptocurrencies and digitization are inextricably linked, and this connection provides one reason why investing in cryptocurrencies can be attractive.
With digitization, money and property are increasingly being transferred to digital form. In the era of digitalization, cryptocurrencies offer a number of advantages compared to traditional money. Familiar concepts from cryptocurrencies, such as DeFi, Metaverse, NFT ja Web3, are exemplary examples of the innovations brought by digitization, in which cryptocurrencies play a central role.
Cryptocurrencies enable a decentralized and transparent way to transfer value, which in turn reduces dependence on the traditional banking system. They are also easily transferable regardless of geographical limitations, making them ideal for global transactions and payments in the age of digital financial systems. Cryptocurrencies can be considered one of the most central manifestations of digitalization, and their role will certainly not diminish as digitalization progresses.
The popularity of cryptocurrencies among young people
Cryptocurrencies have grown in popularity as a form of investment, especially among young people. In the background of this, it is possible to find several different factors, the most important of which are:
Technological understanding: Younger generations often have better technological understanding than older generations. The operating principles and technology of cryptocurrencies therefore do not cause difficulties for younger generations in the same way. Thanks to this, young people often find crypto investing more approachable than older generations.
Growing awareness: Thanks to the Internet and social media, young people are well aware of cryptocurrencies and their potential as a form of investment. They follow the news and discuss the topic with each other on different discussion platforms.
High return potential: Cryptocurrencies have offered many young investors the opportunity to make substantial returns in a short period of time. This, in turn, has naturally attracted more young people to crypto-currencies.
Ease and Availability: Buying and holding cryptocurrencies has become easier with mobile apps and numerous marketplaces. Starting crypto investing is almost always more affordable than stock investing, and young people can thus invest small amounts without large costs.
Distrust of traditional financial institutions: The financial crisis and distrust of traditional banks have made young people look for alternative forms of investment, of which cryptocurrencies are an excellent example.
Historical return of cryptocurrencies
Compared to any other investment, the historical returns of cryptocurrencies have been extremely comparable. Something about this is said by the fact that Bitcoin, the largest cryptocurrency by market value, was by far the most profitable investment target of the last decade, measured by all metrics.
Although the price of bitcoin has fluctuated greatly in history, in the long term owning it has proven to be significantly more profitable than other popular investments. An excellent example of this are the following statistics:
Average annual returns of asset classes 2011-2023 (October):
The attractiveness of cryptocurrencies as an investment target is also supported by their risk-return ratio. Although cryptocurrencies can be highly volatile, their potential returns have proven to be very attractive.
The exceptional historical returns offered by cryptocurrencies are also related to cryptocurrencies' technological innovations and ability to revolutionize traditional financial systems. Over the years, investors have been enthusiastic about the possibilities of cryptocurrencies to offer diversification from traditional asset classes and act as inflation protection.
One of the main reasons for the high historical returns of cryptocurrencies has been their growing acceptance and interest among investors. In addition, more and more institutions and private investors who previously operated in traditional markets have seen cryptocurrencies as a viable alternative investment target.
Remittances
Internationally, global remittances play a very large role in the economy of many different countries. Global remittances can make up a very large part of the gross national product (GDP) of developing countries and the funds available for consumption by the inhabitants of these countries. Today, it is common for families living in such states to have at least one family member who has moved to work in a higher standard of living state. This family member, in turn, sends part of his salary back to his family members living in his home country at regular intervals.
The importance of cryptocurrencies in global money transfers has grown considerably in recent years. There are several different factors behind the growing popularity of cryptocurrencies, the most important of which are explained below.
One of the biggest reasons for the increased popularity of cryptocurrencies in global remittances is definitely their higher speed and efficiency than traditional methods. The use of cryptocurrencies in global remittances enables faster and cheaper remittances compared to traditional bank transfers or other methods that require intermediaries. This is especially useful in situations where a quick money transfer is necessary. Such are, for example, various emergency situations or transactions between companies.
Cryptocurrencies are also significantly different from traditional currencies in that it is possible for people to store and transfer them to each other without any intermediaries. This can be considered extremely important, especially in areas where access to banking services is very limited. Thanks to cryptocurrencies, storing and transferring wealth only requires a working internet connection and a smartphone.
One of the biggest advantages offered by cryptocurrencies compared to traditional currencies is their significantly lower transfer costs. Low transfer costs are important especially in situations where money transfers are carried out frequently or the cost share of the amount to be sent is unreasonably large. Traditional companies specializing in money transfers, such as Western Union, can charge a slice of more than ten percent for a money transfer. In addition, the transfer of money can take several days despite this. It goes without saying that cryptocurrencies offer a much more powerful alternative than this, the benefits of which are most emphasized especially among people living in developing countries.
The advantages of cryptocurrencies in global remittances are indisputable. Using cryptocurrencies in money transfers is faster and more cost-effective than traditional methods. Thanks to this, the use of cryptocurrencies in money transfers will probably increase in popularity in the future.
Inflation protection
When talking about inflation protection, one cannot ignore the largest cryptocurrency on the market, i.e. bitcoin. The original goal of Bitcoin's creator, Satoshi Nakamoto, was to make Bitcoin as immune to inflation as possible. The main reason for Bitcoin's ability to resist inflation is related to its predefined monetary policy. The maximum number of bitcoins is set at 21 million bitcoins, which automatically means that, unlike traditional fiat currencies, it is not possible to create infinitely more bitcoins. Unlike traditional fiat currencies, Bitcoin is also not under the control of any single entity, such as a central bank.
New bitcoins enter circulation whenever a new block is mined. A new block is mined every 10 minutes on average and the block reward is currently 6.25 bitcoins. Bitcoin's block reward is programmed to halve every 210,000 blocks. Typically, it has taken about four years for block rewards to halve.
Bitcoin halving is one of bitcoin's key anti-inflation features. Bitcoin's inflation rate is currently around 1.7% and the next time it will drop significantly will be the halving that will take place in the spring of 2024. With the next halving, Bitcoin's inflation rate will only be around 0.8%. With future halvings, Bitcoin's inflation will decrease to almost nothing.
Bitcoin's predefined and unchanging monetary policy make it an excellent inflation hedge, according to many experts. In other words, Bitcoin is able to retain its value significantly better than traditional fiat currencies, which central banks are able to print more of without limit. This attracts investors around the world to use bitcoin as a store of value.
Summary
Today, cryptocurrencies offer investors an excellent way to diversify their investment portfolio. The income potential of cryptocurrencies and their low correlation with other asset classes make them attractive investment targets. In particular, the historical return of the largest cryptocurrency on the market, bitcoin, is excellent compared to any other investment class. In addition to this, cryptocurrencies have also rapidly grown in popularity, especially among young investors. In addition, the practicality of cryptocurrencies in global money transfers and the opportunity to act at the forefront of the digital revolution make cryptocurrencies an attractive investment target now and in the future.
Mikko Soon Head of Private Banking Last updated: 10.11.2023 14:00
