Cryptocurrency: It’s So Volatile, Protect Your Money by Including Less Risky Assets in Your Portfolio
Bitcoin has gained massive popularity in recent years among Indonesians, particularly the younger generation who are drawn in by the way the cryptocurrency can soar sky high in the blink of an eye. But, as recent events have demonstrated, the prices of the so-called “digital gold” can also plunge, causing many of its investors, including those in Indonesia, to suffer a huge loss.
One of the most recent global price nosedive bitcoin took happened in mid January, after South Korea hinted that it was planning to ban cryptocurrency trades. A few days later in Indonesia, bitcoin took another blow when the Central Bank issued a fresh warning against trading in virtual currencies, further dampening Indonesian investors’ confidence in the world’s most popular digital currency.
That weekend, the virtual coin markets were thrown into turmoil and the local bitcoin price skidded to as low as Rp186.6 million (US$13,977) on January 14, an almost 11% fall from its closing price of Rp209.4 million the day before. Prices rebounded on January 15 when the bitcoin closed at Rp 204 million, only to plummet again two days later to Rp138 million just as the Indonesian Central Bank started a crackdown on businesses in Bali that were conducting transactions using bitcoin.
Cryptocurrencies like the bitcoin are indeed a extremely volatile asset class. For speculative investors, the high risk might be worth taking; you could lose a lot, but there is also a chance to gain a lot. It is obvious, however, that the hype surrounding digital currencies has been fuelled mainly by the success stories of those who, one day in 2009, bought 5,000 BTC (bitcoin’s ticker symbol) on a whim for just under $30, forgot about it, and are now discovering that they are a millionaire.
But as one bitcoin investor who lost a big chunk of his investment during the market slump last week said, we only hear about those who are making a big profit out of bitcoin because people like to boast their achievement but will keep it to themselves when they fail. That’s why we rarely hear a cautionary tale for bitcoin.
A cautionary tale, nevertheless, is what every investor, beginner or seasoned, needs to hear. A wise investor always seeks to understand the risks associated with their investment and one way to do that is to learn about the different ways they could potentially lose money.
High Risk, High Return?
Many would agree that bitcoin is among the highest risk investments one can make. The risk-return trade off concept teaches us that in a high risk investment, there is a possibility of high returns and this is what the cryptocurrency’s exponents are promoting. The problem is, to gain extremely high returns from bitcoin, you have to buy and then sell it at the right time to get the most profit. Given bitcoin’s highly volatile nature, this is almost impossible to do.
In December last year, Mizuho, an Asian investment bank, calculated that bitcoin’s risk-adjusted return last year may have been as low as 3.1%. Not so appealing anymore now, is it?
This is not to say that you should get off the bitcoin bandwagon; every investor has their own risk tolerance level. But you might want to be careful not to put all your eggs in one basket. Diversify your portfolio by investing in less risky assets just in case that bitcoin investment don’t live up to your expectations.
For the former, you can always turn to MEKAR, where you can invest in small business loans and earn up to 16% per year with much less risks than bitcoin trading. In MEKAR, your initial investment is guaranteed. That means, unlike investing in cryptocurrencies, there is 0% chance that you might lose your money when you invest in MEKAR. So even if your bitcoin endeavour don’t go as smooth as you have planned it, you can rest assured that your money in MEKAR is safe and working for you while helping small business owners everywhere in Indonesia grow their ventures.