Investing in Crypto can ‘hedge against inflation’ – tips from experts

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With UK inflation rates hitting record highs while base interest rates run low, many have been left considering other options to invest cash, as the value of savings continues to erode. Although it’s well known to be one of the more risky investment routes, crypto remains a popular option for many Britons hoping to see better returns.

Crypto is said to be a much more complex space and those looking to invest should be aware of just how the industry moves in order to make a decision on whether it’s right for them.

Naeem Aslam, chief market analyst at AvaTrade told “Cryptocurrencies are a different beast, known for being highly volatile assets.

“Having said that, crypto is also an asset class, which is difficult to compare with others due to its history of gigantic gains, making them an attractive prospect for retail investors.”

However, Mr Aslam continued: “Crypto has come a long way from its initial days, where both professional and retail investors perceived it as predominantly being a pump and dump scheme.”

The space has vastly changed since larger institutions, such as Blackrock, have started dabbling in it. But while the current turbulent economic climate stirs further financial uncertainty, is now a good time to invest in crypto?

Is Crypto a good investment route to take in today’s climate?

Sam Kopelman, UK country manager at Luno told “We know the market remains under pressure from macroeconomic factors, such as inflation and the looming recession, but cryptocurrencies aren’t that different to the stock market.

“Investors are still vulnerable to the same shocks, and history has shown us that these markets tend to recover after short-term fluctuations.”

He continued: “Crypto has the potential to elevate people financially, and as it matures, it will emerge as an essential part of a balanced long-term investment strategy. For example, Bitcoin is scarce and the cryptocurrency is limited to a quantity of 21 million.

“As a result, it has gained significant popularity as a hedge against inflation. While much of the hype and attention around cryptocurrency has focused on trading and short-term gains, it actually distracts from the real rewards for individuals and society that come when you look at crypto for its long-term investment potential.”

However, while the number of active cryptocurrencies continues to increase, it remains continuously difficult for experts to outline the full level of risk.

Mr Kopelman said: “The number of active cryptocurrencies doubled from early 2021 to early 2022 and continues to grow every year.

“This makes it nearly impossible for people to maintain a true understanding of the risks and benefits of each digital currency. Our research revealed that only 16.9 percent of investors who have bought crypto “fully understand” the value and long-term potential of cryptocurrency.”

Paddy Osborn, Academic Dean and managing director of the London Academy of Trading (LAT) weighed in: “[Crypto] is a very speculative market since it’s difficult for even the most experienced investors to attribute a true value to a cryptocurrency.

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“Unlike a company share price, which is directly related to the company’s profits and performance, cryptocurrencies are basically worth whatever the market will pay for it.

“As an example, in November 2021, investors loved Bitcoin and were prepared to pay nearly $70,000 per coin, but by June this year, the price had fallen by 75 percent – without any significant change in the underlying fundamentals of the industry.”

So, Mr Kopelman advised: “In order for people to responsibly invest in crypto, it’s imperative that they understand what they are investing in.

“Promises of sky-high returns and low fees should be a big red flag – if it sounds too good to be true, then it probably is.

“False guarantees that you ‘can’t lose money’ or feeling pressured by a sense of urgency that you ‘must invest now’ both indicate you are being led into a scam.

“Investors should always check that they can verify the information of the company and owner before making a transfer; only dealing with reputable, registered companies that only list cryptocurrencies that have a clear track record and can be considered as a long-term investment.”

Where to start?

Investing in Crypto is also more complex than buying shares or other traditional assets, according to Mr Osborne.

He said: “The first step is to select a broker or Crypto exchange to enable you to buy your cryptocurrency. Brokers can make the buying process easier, but the cost of using a broker is usually quite high – either through direct fees or by executing your trades at a more expensive price.

“Crypto exchanges such as Binance or Coinbase provide platforms where buyers and sellers can trade cryptocurrencies. Some exchanges only allow you to buy Crypto using other Crypto, so make sure the broker allows you to buy Crypto using pounds or dollars (called FIAT currency).”

Mr Kopelman said: “You don’t need to make one large investment to get started, but can rather build and grow your investment over time through smaller amounts.

“Just as you make contributions to your retirement fund, you can make contributions to your crypto investment on a weekly, monthly or quarterly basis.”

However, before any Crypto is purchased, Mr Osborne advised investors to figure out exactly where they plan to store them.

He said: “You can store them with the broker, but a more secure solution is to transfer them to a Crypto wallet. There are two types of wallets.

“Hot wallets, stored online, are useful, but there’s a risk that hackers could access and steal your Crypto investments, and cold wallets, separate hardware like a memory stick or USB, which cannot ever be hacked – just make sure never to lose it!

“When you come to sell your Crypto and convert it back to FIAT currency, some wallets don’t allow you to directly convert crypto into pounds or dollars, so you’ll need to execute this trade via an exchange – and everyone will take their slice of the pie on the way through. This can add up to maybe five percent of your investment, so beware.”

All-in-all, Mr Osborne said: “For beginner investors, I’d be more comfortable investing in the stock market than the Crypto market since the equity trading process is simpler, carries lower fees, and stock prices reflect the performance of more tangible assets that you can see and evaluate through traditional techniques.

“Crypto is altogether a more complex industry, with layers of fees from brokers and exchanges. That said, if you want to dip your toe into the Crypto market, I’d invest a safe amount that you’re prepared to potentially lose, and hold the position for many months in anticipation of another exciting speculative surge in the Crypto market.”

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