S’pore ADDX trading platform on the part of your portfolio that should be dedicated to crypto, NFTs

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Cryptocurrency has proven its appeal for those looking to test their risk appetite. Armed with the potential for high gains (or losses), the space has made it extremely easy for new users to get started.

Unlike traditional investments, which are cordoned off by gatekeepers – requiring all sorts of KYC checks and proof of income – crypto invites everyone to participate. Today, buying Bitcoin is as easy as buying coffee at Starbucks; all it takes is a credit card.

This ease of access has certainly played a role in the growing popularity of crypto. Between 2018 and 2021, the crypto user base grew by over 500% and now stands at over 220 million people.

“A growing number of investors – both individual and institutional – are open to some exposure to crypto in their portfolios,” says Darius Liu, group strategy director at Singaporean digital security exchange ADDX.

That being said, just because you can investing in crypto does not necessarily mean that you should. Here are some key considerations to make when diversifying your portfolio.

Consider your risks first

After reading the headlines of crypto millionaires overnight, it can be tempting to buy the first coin you come across. It would not be so much an investment as it would be a gamble.

Investors should be well informed about the risks involved in the crypto market before investing money. Price volatility continues to be a risk factor, even as crypto stabilizes as an asset class, and the investment world wonders how best to value crypto. assets.

There are also security risks. We read the headlines about security breaches on crypto platforms that led to major losses.

– Darius Liu, Group Strategy Director of ADDX

Due diligence is crucial in this space, even more so now with over 10,000 cryptocurrencies in existence. Every day new pieces promise the world – often with no plan of action but to tweet at Elon Musk and hope he makes them go viral.

“New investors need to understand the value proposition of any coin they wish to trade, as well as the platform they are trading on,” Liu says.

Choose an investment

For new investors, following the lead of professionals can be one of the safest options. This usually involves buying large-cap coins such as Bitcoin and Ethereum, which are well-established and traded by institutional investors.

Investors, especially retail investors, should not invest more than they are prepared to lose, and never at the expense of other financial needs.

– Darius Liu, Group Strategy Director of ADDX

It is also possible to gain exposure to these coins by investing in funds.

“To give just one example, the ADDX-listed TCM Digital Asset Fund offers investors access to an underlying fund that has a portfolio with positions in Bitcoin and Ethereum, as well as allocations in seven other coins,” explains Liu.

Another popular choice are stablecoins such as Tether and USDC, which are also among the top cryptocurrencies by market capitalization. These have their value pegged to the US dollar, but currently offer much higher interest rates than banks on fiat currency.

While they can be relatively safe crypto investments, stablecoins also come with risks.

Darius Liu is the Group Strategy Director of ADDX, a blockchain-based digital stock exchange regulated by the Monetary Authority of Singapore / Image Credit: Darius Liu

The risk associated with stablecoins stems from the opacity as to whether they are properly backed by fiat currency assets. If many people redeem their stablecoins at the same time, will the system be able to cope with these redemptions?

How can we be sure that stablecoins that claim to be fully backed by underlying fiat reserves are actually backed as they claim?

– Darius Liu, Group Strategy Director of ADDX

In 2019, Tether claimed that each of its tokens was backed by $1 held in traditional reserves. However, soon after, it was revealed that the reserves were not entirely made up of cash. They also included less liquid instruments such as loans receivable.

The importance of diversification

For those with access to traditional markets, the need to diversify into crypto may not be obvious. After all, if they want to increase their risk appetite, they can turn to instruments such as stock options or futures.

In such a scenario, the incentive to buy crypto might not come from its high earning potential, but rather from the protection it offers against traditional market cycles.

“Diversification helps increase the robustness of a portfolio in different market scenarios, as the assets in the portfolio are not highly correlated to each other,” Liu explains.

“What’s important is that investors have a good understanding of what they’re buying and that they build a diversified portfolio across different assets – public stocks, private market stocks, bonds, real estate and cryptocurrencies – and demonstrate resilience through market cycles.”

The emergence of NFTs

Over the past year and a half, crypto users have also started exploring the investment potential of NFTs.

Some projects operate on revenue sharing models and offer passive income to NFT holders. Some are enduringly backed by established brands, while others share an eerie resemblance to Ponzi schemes.

Liu believes there is still some time before the market better understands the underlying value of NFTs. “It’s unclear whether they’re established enough to be considered a mainstream investment. They’re still relatively new and not yet well understood by many investors.

For those buying NFTs, it might be best not to treat them as investments at this time.

“The average NFT buyer should have other purposes in mind than investment. For example, one may buy an NFT to enjoy it as a work of art in a personal collection, to show support for cause or to a particular artist, or as a membership token for exclusive access to events and content,” says Liu.

“This ensures that even if the price of the NFT does not appreciate, the fundamental reason you bought the NFT remains valid.”

Featured Image Credit: ADDX

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