Are you ready to invest in crypto assets?

The famous phrase of the billionaire Warren Buffett, “I do not invest in things I do not know”, seems to be unknown in the current environment: Internet platforms, forums or social networks have been captivating more people without experience to invest in financial products. and crypto assets, however, the risks that are assumed are often unknown and the best decision is not always made to preserve capital or, better yet, achieve profitability.

This article does not intend in any case to go against or in favor of the new investment horizons and the possibilities of investing in bitcoin or related products, on the contrary, it is intended that the reader understand the three main differences between investing in traditional markets and crypto assets, in order to make financial decisions based on data and not on subjective information.

To start with the explanation, the first difference between traditional and crypto markets is that in the traditional world behind an investment there must always be an asset that can be calculated through financial valuation of its potential value. On the contrary, in the crypto world, financial valuation models do not work. The reason is that practically the previous valuation models are based on the financial statements and forecasts of the companies, or countries.

In practical terms, if a person invests in a share, they are buying a piece of a company, and they own the company, which gives them the right to vote and distribute profits. In these markets, the important thing is that when you buy the stock, you do an exercise similar to when you make an investment in a vehicle or a house. In the case of an investment, it is advisable to analyze, model and mathematically validate the performance of this investment and analyze in a technical and qualitative way the support of whoever offers us this investment opportunity.

For cryptocurrencies, it is very difficult to get to calculate such a numerical valuation, we simply do not have the data we need to make the proper valuations when it comes to investing in virtual currency and even if we did, the valuations would be fruitless since their possession does not give right to the assets of the company. Nobody really knows the true value of any cryptocurrency, it is an inherent risk in investment since to the extent that more companies or people believe in them, they can be valued, but if they begin to liquidate, the value begins to fall. It is true that the blockchain network exists, which is what protects the security of the currencies, and there are large companies that offer the trading platform and even have physical headquarters, but the fundamental principle of crypto assets is decentralization, that is why there is no who to claim in case of any fortuitous situation.

The second difference between traditional investments and cryptoactives are the platforms, commissions and hours for their trading, since in the capital markets, orders are received and executed during stock market hours, and generally in countries like Colombia where there is no progress. very strong technology for the purchase of shares there are some intermediary agents who receive the orders and take the operational part of the transactions to buy, liquidate and look for the custodian of said investments, and of course they charge commissions.

On the contrary, cryptocurrency exchanges (or exchange platforms) are open at all times, throughout the year (including holidays), and their transactions are made online, where with knowledge of virtual wallets and platforms you can negotiate without to pay; there are platforms with zero commissions and some that even offer negative commissions: that is, they can pay you to trade. However, almost all cryptocurrency exchanges charge withdrawal fees or fees for “converting” the virtual currency to dollars.

Now, in order for people who are not experts in virtual wallets, virtual exchanges and the technology behind it, structured financial products are booming in the traditional market based on the crypto world, which give confidence to the novice investors who do not want to be left behind in this trend, since they have exposure to the virtual but with the guarantee of the traditional, of course paying commissions and brokerage as we mentioned in point 2. These new products are, for example, the new Bitcoin ETF or multiple AMCs that have up to leverage, where they invest in the different virtual currencies (Bitcoin, Cardano, Ethereum, LiteCoin, Riple, etc.) and the companies that offer technological solutions in this market.

The third and last difference that I want to highlight is the volatility of these investments, because although cryptocurrencies have had exorbitant increases in profitability, in the last month the losses in their price have been more than 12%. It is estimated that the volatility of crypto is four times that of the stock markets (see graph), so in addition to understanding the product in which it is invested, it is necessary to understand the risk profile and even the type of personality of the investor, because traditional products are for very conservative profiles, but probably some crypto-assets, being much more volatile, can involve much more danger of loss, so they are not suitable for people with low risk tolerance.

The ideal is to invest in a way that we feel comfortable understanding the product in which it is invested, the risk that we are willing to assume and our objectives. If you do not have the ability to understand what you are investing in, it is better to seek advice from those who know. Whether it’s crypto or traditional, the decision is yours but hopefully not social media’s.

With the collaboration of Ana Vera, Chief Economist of In On Capital SA

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