Investing Pros and Cons

In late 2010, I was a professor and coordinator of an undergraduate course in economics when a student came to me asking for help writing his graduation thesis on cryptocurrencies.

His difficulties were the same as those faced by the subject matter of his research: little information/bibliography, a lot of prejudice towards novelty and great uncertainties regarding results. As a researcher and promoter of innovation, I allied myself with that student and we started to dedicate ourselves to breaking new ground.

Last month, in May 2022, we celebrated Pizza Bitcoin Day. 12 years ago, in 2010, the first commercial transaction using digital currency took place. Laszlo Hanyecz paid 10,000 bitcoins (BTC), about $41, for two large pizzas. On second thought, maybe that was my then student’s motivation!

From there, crypto-assets were gaining ground and becoming the basis of the new online economy. Here, users make decisions, invest and interact without geographic or intermediation limits.

Statistically, 12 years of observations already constitute a more robust scientific basis. Here, I present a portrait of the evolution of the value of bitcoin, the first digital currency, converted into dollars and reais (source: Bitcoin and Brazilian real exchange rate history):

  • In May/2010, 1 BTC was worth US$0.0041 and R$0.0074
  • In May/2015, 1 BTC was worth US$243 and R$746
  • In May/2020, 1 BTC was worth US$9,337 and R$54,954
  • In May/2021, 1 BTC was worth US$50,759 and R$246,704
  • In May/2022, 1 BTC was worth US$ 28,136 and R$ 152,140
  • In June/2022, 1 BTC was worth US$25,644 and R$141,426

Analyzing period by period, it is clear that the value of bitcoin grew dramatically until 2021. However, in 2022 the value began to fall significantly compared to the previous year. A simplistic analysis would end here by stating that the currency is on a downward trend.

However, in the investment world there are some mantras, among which I highlight three: “Past profitability is no guarantee of future profitability”, “The longer the investment time, the greater the potential for profitability” and “Diversification is always the best option” . These three mantras are in the picture of the evolution of bitcoin’s value.

If we consider the entire period of bitcoin, from its emergence to June 2022, its value has grown almost 200 times. In other words, those who invested in bitcoin in 2010 must be super happy today, because their R$ 0.007 became more than R$ 140 thousand!

Some may be thinking: but you lost more than R$ 100 thousand in the last year. From my point of view, I wish I had had that loss because it means I would still have BRL 41,000! But I’m not foolish enough to turn a blind eye to this fall.

Balancing the pros and cons, the main advantages of cryptocurrencies are security and privacy, given that it is practically impossible to falsify them and that the information is recorded on the blockchain, not in some financial institution. Also, being the currency of the new online economy, the trend is for sharp growth.

Among the cons, this type of currency does not have stability in the short and medium term, however, in the long term it is among the assets with the greatest potential for profitability.

This is where the third mantra comes in: Diversification is always the best option. By investing in different products, you protect yourself, as an eventual loss in one product is offset by a gain in another. One way to diversify investments relying on the knowledge of market experts is to invest in recommended portfolios that combine different products.

How to invest in cryptocurrencies

Investors can invest in specific segments of the crypto market, such as decentralized finance (DeFi), blockchain application platforms or even publicly traded companies operating in the crypto market (source: www.hashdex.com).

It is possible to invest in crypto through brokers or via regulated investment products, such as crypto investment funds and crypto Exchange Traded Funds (ETFs), which are funds traded on the B3, the Brazilian Stock Exchange.

As for my student, he became an excellent professional in the capital markets, very successful in his career. The student surpassed the master… and I am very proud of his history.

Want to know if investing in cryptocurrencies is for you? Understand what are the main trends in this market? Keep an eye out for next week’s column.

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