Investing is challenging, not only because of the risks involved but also the heavy decisions along the way. The most difficult decision of them is where to plough your money into. You have to carefully evaluate your options and weight their risks & rewards – which, let’s face, is an uphill task
You may have narrowed your options to relatively safer options like cryptocurrency, bonds or even precious metals but how do you proceed from here? Below we take an in-depth look at these options and help you decide where to inject your money.
Note that the information provided in this article does not constitute trading advice. It is merely a guide to help you discover all the pieces you need to make your decision.
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Bonds and Crypto?
The ultimate goal of investing is to get good returns but arriving there is the hardest part. As an investor, the aim is not to get a highly rewarding option. The aim is to get one with manageable risks that nonetheless guarantees a satisfactory reward. Let’s assess these two options independently.
Cryptocurrency
Cryptocurrencies are newer assets with the first crypto (Bitcoin) having surfaced slightly over a decade ago. Even so, they have a storied history that began with crypto as a virtual currency before transforming into an investment option.
Cryptos are infamous for their volatility despite being considered safe haven assets. Bitcoin is the most volatile (and highly rewarding) crypto as Bitcoin’s (BTC) price has exhibited wide fluctuations in the past. Majority of the cryptocurrencies have a scarcity element due to their capped total supply and this ideal for any investment option.
Bitcoin has a maximum supply of 21 million coins. Litecoin and Ripple have a maximum supply of 84 million and 100 pre-mined billion coins respectively. Only a few cryptos like Ethereum lack an upper limit in total supply.
Here are the reasons that make cryptos a good investment:
- They have high liquidity i.e. can be easily bought and sold through exchanges and other peer-to-peer platforms
- Cryptocurrencies have good returns that can be easily realized through long-term favourable forecasts
- They are still in their early stages and have the potential to grow
- They are backed by their nature of being scarce and very valuable
- Growing cryptocurrency adoption and support from governments and other renowned financial institutions
Trading cryptocurrencies has its risks. The most popular ones are:
- Some crypto coins are new and lack proven track records that can motivate investors to put their money in them
- Many cryptocurrencies and crypto exchanges are common targets for scammers, hackers, and fraudsters. In the past several institutions in the crypto space have suffered several major cyber-attacks and the crypto-related crimes.
- They are volatile and have massive fluctuations in their value that can result in heavy losses. For instance. Bitcoin rose to a high of almost $20,000 at the end of 2017 before plunging to a low of around $3,000 in a space of 12 months
Bonds
Although bonds have been around for longer, they are still confusing to many investors up to this day. Bonds are typically fixed income instruments where the issuer owes the holder a debt and is required to pay the holder interest. Bonds sometimes allow the issuer to repay the principal at an agreed future later date called the maturity date.
The interest is often paid in intervals and as such, bonds represent loans made by an investor to a borrower. They can also be thought of as an IOU (I Owe You) between the holder i.e. lender and issuer i.e. borrower. The main types of bonds are municipal, treasury, sovereign and corporate.
The most confusing element of bonds is usually bond prices and how they move. Currently, bond yields have slumped since the Federal Reserve System cut interest rates. One would expect falling yields to be a sign to move away from bonds but there is more to that.
Here is why. Falling bond yields translates to an increase in the price of existing bonds as those bonds pay higher interest. The higher interests are more desirable especially when current rates on new bonds decrease.
Some of the reasons why bonds are good investment include:
- Bonds offer fixed income which is crucial when you want to hit your income targets even in difficult situations
- Bonds can be used to rebalance in a diversified portfolio
- They also have tax benefits. Municipal bonds, for instance, are tax-free at the federal level whereas those from US Treasuries are tax-free on state and local levels
- Bonds provide stability to investors that need to spend their portfolio for purchases and other expenses
- Bonds protect against deflation even though they carry a risk of inflation. Inflations make bond income lesser with time and deflation makes the bonds worth more. This explains why bonds perform well during a recession.
The downsides of investing in bonds include:
- Rising interest rates that generally make bond prices dip
- Credit risk where issuers are forced to default on their repayment requirements when they experience cash-flow problems
- Market volatility that affects individual bonds’ prices
So, which way to go?
There’s no clear-cut good or bad investment choice between bonds and cryptocurrency. There is only a right choice that depends on individual preference, risk tolerance, and the investment environment. Some bonds carry more risk and usually pay higher so it’s good to always know the specifics of all bonds. Similarly, some cryptocurrencies have more volatility than others which can be leveraged to bring good returns.
You can alternatively choose to bet your bottom dollar on haven metals like gold and silver that outperform many other assets. Gold in particular is a standard safe and proven asset that you can bank on. Precious metals have the scarcity element and perform relatively well in recession due to their stability.
