Global Economic Outlook (G.E.O)
For Crypto Traders, there was Warning before Disaster. Vol. 89. May 16, 2022
Dear readers, welcome to another edition of the Global Economic Outlook (G.E.O) - our weekly newsletter providing insights on the local and global economy. Today, we will discuss about the crash in the cryptocurrency market.
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For Crypto Traders, there was Warning before Disaster
When it comes to the world of investment, there are indeed a large array of assets and investors sometimes get confused about which is the best for them. There are the very popular ones like bonds, stocks and real estate and then there are others such as private equity, hedge funds, private credit and commodities which are not as popular because of the expertise required in making such investments. Then of course, there is cryptocurrency.
Investopedia defines Cryptocurrency as “a virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend”. One major defining characteristic of cryptocurrencies is that they are not controlled by governments or any central authority. This characteristic is one that has made it very attractive to many who believe that a decentralized system is the future. While this could be an issue in itself, our focus today is different.
The truth is that there is no general rule when it comes to investing, and any professional investment advisor will always seek to know the risk tolerance of an individual or corporate before giving out an advice on what will suit them. An investment might be attractive just on the basis of returns alone while others might be appealing for their ability to preserve the value of an asset. Whichever one it is, there is a risk-return trade-off when it comes to investing. In fact, the reason why some investments have high returns is because they have to offer a premium for the additional risk taken by investors.
The cryptocurrency market has been very volatile over the years and predicting the direction of movement has proved difficult. This is because it is not backed by economic fundamentals but by feelings. How else do you want to classify a market which runs on the belief that there will always be more buyers than sellers?
Surely, every market responds to information but when a simple tweet about someone’s thoughts leads to a wide swing in an investment, you really have to check if you are holding on to the right asset.
The Cryptocurrency market has lost more than $600 billion in value in the past week and many whose wealth are tied to it have suffered greatly. Bitcoin, the most popular cryptocurrency, is well below $30,000 and is still testing the lower limits while others like Luna and Ethereum are not left out of the steep decline in value.
Given the volatility of the market and the lack of predictability thereof, the cryptocurrency market is one for those who have a high risk-tolerance. Even at that, it surely must not form a high proportion of your portfolio or you might risk losing all your investment. This is not a new warning but one we must reiterate again for those who choose to listen.
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Inflation has become a serious threat to purchasing power all over the world. In this video, we look at five practical ways to stay ahead.
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