The collapse of the Lehman Brothers, unleashed a host of chaos with huge losses across equity and job markets. The global crisis of 2008 paved the way for several financial reforms, and demystified debates around financial markets. However, one of the key takeaways was — diversifying your investment is important for perseverance and long-term returns. Traditionally, investors have looked to equities, bonds and cash instruments as places to put their money with the expectation of generating returns. However rising volatility of the equity markets, extended periods of low interest rates and assets failing to offer intended results are driving investors, especially the long-term ones in deploying their funds in alternative assets.
The alternative asset class is therefore primarily defined as those that do not fall under the typical classes of financial assets, such as stocks, bonds and cash. While these assets can play a crucial part in improving portfolio returns when equity markets are under performing, through sufficient diversification they also reduce portfolio risks – reducing the potential negative impact of market shocks. This is more so since many of these alternative assets perform in ways that are low-correlated with traditional instruments like the stock market. Thus in case of a market crash, they tend to remain unaffected – adding a much needed insulation layer to portfolio diversification.
Cryptocurrencies have been one such investment class that has surged exponentially in terms of popularity in the last couple of years. The Supreme Court quashing the RBI order and lifting the banking ban on cryptocurrency in India has helped multiple start-ups in the space to gain ground in the country. Even during the ban, people continued to trade with the help of peer-to-peer (P2P) networks but the RBI’s approval is expected to act as a catalyst to the growth momentum. Besides, with the favourable court order multiple platforms in the space have now experienced a sharp rise in both its users and the trading volumes. Two key factors have been fuelling the trading volumes recently. Firstly many traders have now returned to the market after the SC decision and secondly, Indians staying back home with the ongoing pandemic are now finding time to trade on their devices.
What are cryptocurrencies?
Cryptocurrencies are a store of value that is powered by sets of code unique to each token. The transactional data of cryptocurrencies are immutable — meaning that the record of its movements cannot be changed/edited — and decentralized — meaning that the token is not controlled by a single entity, such as a central bank.
There are many different types of tokens with different use cases, ranging from payments, to private transactions, to stablecoins, to incentivizing a network of players. What gives cryptocurrencies their value are their use cases and the number of people trading a cryptocurrency, giving it demand and liquidity.