Dubai: Investors who are exposed to traditional investment avenues such as deposits and mutual funds have been looking to get a slice of the crypto cake, but without taking on the high risk that comes with it.
With an industry-wide push to make cryptocurrencies mainstream, brokerages worldwide have been looking to market new digital products as investment options, with most of them linked to crypto.
These products are evidently making investing in cryptocurrency a lot easier. Here we discuss one such new-fangled crypto scheme in detail – Crypto Deposits.
What are Crypto Deposits and how do they work?
In September, global crypto exchange Coinbase was the first to announce that its users will soon be able to set up direct deposit with any percentage of their income and can choose for the money to be deposited as cash or any of the more than 100 cryptocurrencies available at the exchange, with no fees.
One obvious method to convert any cryptocurrency into cash is through an exchange or a broker, this is quite similar to the currency exchange system at airports of a foreign country. You deposit your cryptocurrency into an exchange, and request a withdrawal in the currency of your choice.
But like you would do for your hard-earned money, you can keep your money in the form of cryptocurrencies at the exchange, as your crypto assets grow in value over time. In principal, it works the same way as fixed deposits wherein you lock-in your money at the bank for a fixed period of time.
How did Crypto Deposits come about? What are the perks?
The idea for the direct deposit came from users who said that making frequent transfers was inconvenient and time-consuming. With direct deposit, customers can more easily access the exchange’s crypto financial services and be ready for any trade or purchase.
One prominent advantage to this is that you are being paid in cryptocurrency, or receiving a portion of pay in the asset. This is essentially for those regular crypto traders who benefit from being paid in digital assets.
This will allow people to put more of their money more easily into cryptocurrencies, and whether it is right or wrong for them is really determined by user and their preferences when it comes to money.
Some cryptocurrency experts opine that the direct deposit feature will help some investors treat cryptocurrency like a retirement plan, where they consistently put money into for a long-term investment.
It especially makes sense for those looking to benefit from cost averaging, an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of an asset in an effort to reduce the impact of volatility on the overall purchase.
On the other hand, it will also be helpful for people who actively transact in cryptocurrencies, as they won’t have to make the extra step of depositing their money into their crypto exchange accounts to make purchases or pay bills with the coins.
What are the risks to keep in mind? Areas to be cautious on
Most matter experts will agree that converting your entire salary and being paid only in cryptocurrency could be risky. Being paid in something that’s volatile may be extremely dangerous.
For example, if you get paid Dh20,000 in Bitcoin and then the cryptocurrency loses 20 per cent, a part of your salary is now worth only Dh16,000.
Let’s say you invest into this product for a 6-month period for a specific goal and the crypto price tanks, do you have a plan B to manage the goal amount?
Whenever you’re new to investing in cryptocurrency, financial planners often reiterate that you should take the time to do research on the asset and decide if it makes sense for you before signing up for it.
Interest on this cryptocurrency fixed income product is received in form of coins and not as a credit in your account. This means the interest will also be subject to the volatility cryptocurrencies have and unless you sell the holding, you are not making any real money.
Some platforms do not allow early liquidation or have limits on early withdrawal. You need to keep in mind that each crypto exchange platform has its own rules of interest calculation, lock-in period etc. Unlike bank fixed deposits, there are no standardised rules being followed.
Finally, locking in your money as a fixed deposit at a bank, versus having your money held in the form of digital assets that you buy at an exchange, are both entirely different – even if similar in principal.
Banking experts debate how this should not be viewed as a fixed deposit but rather as a lending product. This is because an investor who is holding cryptocurrencies can choose to sell the holding in return for what is reaped in so-called ‘interest’.
Verdict: If I do decide to accept the risks, is it worth investing in them?
If you do decide to put your money in crypto-related deposit schemes, you may be wondering what percentage of your money you should put aside.
However, it is recommended that you first reach a few financial milestones before putting money into volatile assets such as cryptocurrencies, like an individual retirement account. You should also have emergency savings on hand — experts recommend three to six months of expenses.
Then, financial experts generally advise investors interested in crypto to start with small amounts. This implies that you invest what you’re willing to lose, or a small portion of one’s income, but those who believe in cryptocurrency and have a higher risk tolerance may want to put in larger portions.
For some, that might be 5 per cent to 10 per cent of their investible assets, according to surveys. Others may want to invest even more, depending on their overall financial situation.
To answer the question as to which of the two investment avenues are better, it depends on what is your goal of investing. Most people keep their money in fixed deposits because it’s safe from market risks, but if safety is your goal, depositing your money as cryptocurrencies is not the solution.
If however, you are looking to diversify your investment portfolio and have been searching for alternate means to invest in order to spread your risks and exposure to different investment classes, history has proven that investing in cryptocurrencies does reap significant returns.
