Is now the time to invest in cryptocurrencies in Czechia?

No other form of investment brings the same thrill as cryptocurrencies. The Czech Republic is one of the world’s most crypto-friendly countries, with Prague ranked as one of the cities where virtual currencies can be used most freely. 

But amid an inflation crunch and facing an uncertain economic future, are cryptocurrencies too risky a solution for maintaining and growing the value of your money? We talked to Mads Eberhardt, an expert in cryptocurrency investments at Saxo Bank, and previously the founder of one of Denmark’s biggest crypto-brokers, to find out more.

What is a cryptocurrency?

Cryptocurrencies are digital or virtual commodities secured by cryptography, making them almost impossible to counterfeit or steal. They consist of decentralized networks constructed using blockchain technology, which uses a distributed database shared among the nodes of a computer network

If that’s all a bit too technological, the fundamental principle behind cryptocurrencies is that because the data from which they are built is shared, they aren’t owned or issued by any central authority. This makes them theoretically immune to government interference or manipulation.

The most popular and well-known cryptocurrency is Bitcoin, introduced to the world by an anonymous inventor in 2008, and made available to the public in 2009. Other major cryptocurrencies include Ethereum, Solana, and Ripple.

Can investing in cryptocurrencies bring high rewards?

It’s a principle of investing that the greater the volatility of the investment, the higher the potential gains. As a new and rapidly evolving phenomenon, crypto has gained a reputation for bringing dizzying rewards to risk-prone investors who happen to get things just right.

But for most investors looking to grow their money over an extended period of time, the extreme short-term rewards of cryptocurrencies shouldn’t be relied upon.

“For normal investors, there are hardly any advantages to relying on the volatility of crypto,” said Mads Eberhardt, cryptocurrency analyst at Saxo Bank. “Of course, high volatility is usually also related to high returns, but few can benefit from this financially in terms of trading the volatility.”

And while cryptocurrencies can bring strong gains, their volatility means they can also bring serious losses if not invested with professional care. Inexperienced investors will therefore find working with crypto a stressful business.

“The volatility can affect the mind quite a lot. For example, the sadness of being down by 20 percent often feels much worse than the joy of being up by an equal 20 percent,” says Eberhardt.

Is it possible to invest safely in cryptocurrencies?

Despite their volatility, cryptocurrencies can form a strong pillar of a wider long-term investment strategy. Saxo Bank, as a regulated and licensed bank, offers exchange-traded products (ETPs) which are exposed to cryptocurrencies and traded in the same way as stocks. But the experts warn that investing in crypto can be a gamble if done without significant care and expertise.

“It’s important to reiterate that the crypto market as a whole is extremely risky due to its speculative nature. However, in our view, a good rule of thumb is that the larger the market capitalization of a cryptocurrency, the less risky it is. Following this rule, Bitcoin tends to be less risky in general than a cryptocurrency only a tenth of the size,” explains Eberhardt.

Investing with the help of professionals provides invaluable knowledge of the market which could make all the difference between a big win and a major loss. “We monitor all changes in the crypto market and keep our clients well-informed about movements and trends,” says Eberhardt. 

Is crypto a good option for beating inflation?

Steep rises in the cost of living make investing the only effective option for growing your money in line with inflation. Consumer price growth hit an astonishing 14.2 percent in April 2022, according to the Czech Statistical Office. With savings accounts offering interest rates of less than five percent, keeping your money in the bank only decreases its value.

Investment in crypto can deliver the returns needed to keep up with and even outstrip inflation. But these high gains are the result of high risk; a characteristic influenced by crypto’s sensitivity to wider market pressures.

“Some people think of Bitcoin as a ‘digital gold’; a way of protecting your wealth against inflation. We prefer to view investments in cryptocurrencies as a hedge against the future. Still, due to the risky nature of crypto, it is much more sensitive to market pressures than traditional currencies, including increased interest rates, inflation, and events causing global unrest, such as Russia’s invasion of Ukraine,” says Eberhardt.

Sensitivity to external forces and events is all part and parcel of the volatility of cryptocurrencies. This volatility is central to their appeal, bringing the potential for significant gains which are tempting amid a cost-of-living crisis. But investing with experts, such as those at Saxo Bank, is the best way of balancing this risk and protecting your money.