Options For Investing In Currencies

by Evan

Investing in currency is a unique way to build wealth. It takes advantage of a very simple economic principle, the fact that every independent economy has its own monetary, fiscal, and economic policies that drive the value of their currencies, and that the relative strength of each economy. That relativity—the link between one economy’s good fortunes and another economy’s bad fortunes—is also key to modern economic thought.

Skills Needed to Invest in Currney

So investing in currency requires a variety of skills. First, you need to know how to maneuver through the foreign exchange market (forex). This involves some fairly sophisticated trading knowledge. You’ll have to understand the difference between a long position and a short position because currencies typically trade in pairs that will include one choice for each of those.

You’ll also need to understand international economics so that you can make those decisions correctly. Why is the Vietnamese Dong low right now, and what currencies are contrasted with that? You need to know about how the relative strength or weakness of a currency drives net imports versus net exports, and how the pairings of currencies you choose will be affected by everything from tariffs to embargos.

The need for all this background education begs the question of why someone would invest in currencies to begin with? Isn’t the stock market enough? To a great extent, the answer is yes. Well-managed mutual funds and even individual stocks can prove quite effective as investment instruments.

But therein lies the value of going with currencies. The stock market is just a little too mainstream. It’s filled with underinformed investors who sometimes take irrational positions or make spastic decisions. Their choices can affect their fellow shareholders, who might be reacting more thoughtfully but don’t get the full benefit of their logic because others are making poor decisions.

This problem will continue to grow thanks to the advent of DIY brokerage and the burgeoning number of public retirement systems that are being abandoned in favor of 401(k) accounts and similar instruments. As more and more unsophisticated investors join the market (often advised by underqualified brokers), the stock market could veer further and further away from its historic patterns.

As a result, currencies are becoming more and more appealing to the investor who wishes to stay away from the illogical, hair-trigger crowd and operate a little more independently based on a good understanding of what is going on and how investments are affected by world economic and political conditions.

A great example of what is evolving in the currency markets right now is Bitcoin. It didn’t even exist until 2009 and has rapidly become an economic heavyweight, building fortunes for those who are able to understand it and take advantage of it. There’s no question that money can be made in cryptocurrencies, but there is considerable discussion about their volatility relative to paper money.

The biggest concern about Bitcoin is that it is finite. There can only be so many of them held by investors, so the question is raised about what will happen once it is all in the hands of investors. As a nonregulated tool, there is really no way of knowing. Bitcoin is a truly uncharted territory. There are also concerns about the net value of mining Bitcoin relative to the cost of the energy used to operate so many computers on the blockchain, an area that could lead to international regulation.

Currencies are a unique investment. They allow us to transport our financial security out of unstable economies and into those with better prospects, then to travel elsewhere if that system begins to struggle. They are a tool for a well-informed investor who understands his or her own tolerance for risk, planning horizon, and level of knowledge about a very complex and dynamic international economic system. Within those narrow qualifications, there are people who can do quite well trading hard currencies and cryptocurrencies alike.

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