Why do we consider currencies as investments?

In difficult times, especially when inflation rises, a lot of people consider switching the currency of their savings to one of the major world currencies. Keeping the value of money is not the only reason why people buy foreign currencies. The second reason is of course possible profit. Some of us want to gain more during hard times. The process is in some cases a self-fulfilling prophecy. Thanks to laws of supply and demand the more foreign currencies people would like to buy the stronger it gets. That is why weaker currencies lose more during hard times than they should be looking at the results of the economy. Currently, we have this situation in Poland, but Polish złoty (PLN) is only one of the many currencies that share this problem. Last year's best example of this trend is the Turkish lira (TRY). There are, however, additional factors that justify some of those impressive losses.

In what scenario we might lose on such investment?

Regardless of the reasons for the investment, we need to remember that currencies are volatile and dependent on many factors. We have to keep in mind that during the stabilization in the economy the value of currencies may adjust closer to the previous rates. That may result in losses in our investment. Global investors prefer bigger developed economies during crises, but once the market is stable they prefer bigger profits. That is why, in better times, they come back to developing markets. The second major factor is the case of interest rates. To battle inflation, national banks increase interest rates. That, as result, means that the currency should go up. That is the main reason why investing in foreign currencies to retreat from the negative effects of inflation might be a bad idea. Of course, if the country is willing to fight inflation.

How to invest if we want to?

Once we know that we want to invest, we need to know-how. The first challenge is choosing the currency right for you. If we would like to maximize the risk and profit we may choose one currency that gives us possibly the best rate of return. If our priority is to secure the worth of savings, we should consider diversification — just spread our funds to several different currencies so in case one goes down, the other may cover for the loss. In the 21st century, we probably don’t even consider buying physical banknotes.

Currency One is one of the largest companies on the online currency exchange market in Poland. Maciej Przygórzewski is the COO at the company.