Cryptocurrency has grown in popularity. It may offer high returns really fast, but there are also some things to consider before deciding if cryptocurrency is a good investment for you.
Apart from all the obvious benefits of cryptocurrency, there are certain risks and downsides. Consumer protection is minimal, transactions are irreversible, and currencies are quite volatile.
In addition, you need to have a minimum capital, which is not always easy to find, because you often don’t have free money. In such a situation, Paydaysay made a list of $50 loan instant apps, or you can borrow money from family.
Keep on reading to learn if this can be a suitable investment option for you.
What Is Cryptocurrency?
Cryptocurrency is a type of digital assets such as Ethereum, Bitcoin, and Tether. The name is taken from the cryptographic techniques that allow consumers to trade, sell, or buy them securely. While the national governments of the countries manage traditional currencies, cryptocurrencies may circulate without financial control.
There are over 22,000 various cryptocurrencies in the world these days. Some of them present more value, while others are worthless and obscure. Are you planning to get into cryptocurrency? If you want to start investing in it, you should begin with one that is relatively well-established and commonly traded now.
According to a survey from the Pew Research Center, 16 percent of Americans state they have used, traded or invested in cryptocurrency. Speaking of gender, 43% of men and 19% of women aged 18 to 29 mentioned that they have invested in or used a cryptocurrency, such as Bitcoin or Ether.
Will Cryptocurrencies like Bitcoin Become the New Global Currency?
Experts believe that cryptocurrencies like Bitcoin and others won’t become the new global currency in the near future as there are no consumer protections or necessary regulations for these currencies. A currency needs the following characteristics to be viable:
- To be a unit of account
- To be utilized as a reliable and inexpensive medium of exchange
- To be a store of value honored as a payment option.
Due to the fact that Bitcoin and other cryptocurrencies have high transaction fees and high volatility, they will be utilized with certain limitations. Moreover, there are other factors that prevent these cryptocurrencies from becoming globally accepted.
There is a risk of regulation as these currencies are becoming increasingly popular worldwide. National governments or central banks can’t control them, which presents additional risks to potential investors.
Benefits of Investing in Cryptocurrency
Here are some of the advantages of investing in cryptocurrencies.
- New asset class. Ethereum and Bitcoin continue developing, so we can notice the emergence of a new asset class. There are some professional fund managers who have made dedicated investment funds only investing in cryptocurrencies.
- Upside potential. New updates and changes have the potential to come in the nearest future. So, investing in cryptocurrencies may become even more attractive. Stablecoin is just one example. It is a cryptocurrency connected to the value of a regular currency to back the digital currency.
- Investors are willing to diversify the risks, so they prefer to keep various investments with different behavior under the same economic conditions. Specialists claim that cryptocurrencies can help diversify your assets by offering positive effects against rising inflation rates.
Risks of Cryptocurrencies
There are some downsides of cryptocurrencies that you need to take into account before deciding if this is a suitable investment option for you.
- Future regulation. We can’t regulate cryptocurrency trading and issuance. Experts are afraid that cryptocurrencies can be utilized for illicit funding in the future.
- Monetary loss. The prices of cryptocurrencies such as Bitcoin are very volatile. The fluctuations can easily lead to major financial losses if you trade or sell them at the wrong time.
- Theft or loss. In order to gain access to a cryptocurrency exchange, you will need to enter your password and ID. Your personal data might be stolen, hacked, or lost. As a result, access to the exchange can be lost or denied. Although it isn’t a common practice, you might keep your cryptocurrencies in physical wallets. You will be able to spend cryptocurrencies without computer access. However, it presents risks that all other cash currencies have. They may also be stolen or lost.
- Cybercrime and fraud. Some investors have already encountered these drawbacks. The Financial Crimes Enforcement Network can check cryptocurrencies for noncompliance with the Bank Secrecy Act (BSA) as well as anti-money laundering demands. There have already been computer outages in Bitcoin exchanges. These outages were caused by high demand. A cyberattack would prevent free access in a state of emergency as the ledgers are kept on the web. The same situation will unlikely happen with gold or cash.
Is Cryptocurrency a Good Investment?
With all the hype around cryptocurrencies and new projects being launched daily, and trillions of dollars invested in them, a common question among investors is whether they should consider cryptocurrencies a good investment opportunity.
Before you find the answer, you should look closely at asset allocation. It meant dividing your investments across different instruments to offer diversified returns in the long run. Furthermore, you should review the financial aims, risk tolerance, and timeframe to make a smart choice on how much you can allocate to cryptocurrencies in your investment portfolio.
Experts don’t advise investors to listen to their friends as they need to conduct their own research on the cryptocurrency they are considering. It is advisable to review the whitepaper to realize the technology and purpose of the cryptocurrency better.
Bitcoin and other cryptocurrencies may be helpful to investment options, but they are speculative as well. They don’t fit within conventional asset allocation models these days. The high volatility of cryptocurrencies is caused by demand and supply. Conventional value strategies don’t apply to cryptocurrencies. They don’t have book value, price-to-sales ratio, price-to-earnings ratio, etc.
The Bottom Line
Whether an investor should work with cryptocurrencies depends on their preferences and aims. The same goes for any security or asset. Bitcoin and other types of cryptocurrencies are considered speculative investments.
Although there are some benefits to trading them, there are also obvious downsides and risks. You need to consider these risks and approach these investments as speculative ones due to high volatility, irreversible transactions, and minimal consumer protection.
