Cryptocurrency has taken the globe by storm. Since the launch of the first cryptocurrency Bitcoin in 2009, the crypto market has seen incredible highs and scary lows. It has expanded exponentially, introducing numerous digital assets and blockchain technologies. Bitcoin and numerous other cryptocurrencies are increasingly being kept as investments and utilized as currencies to purchase various products and services, including software, digital real estate, and illegal substances.
To their supporters, cryptocurrencies represent a democratizing force, taking the power of money generation and control away from central banks and Wall Street. Critics argue that the lack of legislation for cryptocurrencies strengthens criminal groups, rogue states, and terrorist organizations, while the assets themselves exacerbate inequality, struggle with extreme market volatility, and use massive quantities of electricity. Regulations vary greatly around the world, with some governments welcoming cryptocurrencies and others prohibiting or restricting their use. By February 2023, 114 countries, including the USA, are considering creating their own central bank digital currencies (CBDCs) to fight the cryptocurrency boom.
The reality is that cryptocurrency is a highly volatile investment. Investors must understand that owning crypto entails taking on a significant amount of risk in their investment portfolio. However, cryptocurrency may give tremendous opportunities for investors who understand risk management. In this blog post, we’ll explore the good, the bad, and the profit potential associated with investing in crypto.
Let’s begin!
The Basics of Cryptocurrency and Crypto Investing
A cryptocurrency or crypto is a digital currency that is protected by encryption, making it nearly hard to forge or double-spend. The word cryptocurrency comes from the cryptographic techniques that allow users to spend them securely without the need for a central government or bank. This defining aspect of cryptocurrencies that they are often not issued by any central body, makes them potentially impervious to political meddling or manipulation.
So, coming to the question – Is cryptocurrency a good investment? First of all, Bitcoin is the first cryptocurrency. It was founded in 2009 and is the most valuable cryptocurrency in terms of market value. During the previous bull market, Bitcoin was valued at more than $68,000, putting it at nearly $1.2 trillion.
However, dozens of additional cryptocurrencies have subsequently entered the market. These are referred to as alternative coins or altcoins. This, like the stock market, implies that investors have a plethora of options to pick from. Many cryptocurrencies, including Bitcoin, have seen significant capital gains in recent years. For instance, when Ethereum first debuted in 2015, it was worth less than a dollar. Since then, Ethereum has reached all-time highs of roughly $5,000.
How Crypto Works?
Cryptocurrencies are a type of digital asset. In contrast to traditional money, they aren’t available in physical form. Some of them are decentralized. This implies that the network is not governed by a single person or institution. In turn, those who own a decentralized cryptocurrency such as Bitcoin have complete authority over their funds.
Furthermore, cryptocurrencies run on the blockchain network. This allows users to transmit and receive crypto tokens without the use of a third party. The implementation of blockchains tackled a problem encountered by previous attempts to build full digital currencies: preventing users from creating duplicates of their holdings and attempting to spend them twice.
Some cryptocurrencies, including Bitcoin, Ethereum, BNB, and Solana, have their private blockchain. The bulk of cryptocurrencies, however, run on top of another blockchain. For example, there are dozens of cryptocurrencies based on Ethereum, known as ERC20 tokens. Some cryptocurrencies have practical applications. Ethereum, for example, allows developers to build smart contract agreements. Financial institutions utilize XRP for cross-border payments. Furthermore, BNB is utilized to pay Binance exchange commissions.
Individual units of cryptocurrency are referred to as coins or tokens based on how they are used. Some are created to be units of exchange for goods and services, whereas others are value stores that allow users to take part in specialized software programs, including games and financial products.
Are Cryptocurrencies Financial Securities, Such as Stocks?
Right now, it’s unclear if cryptocurrency is considered a security. To clarify, a “security” in finance is anything that indicates a value and can be traded. Stocks are securities as they reflect ownership in a publicly traded corporation. Bonds are securities as they reflect a debt related to the bondholder. Both of these securities can be traded on public marketplaces.
Regulators are increasingly signaling that cryptocurrencies should be governed similarly to traditional securities like stocks and bonds. However, this viewpoint is being challenged; researchers, legal companies, and some of the biggest participants in cryptocurrency investing have claimed that the regulations that apply to bonds and stocks, for instance, do not apply as widely to cryptocurrencies.
The Securities and Exchange Commission has set its eyes on the industry as a whole. The authority has expressed concerns about activities such as crypto staking as well as the operations of some significant crypto firms.
The SEC’s decision to consider cryptocurrencies, or particular kinds of cryptocurrencies, as securities will be at the front line of crypto regulation, and may have far-reaching consequences for the asset class shortly.
Why Crypto Can Be a Good Investment?
While cryptocurrencies are a fairly recent creation, they are unquestionably here to stay, with all of their advantages. From the possibility of large returns to 24-hour trading on transparent, ultra-secure infrastructure, the world of crypto has a lot to offer—if you know how to access it.
This section of our guide aims to answer the question, ‘Is cryptocurrency a good investment?’ in great depth.
Before delving into the risks, consider the numerous advantages of cryptocurrency as an investment instrument.
Large Profit Potential
Even though cryptocurrencies are a volatile asset class, they can create enormous gains. Cryptocurrencies have historically outperformed the stock market even if it is over a considerably shorter time frame.
Bitcoin is an excellent example of this. It was valued at less than $0.10 in 2011 but has subsequently risen to more than $68,000. This indicates that Bitcoin has risen by roughly 68 million percent since 2011. In 2016, Ethereum was priced at less than $3. It has since risen to about $5,000. This equates to a 166,000% increase.
There are numerous examples of cryptocurrencies that have produced enormous gains. The crucial argument, however, is that cryptocurrencies are likely to draw investors seeking bigger returns than the stock market can provide. For example, the S&P 500 has risen by about 55% in the previous five years.
Bitcoin has climbed by roughly 325% over the same period. Consider an investor who purchased BNB five years ago. This could have moved their portfolio up by more than 2,100%.
Huge Discounts are Available During the Current Bear Market
Bitcoin and other cryptocurrencies move in market cycles. Similar to stocks, they experience price gains (bull market) and falls (bear market). As of writing, cryptocurrency is in a bear market, though it is expected to end at the beginning of 2024.
So, how does this affect investors? Those considering buying cryptocurrency today will enter the market at a cheaper rate. This is because most cryptocurrencies are trading significantly below their previous all-time highs. Bitcoin, for example, is currently trading at slightly under $30,000. It hit $68,000 at the pinnacle of the previous bull market. In general, this indicates that Bitcoin is now 55% cheaper.
This discount is not limited to Bitcoin. Some of the most popular altcoins are currently providing even greater discounts. Solana, for example, reached $260 during the previous bull cycle. It is presently trading for less than $25. This represents a more than 90% discount. Similarly, Ethereum was priced at just about $5,000 in the latter half of 2021, but it is currently accessible at roughly $1,800 – a 65% reduction.
The best part about investing during a bear market is that investors can aim for a larger upside. It enables investors to establish a diverse portfolio of digital assets at the most favorable entry price available.
The Blockchain Technology Driving Crypto is Inherently Safe
Another advantage to consider when answering “Is cryptocurrency a good investment?” is the inherently secure nature of the blockchain technology that forms the foundation of cryptocurrency.
Some of the most significant advantages of cryptocurrencies are not related to the currencies themselves, but rather to the infrastructure that backs them. That is the blockchain—a decentralized data-storage system that records every transaction made on it. An entry on the blockchain can never be deleted. And because the blockchain is stored decentrally among numerous computers, no hacker can break into the entire chain at once; any data stored in it is protected for good.
Cryptocurrencies may Assist Investors in Beating Inflation
Because cryptocurrencies are not connected to a certain currency or country, their value reflects worldwide demand instead of, for example, national inflation. But what about cryptocurrency inflation? For the most part, you can relax as an investor. The quantity of coins is limited so that the available supply does not escalate out of control, resulting in no inflation. Some coins (such as Bitcoin) have an overall cap, while others (such as Ethereum) have an annual cap, but in either case, this strategy prevents inflation.
Potential Risks of Crypto Investing
If you’ve ever wondered, “Is cryptocurrency secure?” You are not alone; many cryptocurrency newcomers are apprehensive to part with their money in exchange for a digital and decentralized asset. Understanding the prospective risk of capital is critical before advancing with any investment decision.
Therefore, to reply to the question, “Is cryptocurrency a good investment?” We will now look at some of the most important risks to consider.
Cryptocurrencies are Highly Volatile
First of all, cryptocurrencies are far more volatile than stocks and index funds. In November 2022, for example, the overall market capitalization of the cryptocurrency business was estimated to reach somewhat more than $1.05 trillion. Only one week afterward, the same industry was appraised at $817 billion, a 17% decrease. By August 2023, the overall market capitalization of the crypto industry has topped $1.06 trillion once more.
Investors should remember that the value of cryptocurrencies might rapidly decrease. Indeed, there is no certainty that the value of crypto assets will ever recover. For example, XRP reached an all-time high of $3.84 in early 2018. Even though there has been a long bull market, it has never recovered this price.
Third-Party Risks- Wallets and Exchanges
Cryptocurrencies are digital assets that are typically kept in software wallets. If the wallet’s owner forgets their password or, worse, recognizes an external hack, the crypto may be gone for good. Remember that because cryptocurrencies are decentralized, a loss or theft cannot be reversed; there are no refunds.
Exchanges are another type of third-party risk to consider. For example, FTX, one of the world’s greatest exchanges at the time, had billions of dollars in customer cash. Since then, FTX has crashed, exposing many investors with profound losses. Using regulated exchanges can protect investors in this case.
Some Cryptocurrencies are Scams
The vast majority of cryptocurrency projects have good intentions. However, a small subset of this field is dedicated to convincing as many victims as possible to leave their money. In simple words, some cryptocurrencies are outright scams.
It is frequently difficult to distinguish between a good and bad cryptocurrency project. After all, it may look like the project has great goals – it only needs to construct a snazzy website and an extensive whitepaper. But this is not to indicate that the project will accomplish – or even attempt to achieve any of its objectives.
This is why investigation, due diligence, and diversity are very crucial for crypto investors. In reality, risk-averse investors will dedicate only a small percentage of their portfolio to cryptocurrencies. Furthermore, they will guarantee that they have a well-balanced portfolio with a wide range of projects. This means that if one crypto investment fails, it will not disrupt the overall portfolio.
Could Cryptocurrency Become the New Global Currency?
With all of the hype surrounding crypto, many supporters have hailed the possibility of it emerging as a global currency.
“I don’t think governments will allow a competing currency like that on that scale,” says William Procasky – a CFA and assistant professor of finance at Texas A&M University-Kingsville. According to him, a global currency should be highly liquid and extremely deep, and there’s nothing that can rival the U.S. dollar.
Money is a closely controlled and regulated asset. Crypto, as evidenced by the 2022 scandals of Terra Luna, Celsius, and FTX, can cause severe financial harm to individuals in its current form. Many of the world’s governments would not put their financial systems at such risk.
“I think it’s years away,” says Lauren Niestradt, CFP/CFA, senior portfolio manager at Truepoint Wealth Counsel, “and this is where some of the speculation lies. It’s not a certainty.”
Conclusion
Investing in crypto assets comes with a unique set of opportunities and challenges. Whether should I invest in bitcoins depends on my financial goals and preferences, just like any other asset or security. We advise investors to approach it as a speculative investment, taking into account the significant volatility and risks associated. We consider cryptocurrency ownership to be outside the standard portfolio for people who already have a diversified portfolio and a long-term investment plan.
A well-rounded investment plan that entails thorough research, diversification, and dollar cost averaging is crucial for navigating the evolving and volatile nature of the crypto landscape. Besides, cryptocurrencies as a part of a broader portfolio that includes stocks, real estate, and other investment vehicles is also a good option.
