While some have seen astonishing profits from their investments in digital currency, it’s important to note that this area also carries its own set of risks.
Cryptocurrency investment can potentially lead to substantial wealth accumulation, but it’s equally possible to lose your entire investment. The risk associated with crypto assets is high, but when done correctly and as part of a varied portfolio, it can be a profitable venture.
Is cryptocurrency a viable investment?
Cryptocurrency can be a beneficial investment for those seeking direct exposure to the growing demand for digital currency. An alternative, which might be less profitable but safer, is to invest in the stocks of companies that have ties to cryptocurrency.
How secure is cryptocurrency?
There are several indicators that suggest cryptocurrency isn’t always a secure investment. However, there are also emerging signs that suggest cryptocurrency is here to stay.
Investment risks in cryptocurrency
Cryptocurrency exchanges are more susceptible to hacks and other criminal activities than traditional stock exchanges. Security breaches have resulted in significant losses for investors who have had their digital currencies stolen. This has led many exchanges and third-party insurers to offer protection against such incidents.
Safely storing cryptocurrencies is more challenging than owning stocks or bonds. While cryptocurrency exchanges like Coinbase make it relatively easy to buy and sell crypto assets like Bitcoin and Ethereum, many people are hesitant to keep their digital assets on exchanges due to the risks associated with entrusting any company with access to their assets.
Keeping cryptocurrency on a centralized exchange means you don’t have complete control over your assets. An exchange could freeze your assets at the request of a government, or the exchange could go bankrupt, leaving you with no way to recover your money.
Some cryptocurrency owners prefer offline “cold storage” options like hardware wallets, but cold storage has its own set of challenges. The most significant risk is losing your private key; without a key, you cannot access your cryptocurrency.
There’s also no guarantee that a crypto project you invest in will be successful. The competition is intense among thousands of blockchain projects, and many projects are nothing more than scams. Only a small percentage of cryptocurrency projects will ultimately succeed.
Regulators may also clamp down on the entire crypto industry, especially if governments perceive cryptocurrencies as a threat rather than an innovative technology.
The advanced technology aspects of cryptocurrency also increase the risks for investors. Much of the technology is still under development and has not been extensively tested in real-world scenarios.
Despite the inherent risks, the strength of cryptocurrencies and the blockchain industry is on the rise. Key financial infrastructure is being developed, and access to institutional-level custody services is becoming more common for investors. Both professional and individual investors are slowly gaining the necessary tools to manage and protect their crypto assets.
The establishment of crypto futures markets is underway, and numerous companies are gaining direct exposure to the cryptocurrency sector. Major financial entities like PayPal are simplifying the process of buying and selling cryptocurrency on their widely-used platforms. Other companies, such as Block, have made substantial investments in Bitcoin and other digital assets. For example, Tesla made a purchase of Bitcoin worth $1.5 billion in early 2021. By February 2022, the electric car manufacturer reported holding nearly $2 billion of the cryptocurrency.
While other factors continue to contribute to the risk associated with cryptocurrency, the growing rate of adoption indicates a maturing industry. Both individual investors and companies are looking to gain direct exposure to cryptocurrency, deeming it safe enough for large-scale investments.
Long-term Investment in Crypto
Cryptocurrencies like Bitcoin and Ethereum debut with ambitious visions that might take time to achieve. Although there’s no certainty in any cryptocurrency project’s success, early backers can see significant long-term gains if the project meets its goals.
However, for any cryptocurrency project, achieving widespread adoption is a prerequisite for long-term success.
Bitcoin as a long-term investment
Bitcoin, the most well-known cryptocurrency, benefits from the network effect, meaning its value increases as more people own it. Many investors currently view Bitcoin as “digital gold,” but it also has the potential to be used as a digital form of cash.
Bitcoin investors anticipate long-term value growth for the cryptocurrency due to its fixed supply, which contrasts with the flexible supplies of fiat currencies like the U.S. dollar or the Japanese yen. Bitcoin’s supply is limited to just under 21 million coins, while most currencies can be printed at the discretion of central banks. Many investors predict Bitcoin will appreciate as fiat currencies lose value.
Those who are optimistic about Bitcoin’s extensive use as digital cash believe it has the potential to become the first truly global currency.
Ethereum as a long-term investment
Investors can buy Ether, the primary coin of the Ethereum platform, to diversify their portfolios with Ethereum exposure. While people often see Bitcoin as a digital gold, Ethereum acts as a global computing foundation, hosting numerous other cryptocurrencies and a vast network of decentralized applications (“dApps”).
The large number of cryptocurrencies built on the Ethereum platform, plus the open-source nature of dApps, creates opportunities for Ethereum to also benefit from the network effect and to create sustainable, long-term value. The Ethereum platform enables the use of “smart contracts,” which execute automatically based on terms written directly into the contract code.
The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has significant potential to disrupt massive industries such as real estate and banking and also to create entirely new markets.
As the Ethereum platform becomes increasingly used worldwide, the Ether token increases in utility and value. Investors bullish on the long-term potential of the Ethereum platform can profit directly by owning Ether.
That’s not to say Ethereum doesn’t have competition. A number of “Ethereum Killers,” including Solana, Polygon, and Avalanche, are all built to handle smart contracts and use a blockchain system capable of processing more transactions per second. The speed has the added advantage of being less expensive for users as well. But Ethereum is the most broadly adopted platform for using smart contracts.
Should you invest in cryptocurrency?
Owning some cryptocurrency can increase your portfolio’s diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market. If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time. If you do your research and learn as much as possible about how to invest in cryptocurrency, you should be able to manage the investment risk as part of your overall portfolio.