Cryptocurrencies, also often referred to as coins, is decentralized digital money created by encoding strings of data into units of currency based on blockchain technology. Unlike traditional currencies, they are not issued by the government, they are not regulated and they don’t have a physical form. It’s like buying virtual tokens or credits that you can invest in, trade, or use to buy goods and services in certain places.
While cryptocurrency is exciting, experts hold mixed opinions about investing in it, mostly due to the fact that it’s a highly speculative investment. Because we never make blanket suggestions about finances, we’ve laid out the pros and cons of adding crypto to your portfolio, below.
As with any investment, those interested in buying, selling and trading cryptocurrency should do their own research before getting involved in their market, and should seek out advice from their financial professional.
The Cons of Investing in Cryptocurrency
Cryptocurrency exchanges are vulnerable to cyberattacks.
Safely storing cryptocurrencies is more difficult than owning stocks or bonds. Cryptocurrency exchanges, such as Coinbase, make it fairly easy to buy and sell assets, but many investors don’t like to keep their digital assets on exchanges due to the risk of cyberattacks. Security breaches have led to sizable losses for investors who have had their digital currencies stolen.
Trying to mitigate this will require ongoing security technology maintenance by the exchanges, but several firms are already tackling the threat head-on with advanced technology.
“Cold storage” can be just as challenging as storing crypto on exchanges.
Some investors prefer offline “cold storage” options such as hardware or paper wallets, but cold storage comes with it’s own set of challenges – the biggest of which is the risk of losing your private key.
Several cryptocurrency investors have lost access to their cryptocurrency through cold storage, such as James Howells, who accidentally disposed of a hard drive containing what would be half a billion dollars in Bitcoin.
Cryptocurrency is highly volatile.
All cryptocurrencies are unpredictable, as they experience huge fluctuations in their valuation – what’s known as volatility – resulting in significant gains or losses.
Just last week, cryptocurrency prices crashed as around $1.4 trillion was wiped from the combined crypto market.
Regulators may crack down on the cryptocurrency industry.
One of the most significant drawbacks is the lack of regulatory insight. Cryptocurrency laws and taxes differ from country to country and are often ambiguous or contentious. If governments begin to view cryptocurrency as a threat rather than an innovative technology, crypto may be subject to future regulations.
Products based on cutting-edge technology have innate volatilities.
Much of the technology is still being developed and is not yet extensively proven in real-world scenarios.
Despite the risks, cryptocurrencies and the blockchain industry are consistently growing stronger.
Related: Cryptocurrency 101: Understanding the Basics
The Pros of Investing in Cryptocurrency
Portfolio diversification.
Cryptocurrency has become known as a non-correlated asset class, which means that cryptocurrency markets largely function independently of assets such as stocks, bonds and commodities. However, over the course of the last few years, cryptocurrency has begun to sometimes trade in tandem with stocks for short periods of time.
Cryptocurrency is highly volatile, which can result in outsized returns.
Cryptocurrency Bitcoin has been the best-performing asset over the last 12 years. When it began in 2009, Bitcoin essentially had no value. In the following years, it rose to a fraction of a penny and then eventually to tens of thousands of dollars. This represents millions of percentage points of gains.
Gains like these are among the most well-known benefits of cryptocurrency, just as the losses are among the most well-known drawbacks.
Asset trading.
While some people invest in cryptocurrency for price appreciation, others find it beneficial because of the ability to use crypto as a medium of exchange.
Cryptocurrency is a cash and credit card substitute. In today’s world, many businesses accept crypto like Bitcoin as a payment. Benefits of cryptocurrency transactions include;
- They’re one-to-one – or a two-party transaction – nullifying concerns of a third-party or middle man, making the transaction freer and censorship-resistant.
- Depending on the currency, transactions can be sent for pennies or less (like Litecoin and XRP).
- Payments for most cryptocurrencies settle in seconds or less.
Lower fraud risks.
Cryptocurrencies enable buyers to complete transactions without sharing any confidential financial information to a seller, such as credit card numbers, expiration date, zip code, etc. While digital cyberattacks on the actual currency is still a risk, the investor’s true identity cannot be compromised.
Accessibility.
A bank account isn’t always required to use cryptocurrency. For example, someone can buy Bitcoin at an ATM using cash, send those coins to their phone and engage in an exchange/transaction. People who lack access to the traditional financial system – but have access to a smartphone – can “become their own bank.”
So, should you add cryptocurrency to your portfolio? As you can see, it all comes down to an individual’s personal situation, financial goals and acceptable levels of risk and reward. If you need further guidance or financial advice, schedule a complimentary consultation with our team of financial advisors.
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