Whether you are new to investing or are someone who's spent years building an investment portfolio, one alternative type of investment is cryptocurrency. You may have heard of different types of cryptocurrencies, which include everything from Bitcoin to Ethereum. Unlike real estate and other stable investment opportunities, investing in cryptocurrencies requires you to take on a significant amount of risk for the potential of high returns. Before you put your money in cryptocurrency, you should have a better understanding of what this currency is and how it compares to traditional investments.
Understanding Crypto Investments
Cryptocurrency is a type of digital payment system that doesn't use traditional banks to verify the transactions that people make. This peer-to-peer system allows any individual to send or receive payments. Instead of using physical money that's carried around and placed into a bank, crypto payments are digital entries found on an online database.
These entries describe individual transactions. If you transfer crypto funds, the transaction will be recorded within a public ledger. Your cryptocurrency is held in a digital wallet. Cryptocurrency is a highly popular investment because it uses encryption technology for transaction verification, which means that advanced coding is used to store and transmit data to public ledgers and between wallets.
The purpose of encryption is to bolster safety and security. Bitcoin was the first cryptocurrency to be developed in 2009 and is still the most popular cryptocurrency around. Most of the interest in crypto is to trade the currency to generate profit. All cryptocurrencies are run on public ledger known as blockchain.
A blockchain is a record of every transaction that's held by currency holders. It's possible to create crypto via a mining process, which uses computer power to answer complex mathematical problems that produce coins. You can also purchase these currencies directly from brokers. Keep in mind that cryptocurrency isn't a tangible asset.
Is Cryptocurrency a Good Investment?
If you're wondering about the viability of cryptocurrency, it's always going to be a risky investment. People place their money into this currency because of the possibility for high returns. Of the more than 10,000 different cryptocurrencies you can invest in, there are some that have performed consistently well over a lengthy period of time.
Just like any investment, however, you can't be 100% certain about the success of any crypto investment you make. If you want to place investments in your portfolio that don't add much risk and can provide you with low but stable returns, a few options you could look into include money market funds, corporate bonds, high-yield savings accounts, and real estate.
On the other hand, cryptocurrency might be a good investment for you if you're willing to take on a considerable amount of risk. Weigh the pros and cons of cryptocurrency before making an investment.
Is It Safe to Invest in Cryptocurrency?
Cryptocurrency is among the most volatile investments you can make. Even if you invest in a popular currency like Bitcoin, there can be some notable swings in the coin's value on a week-to-week basis. If the value of a cryptocurrency rises rapidly one day, it could plummet the next, which is why you should only consider investing in crypto if you've performed ample research beforehand and know how much risk will be added to your portfolio.
Keep in mind that fraud is also easier with cryptocurrency. Since October 2020, thousands of people have lost millions of dollars on scams. Because of the encrypted nature of crypto transactions, it's difficult to keep fraud at bay.
Cryptocurrency vs. Traditional Investments
While most traditional forms of investments differ substantially from cryptocurrency investing, they also have their similarities. One comparison can be made to the stock market. Just like the stock market, investors in cryptocurrency will benefit from price appreciation. The markets for cryptocurrency and stocks will have their good days and their bad days.
Since stock markets have existed for a lengthier amount of time, it's easier to make predictions that will guide your investment decisions. The risks associated with investing in stocks include business risk, government regulations, market risk, and purchasing power risk. Since there are thousands of different stocks to select from, predicting the risk associated with a company's future performance can be challenging.
You could also choose to invest in bonds, which are in a completely different investment category than cryptocurrencies and stocks. Bonds provide investors with the opportunity to loan funds to third party entities for a certain period of time. In return, the investor will obtain a fixed interest. Bonds have less risk than stocks and cryptocurrencies.
Benefits and Risks of Cryptocurrency Investments
Before you decide to invest in cryptocurrency, you should know about the advantages and disadvantages of making this type of investment.
Benefits
Cryptocurrency is a new and decentralized form of money, which means that monetary institutions aren't required to manage transactions between multiple parties. Because of how this system is implemented, it's impossible for one point of failure to arise, which means that a financial crisis that's similar to the one that occurred in 2008 can't happen.
These currencies also make transferring funds between multiple parties easier. These transfers are secured with private and public keys as well as incentive systems. Since third-party intermediaries don't take part in this process, crypto transfers are typically faster than traditional money transfers. The global market cap for cryptocurrency is currently more than $1 trillion, which means that it's possible to generate high profits.
Risks
While cryptocurrencies are meant to be anonymous, they still leave a small digital trail that federal agencies can decipher, which means that governments could still monitor financial transactions. As mentioned previously, cryptocurrencies have become popular among criminals who want to run scams or ransomware activities. Even though crypto blockchains are secure, wallets and exchanges can be hacked with relative ease.
While cryptocurrencies are designed to be decentralized, ownership of these currencies is still highly concentrated among a small number of investors. Keep in mind that the mining processes for cryptocurrencies require a high amount of energy and are bad for the environment. Cryptocurrencies are extremely volatile as well.
If you want to invest in the cryptocurrency market, remember that it has its ups and downs. When you notice that your investment has a dramatic swing in price, this doesn't always mean that you should immediately sell it. Since this type of investment is still highly speculative, you should conduct ample research and begin by investing conservatively.
As with any investment, cryptocurrency speculation is best undertaken as part of a balanced investing portfolio, with the advice of a qualified financial advisor. Cryptocurrency certainly isn't the best option for many people, but it may have a place for those who have stable assets in other areas of their portfolio and can manage the risk inherent in crypto investing in order to realize higher returns. Our team here at Attentive Investments can help you evaluate the crypto opportunity and see if it's right for you!