The internet is full of stories about people who made it rich by trading cryptocurrencies, and I myself have been investing in Bitcoin since 2017. But lately, the values of Bitcoin (BTC), Ethereum (ETH), and other cryptocurrencies have been plummeting as we enter into the bear market that many experts are calling a “crypto winter.”
If you’re considering getting into cryptocurrency investing, you may be wondering if it’s worth even bothering. Is crypto trading worth the risks?
For sure, cryptocurrency comes with higher risk and volatility. But crypto can also add a level of diversification to your portfolio when paired with investing in the stock market. While less than 1% of my net worth is invested across digital currencies and sports cards, they make up a valuable part of my alternative assets.
But most new crypto investors risk a lot more than 1% of their net worth and make risker bets with tokens like dogecoin and fad NFTs.
Knowing the pros and cons of crypto can help determine if crypto makes sense as an investment for you.
Is Cryptocurrency a Good Investment?
When evaluating any investment, it’s important to figure out how it aligns with your personal investing goals. Why are you investing in the first place? How long is your time horizon? What do you want to use the money for?
Unfortunately, many people want to get rich quickly, especially when investing in crypto. This isn’t investing, it’s gambling. There’s a big difference. Any investment can be good if you’ve aligned your investment with your own risk strategy. Is putting 100% of your money into a Shibu Inu coin or some coin you read about on Twitter a good investment? Probably not.
First, you should never be putting all of your money into any investment. Second, especially in crypto, many of the crypto prices have wild fluctuations, and many new coins are pegged to a stablecoin (meaning they aren’t backed by anything like the US dollar).
Many new coins and stablecoins also have poor liquidity, which means it might be hard to withdraw them quickly and turn them into cash. Just look at the recent Celsius coin scandal where investors could not withdraw their money when the price of cryptocurrencies dropped.
As of this writing, Celsius and Voyager users are still trying to access their money after both companies went bankrupt. One of my friends has 75% of his net worth locked up in Celsius right now. To me, that wasn’t a good investment.
Should you buy bitcoin with 1-3% of your net worth as a way to diversify your portfolio into an asset class that, while volatile, has a huge potential upside? Yes, in this scenario investing in cryptocurrency could be a good investment. This is exactly what I do and have been doing since 2017. Currently, I invest in Bitcoin, Ethereum, and Solana. Bitcoin is the oldest and largest cryptocurrency, with a current market cap of $372 billion.
My goal was to retire early, so I’ve always invested so my money could grow as much over the longest period. Because of this, I’ve built a diversified portfolio of stocks, real estate, and some cryptocurrencies. But because crypto is so volatile and risky, I don’t invest a high percentage of my net worth into it.
What Are the Most Important Things to Consider When Deciding To Invest in Cryptocurrency?
Cryptocurrency investment is more complex in some ways than traditional investing. While investing in stocks is pretty clear-cut – you buy shares of companies whose values you expect to rise or index funds of stocks based on a theme, cryptocurrency is a much broader investing category.
There are now millions of different types you can invest in, making it increasingly difficult to find the best cryptocurrencies to invest in. This is why I stick with the three largest and most reputable.
Most cryptocurrencies are purely speculative, which means there are no underlying products or property to give a crypto asset its value. Before you start cryptocurrency trading, make sure you understand how the digital asset you’re considering is valued.
You should also have a decent grasp of how blockchain technology works, as well as an understanding of some common crypto terminology.
Crypto isn’t immune to scams, either. To avoid cryptocurrency scams, the Federal Trade Commission (FTC) recommends that you understand:
- How to use and get cryptocurrency
- How cryptocurrency is stored
- How cryptocurrency is different from U.S. dollars
- There is a lack of legal protection
- Cryptocurrency payments are typically not reversible
- Transactions can be public
- Scammers often demand pay in cryptocurrency
- Only scammers guarantee a profit or big returns
- Avoid investment advice from those on dating apps
- Avoid investment managers, celebrities, and love interests that want you to invest in or send them cryptocurrency
- Scammers promise free money
- Scammers make big claims with little or no details or explanation
- Scammers often impersonate businesses, government, and job sites
You can report cryptocurrency scams to the FTC, CFTC, and SEC. Also, report any scams to the cryptocurrency exchange company you used:
What Makes Cryptocurrency a High-Risk Investment?
Three major factors contribute to crypto being high risk as well as highly volatile.
The first factor is that crypto is currently unregulated by the US central bank or government. It’s the Wild West out there. There are no laws in place to keep you safe from total losses or scams. Well-known cryptocurrency exchanges go bankrupt and get hacked regularly, resulting in hundreds of millions of losses for investors. If your money gets stolen or the exchange goes bankrupt, there’s very little you can do.
The second is that crypto trades in real-time. Trades can take place 24 hours a day, seven days a week. This also means prices can rise and drop anytime for any reason. It’s not uncommon to lose 70%-80% of your investment in a single day if you invest in riskier cryptocurrencies. I know some dogecoin investors who lost 40% of their principal in a single day.
The third factor that makes crypto risky and volatile is that some coins are finite, meaning a large number of them could be owned by a small group of people. That makes them subject to market manipulation.
There are many pump and dump schemes on social media or through newsletters, where a small group of owners promotes a cryptocurrency heavily, and then when the price gets elevated, they sell their holdings. There are also instances where coin creators make a coin offering and then just completely run away with the proceeds in what’s known as a “rug pull.”
Why Do Cryptocurrency Investments Often Generate Very Large Returns?
Basic supply-and-demand principles can be applied to crypto returns. Coins with a finite number can increase in value rapidly when demand increases – especially when a single investor holds a large share of the total amount of coins.
Bitcoin, the first cryptocurrency, has a maximum supply of 21 million coins. To understand Bitcoin and other cryptocurrencies’ rules, look to its creators. Creators set the parameters for each coin — things like the number of coins, the rules for buying and selling, how new coins are added, and more.
What Are the Disadvantages of the Relatively Unregulated Nature of Cryptocurrency Markets?
As the FTC warns, crypto lacks legal protections. Even with encryption and security, many investors get their crypto wallets hacked, even when they use a reputable online wallet like Coinbase. This is why I always recommend using a hardware wallet, which isn’t accessible online and is much harder for hackers to penetrate.
As I previously mentioned, even crypto exchanges are regularly hacked or go out of business. There is no way of really knowing how secure a crypto exchange is, even with bank-level encryption and security.
Another disadvantage is that almost anyone can create a new coin anytime. There isn’t a way for investors to keep up with every coin on every market. Deregulation and high volatility make crypto susceptible to high speculation and artificial pricing. This can make it extremely difficult for new investors to find good investments.
What Are Alternative Investments in Cryptocurrency?
If you’re looking to invest in blockchain stocks, there are several options to invest in companies and exchange-traded funds or ETFs that use blockchain technology or that hold cryptocurrency on their balance sheets.
- PayPal Holdings
- Siren Nasdaq NexGen Economy ETF (BLCN)
- Amplify Transformation Data Sharing ETF (BLOK)
- First Trust Indxx Innovative Transaction & Process ETF (LEGR)
How to Determine If Investing in Cryptocurrency Is Right for You
The easiest way to figure out if investing in crypto is right for you is to think hard about how much risk you want to take in your portfolio and then talk to an investment professional if you have one.
If you’re curious about crypto, try looking at the blockchain stocks or ETFs mentioned above. New investors can also try Robinhood for trading crypto and even earn a free stock when you sign up for the service.
Robinhood makes investing simple with their mobile app. You'll also trade commission-free, and can start building your portfolio with just $1.
Who Should Consider Investing in Cryptocurrency?
If you already have a 6-month emergency fund and are contributing to your employer’s retirement plan (if you have one), it’s worth considering investing in crypto. But once again, since all cryptocurrencies are high-risk assets, you should only make them a small part of your investment portfolio.
Never invest any money you can’t afford to lose, or that would alter your life negatively in some way. You’ve invested way too much if you can’t sleep at night because you’re worried about your crypto holdings.
What Do Projections Show About the Longevity of Cryptocurrency?
Even with the recent market downturn, cryptocurrency will become increasingly popular and become a greater part of our culture. It’s here to stay. But I have no idea what it will look like in 5-10 years.
Bitcoin has grown exponentially since its inception in 2009 and hit an all-time high of $68,990.90 in November 2021. Coinbase became the first crypto company to be listed as a Fortune 500 company, and they sponsor an NBA team. Many of the best investing apps now offer crypto investing as more investors want access to these alternative assets.
Even though the crypto market has crashed and failed to meet analyst expectations, crypto is already mainstream, and with greater transparency and innovation, it will gain even more traction in the coming years. From an investment standpoint, this means it’s still early.
What Are the Advantages of Cryptocurrency As a Short-Term and Long-Term Investment?
Like other highly speculative investments, short-term rewards can be great. Following the adage of buying low and selling high has made an estimated 81,000-plus Bitcoin millionaires. I was one of them.
With a total of 21 million Bitcoins available, over the long term, those with the biggest shares could receive the biggest rewards. Bitcoin, being a speculative investment, may not ever be held over time by most investors. Why? Because investors will be tempted to sell at some point.
Investors will be tempted to sell when the price gets too high or too low. Investors will want to cash out their coins to enjoy their gains.
How to Start Investing in Cryptocurrency
Investing in cryptocurrency can be as easy as looking at your brokerage account. Many brokerages are offering crypto investments now.
Robinhood and Schwab are two common brokerages that offer crypto investing.
Fortune 500 company Coinbase is also a popular choice for creating your crypto wallet. Opening a Coinbase account is as easy as opening a bank account.
How Do You Choose a Cryptocurrency in Which to Invest?
If you want to try investing in crypto, check out the most popular cryptocurrencies:
Bitcoin is the gold standard of cryptocurrencies. Investors believe that Bitcoin can be a store of value, and other crypto coins follow Bitcoin when it goes up or down in value.
Ethereum is just behind Bitcoin, In large part thanks to its blockchain technology that is the standard for decentralized app creation. Most of the NFT market is built on Ethereum.
Litecoin is known for its speed. Litecoin transactions are almost four times faster than Bitcoin transactions. Litecoin has also been around since 2011, making it one of the oldest alternative crypto coins.
Polkadot is a slight competitor to Ether. Polkadot’s blockchain technology is known for speedy transactions and the ability to communicate with other blockchains.
Cardano sets itself apart from other coins with updates. A slow, meticulous plan for decentralization gives Cardano a competitive edge. Using the slower plan with more updates, Cardano looks to increase its transaction speed above other crypto coins.
How Do You Choose a Broker or Cryptocurrency Exchange?
If you already have a broker that sells cryptocurrency, keep it simple and use your existing company so you can have more of your investments in one place.
If you don’t have a brokerage account — or a crypto-friendly one — check out Coinbase, a trusted cryptocurrency exchange. Coinbase and other large crypto exchanges often carry the major cryptocurrencies listed above.
Webull, Robinhood, eToro, Binance, and Gemini are other exchanges to consider.
Thousands of coins aren’t on every exchange. Therefore, you might have to hunt around for an exchange if you want to invest in a specialty coin.
How Do You Set Up a Cryptocurrency Account?
The hardest part of setting up an account is figuring out which coin you want to invest in. Next is figuring out which exchange you want to use. When you have those two things figured out, it’s time to set up your account.
After signing up for an account, you need to verify your identity. Most likely, you will need government-issued identification. Have your driver’s license or other government photo identification ready.
After your identity has been verified, you will need to connect your bank account or transfer funds another way to your broker or exchange. The broker or exchange can walk you through the different processes for transferring funds.
Once the funds are deposited into your account, find the coin you want using its ticker symbol, just like with a stock or ETF. Brokerages and exchanges often have the option to purchase fractional shares.
Lastly, crypto must be stored in a crypto wallet. This is where brokers differentiate from exchanges. Brokers usually don’t give you a choice in a crypto wallet. Exchanges generally do.
Choose between a hot crypto wallet or cold crypto wallet. Hot wallets are stored online and are connected to devices via the internet. Cold wallets are stored on external devices like USB sticks or hard drives.
The Bottom Line
Cryptocurrencies are highly speculative investments with high risk and reward. Like an investment, it’s important to understand exactly what you’re investing in before you invest. The more educated you are on the coin, its history, and its projected future, the easier it will be for you to determine its growth potential.
Since I don’t have a ton of time to keep up with all of the new coin offerings, I stick to the three most popular: Bitcoin, Ethereum, and Solana. I won’t diverge into other alternative coins simply because I don’t need to take that much risk in my portfolio. Of course, how much risk you’re willing to take is completely up to you.
When investing in crypto, it’s essential to learn how to spot scams, understand the differences between other traditional investments, and understand what makes crypto so volatile.
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