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The internet is full of stories about people who made it rich by trading cryptocurrencies. But lately, the values of Bitcoin and other cryptocurrencies have been plummeting.
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. Knowing the pros and cons of crypto can help determine if crypto makes sense as an investment for you.
Is Cryptocurrency a Good Investment?
A good investment is like a good pair of pants. It will cover your butt when you need it. But your pants might not fit others, and others’ pants might not fit you.
Investing is not a one-size-fits-all proposition. What may be a good investment for you and your level of risk tolerance might be a terrible fit for someone else.
This definitely applies when it comes to crypto. While investing in digital currency might make sense for some, it might be too risky for others.
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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 — cryptocurrency values are not so easy to understand.
Most cryptocurrencies are purely speculative — 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:
- ReportFraud.ftc.gov
- CFTC.gov/complaint
- sec.gov/tcr
What Makes Cryptocurrency a Particularly 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. It’s the Wild West out there. There are no laws in place to keep you safe from total losses or scams.
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 at anytime.
The third factor that makes crypto risky and volatile is that some coins are finite. That makes them subject to market manipulation.
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 have had heir crypto wallets hacked.
Another disadvantage is that almost anyone can create a new coin at 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.
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 cryptocurrencies on their balance sheets.
Stocks:
- Coinbase
- NVIDIA
- Square
- IBM
- Mastercard
- Visa
- Salesforce.com
- PayPal Holdings
- Walmart
- Microsoft
ETFs:
- 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
Ask your investment professional if crypto is right for you.
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.
Who Should Consider Investing in Cryptocurrency?
Do-it-yourself investors who want to try a bit of everything should consider investing in crypto.
What Do Projections Show About the Longevity of Cryptocurrency?
Digital banks are increasing in popularity.
With the increasing adoption of digital banking, cryptocurrency will become increasingly popular. Cryptocurrency and popular coins have become household names.
Bitcoin has exponentially grown since its inception in 2009. Coinbase has become the first crypto company to be listed as a Fortune 500 company.
Even though the crypto market has crashed and failed to meet analyst expectations, crypto is gaining in popularity. Crypto has even come into the mainstream media. Celebrities have been using social media to promote cryptocurrencies. And Coinbase was one of several companies that bought Super Bowl Ad airtime.
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 have made an estimated 81,000-plus Bitcoin millionaires.
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.
When the price gets too high or too low, investors will be tempted to sell. Investors will want to cash out their coins to enjoy their gains. Because what good is a huge investment paying off if you don’t spend it?
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. 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, from my personal experience.
How Do You Choose a Cryptocurrency in Which to Invest?
Just dipping your toes into the crypto investing world? If you want to try investing in crypto, check out the most popular cryptocurrencies:
- Bitcoin
- Ether
- Litecoin
- Polkadot
- Cardano
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.
Ether is just behind Bitcoin, In large part thanks to its blockchain technology that is the standard for decentralized app creation.
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 account.
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.
Certain coins will pick the exchange for you. 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. When investing in crypto, keep in mind how to avoid scams, the differences between traditional investments, and what makes crypto volatile.