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Thursday, November 11, 2021

The Pros and Cons of Cryptocurrency as a Personal Investment Vehicle

You don’t need to be particularly involved in your financial health to have heard all about cryptocurrencies. Bitcoin is the best know by far, with Ethereum close behind, but thousands of these currencies are out there.

Even those that barely sneak into the 400 most valuable cryptos boast market caps into the tens of millions, and there are bound to be people out there holding onto them in the hopes of them becoming the next Bitcoin.

These currencies are of interest because they are open to interpretation. Some appreciate the anonymity and decentralized nature. Others look for opportunities to replace traditional currencies, spending like they would dollars. In the context of this feature, others make a play at investing in them, hoping they’ll go up like stocks and shares.

Let’s examine why using cryptocurrency as an investment may be a good idea and why it might not.

The Pros of Crypto Investments

Cryptocurrencies certainly have plenty going for them as places to store your money and watch it grow. Of course, there’s no such thing as a sure bet, just as with any investment opportunity, but if you’re focused on long-term growth, they might be worth a closer look.

Potential for Massive Gains

This feature isn’t all about Bitcoin, but it is impossible to ignore. These coins were worth under $500 as recently as 2015. In 2021, they passed $60,000. Few stocks can claim to have come close to rivaling that growth.

It’s a risk/reward scenario, as most cryptocurrencies lack the underlying fundamentals of actual companies. However, the growth potential is there, and anyone that wants to take a punt on turning their investments into life-changing wealth has few better options.

Staking Rewards

Depending on how you prefer to invest, you might appreciate dividends. For example, many financially independent investors focus on stocks with dividends and live off the annual payments while their funds continue to grow in the best cases.

Staking rewards are the crypto equivalent, and they are paid out to coin owners for holding certain currencies.

This is made possible by underlying blockchains putting your stored cryptocurrency to work, verifying transactions through the Proof of Stake mechanism.

Just as not all stocks pay dividends, not all cryptocurrencies pay staking rewards. Bitcoin doesn’t, but Cardano does. The more of each currency you hold, the higher the potential recurring returns.

Higher Liquidity

In conventional investing, it is often advised to have an exit strategy. This advice varies – if you’re investing for retirement, you’re more likely to wait and see how your portfolio looks when it comes time to sell. However, if you’re investing in the mid-term, it’s a good idea to have targets in mind.

Crucially, to sell your stocks, you need to find a buyer. It’s the same quandary Jeff Bezos would face if he chose to liquidate his Amazon holdings. Selling 10% of the company in short order would tank the price, and it would become increasingly difficult to find a buyer at a certain amount.

While the same applies to cryptocurrencies in a way – selling large amounts will make the price go down – it is far easier to find buyers. So when it comes time to cash out, you can shift relatively large amounts of crypto without having too much of an impact on the price.

Extensive Choice

Cryptocurrencies are not yet necessarily a direct rival to the stock market, but anyone who thinks there aren’t many investment opportunities would be incorrect.

As already mentioned, there are plenty of different currencies in which to invest. Indeed, there are so many that there are bound to be options that match your investment profile.

If you’re the kind of person that likes to invest in stocks under $1, you’ll be spoiled for choice in the crypto market – even some of the most popular coins in existence trade under a dollar at the time of writing.

Similarly, if you like to invest in more prominent names – the Apples, Microsofts, and Amazons of the world – then there are enough currencies that have reached a level of maturity that warrant further examination.

Cryptocurrency Investment Cons

It does take a particular type of investor to consider cryptocurrencies over and above stocks for long-term holdings. It is still a waiting game to see how these currencies change the global financial landscape.

Increased Volatility

When you hold a long-term stock portfolio, you become accustomed to sideways trading. You’re in for the long haul and probably don’t check your holdings daily. This makes sense, as not a lot happens in a short timeframe unless there is market-wide volatility.

With cryptocurrencies, you need to be prepared for massive swings. If going 10% into the red on a single day would wipe out your confidence, they might not be the investments for you. But, naturally, it goes both ways, so if you can stomach this volatility, it’s all part of the growth process.

Complicated Price Assessment

Public companies report a broad selection of financial information each year. In most cases, these reports drive the price in a particular direction.

Most cryptocurrencies aren’t necessarily tied to the performance of a single entity. Indeed, some of the most significant swings in crypto prices in recent memory have been driven by exchange hacks and Elon Musk tweets.

It’s not always easy to explain why price changes as it does, which is another reason to exercise caution.

Reliance on Small Teams

While not a blanket statement, the smaller a cryptocurrency, the smaller the team behind it. In buying into one of the lesser-known options, you’re demonstrating faith not only in its growth potential but also in the team behind it. Their decisions can make or break even the most cautious growth strategy.

In some cases, the very nature of cryptocurrencies means that these teams are often more comfortable with programming and technology than business and finance. As a result, a single wrong decision can have long-lasting consequences on a coin’s value.

If You Invest Now, You’re Still Early

The New York Stock Exchange opened in 1792. Bitcoin launched as the widely accepted first cryptocurrency in 2009.

Sure, we’d all love to go back to that launch and stock up for pennies. However, in the grand scheme of things, cryptocurrencies remain in their infancy.

Complex pricing factors are just one ingredient in making each coin challenging to assess. Only now are we entering a period where governments are paying enough attention to potentially regulate their use? Some countries are pushing to make crypto legal tender, while others are moving to eliminate them from within their borders altogether.

Essentially, there are plenty of factors at play. Some could drag prices down, while others could potentially see other currencies emulating Bitcoin.

In Closing

If you’re an even remotely cautious investor, then cryptocurrencies involve a lot to think about. The fundamentals are often different, and there are many more external influences to consider than when investing in conventional stocks and funds.

It was impossible to predict a decade ago that Bitcoin would reach the heights of March 2021, and the same applies today.

As things stand, cryptocurrencies appear to represent an opportunity to diversify a portfolio. For those that are happy with risk and volatility, a chance to overperform the most popular stocks vastly.

As with any investment decision, it is best to seek advice from a professional before making any commitment, preferably one that understands your current portfolio and investment goals. With cryptocurrencies, it is essential to understand what may influence future price movements and continue to adopt best investment practices when making decisions.

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Kiara Dawson
Kiara Dawson comes from an Engineering background, with a specialization in Information Technology. She has a keen interest and expertise in Web Development, Data Analytics, and Research. She trusts in the process of growth through knowledge and hard work.

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