Cryptocurrency: The latest investment buzzword. However, when it comes to making decisions about your financial portfolio, you need to look past the hype of new investment trends. Before deciding whether or not to invest in crypto, make sure to consider these critical advantages and drawbacks.
What Is Cryptocurrency?
You’ve likely heard the term, but, in keeping with its name, cryptocurrency can often feel cryptic and vague. Put simply, cryptocurrency is any form of digital currency that uses encryption to secure and verify any transactions. In other words, anyone can send or receive payments to anyone else in the world without an intermediary facilitating the transaction.
What Are the Advantages of Investing in Cryptocurrency?
PRO #1: INHERENT SECURITY & TRANSPARENCY
Perhaps the most notable benefit of cryptocurrency isn’t the currency itself, but rather its underlying infrastructure. Because crypto exchanges are run through blockchains (decentralized data-storage ledgers), every transaction is secure. Once the owner authorizes the transaction, it is recorded and can never be changed. Helping minimize fraud, a blockchain allows the public to see the details of every transaction but prevents any data corruption.
PRO #2: HIGH REWARD
There are thousands of types of cryptocurrency on the market today, but they all share one thing in common: sudden spikes in value (and drops in value). As a result, crypto investors have the potential to receive high rewards. However, with frequent and drastic price fluctuations, there is also a high chance that an investor will experience significant losses too.
PRO #3: NO CENTRALIZED REGULATION
As a decentralized currency, cryptocurrency isn’t regulated by a central bank or government, meaning there is no way for authorities to ever freeze your wallet as they could your bank account and transactions can be carried out peer-to-peer without any middleman. This independence gives investors greater control over their money, eliminates third-party fees, and is generally seen as one of the biggest advantages of buying cryptocurrency.
Disadvantages of Cryptocurrency You Need to Know
CON #1: HIGH VOLATILITY
The cryptocurrency market is highly volatile. Anticipating spikes and drops in the market and estimating changes in value is nearly impossible. To do so, you’d have to stay up to date on all of the latest cryptocurrency news and, on top of that, would likely need the skills of a seasoned analyst, meaning many crypto investors may find themselves out of their depth.
CON #2: NOT A LONG-TERM STRATEGY
While their popularity may be rising, cryptocurrencies are still new to the investment world at just over a decade old, quite young compared to assets like stocks, which have shown to have long-term value. The future of cryptocurrency is still unsure, so those who decide to invest must be willing to accept the risk that comes with a currency whose value isn’t clearly established.
CON #3: MINIMAL USAGE
Using your crypto assets is not like using your debit or credit card. Even the most popular cryptocurrencies, such as Bitcoin, are still not widely used. There are very few companies that actually accept crypto as a form of currency, which means even investors with large crypto wallets will still be limited in where they can use it.
CON #3: HIGH RISK OF LOSS
Unlike fiat currencies, such as the dollar, euro, etc., the value of cryptocurrency is not backed by any central authority. While this may give users new levels of independence, it also means that its value is determined by the users themselves. If enough participants stop backing cryptocurrency, the value could be lost completely, and investors could lose all of the money they invested.
CON #4: CYBERSECURITY CONCERNS
Cryptocurrency is a double-edged sword when it comes to cybersecurity. While the technology behind crypto means transactions are generally secure, there is always a risk of cyberattacks. This is especially true for newer investors who may not be aware of the red flags that indicate a hacking attempt.
CON #5: NO BACKUP PLANS
Any cryptocurrency transaction is final. If the wrong amount is sent or if it’s sent to the wrong person, there is no chance of reversing that mistake. Even if you used crypto perfectly, in the case of a technical error, you still would be unable to safeguard your wallet. There are no regulating industries and, therefore, no one to whom you can report any problems.
Should You Invest? Our Takeaway on Crypto.
While cryptocurrency may have its advantages, there’s no denying the high amount of risk that comes with it in its current state. Here at Ironwood Wealth Management, we believe long-term, time-tested investment strategies are currently the best move for investors, and we’re here to help you reach your financial goals with our comprehensive financial planning services.
Contact us today to learn more about how we support you along your investment journey.