Pros and Cons of Investing in Cryptocurrencies
In this digital age, the use of virtual currency has become more mainstream. With online financial services like peer-to-peer payment systems growing in popularity, the use of digital tokens as a medium of exchange is expanding rapidly.
And while virtual currencies have yet to achieve widespread adoption, they have begun to attract the attention of individual investors and financial institutions alike.
As such, many are asking: Should I invest in cryptocurrencies like Bitcoin? Investing in cryptocurrencies can be a smart move for savvy investors looking to diversify their portfolio with an asset that has soared in value over the past year.
However, before you take the leap, it’s important to understand exactly what investing in cryptos entails and what risks you might be taking on by buying them. Here are some pros and cons of investing in cryptocurrencies
Pros of Investing in Cryptocurrencies
- Lower investment thresholds – Cryptocurrencies can be purchased with modest amounts of capital. For example, an investor who wants to put $10,000 into Amazon stock will have to purchase 102 shares at a price of $1,090 per share.
- Higher returns – Cryptocurrencies have historically delivered higher returns than traditional stocks and bonds. While there is no certainty that cryptocurrencies will continue to outperform stocks and bonds in the future, they have returned 5.82% over the past year, compared to -1.35% for the S&P 500.
- Higher liquidity – Cryptocurrencies can easily be traded with minimal transaction costs compared to traditional financial assets that often incur high trading fees. In addition, investors can liquidate their cryptocurrency holdings whenever they want. As long as the market is active and that there are willing buyers.
- Ease of diversification – Cryptocurrencies can be easily integrated into most portfolios that already include stocks and bonds. This can help investors to minimize the overall volatility of their holdings.
- Government-Free – Cryptocurrencies are free from any government, which means that they are free from regulation and government intervention.
- Immutable ledger – Cryptocurrencies have transparent and immutable ledgers. It means that there is full transparency in terms of issuing, trading and spending virtual currencies.
CONS of investing in cryptocurrencies
- Uncertain future – The future of cryptocurrencies is highly uncertain due to the fact that their value is weak to speculation.
- High volatility – Cryptocurrencies are extremely volatile. It means that the value of virtual currencies can fluctuate significantly over the course of a single day. This makes investing in cryptocurrencies risky, especially for investors with a long-term outlook.
- Lack of regulations – The lack of regulations surrounding cryptocurrencies has allowed fraudulent schemes to flourish. And it has also made it difficult for investors to secure their funds.
- No underlying assets – Many cryptocurrencies don’t have any underlying assets. This means that you can’t use them as a store of value like gold or silver.
- No intrinsic value – Unlike traditional assets, virtual currencies have no intrinsic value. This means that their prices are not linked to the value of a tangible commodity such as gold.
- Lack of liquidity – Cryptocurrencies are highly illiquid assets; most exchanges only permit cryptocurrencies to be traded for other cryptocurrencies. This means that it can be difficult to convert cryptocurrencies into cash.
- A high degree of risk – Investing in cryptocurrencies is a highly risky move that can lead to significant losses if investors aren’t careful.
Should you invest in cryptocurrencies?
Before you invest in cryptocurrencies, it’s important to understand that this is a highly speculative market that is rife with scams and schemes.
Moreover, the security surrounding cryptocurrencies is often not strong enough against hackers and fraudulent exchanges. Cryptocurrencies are still in their infancy and are nowhere near as common as a medium of exchange.
This means that investing in them is extremely risky and that it’s difficult to predict how their value will change in the future. Cryptocurrencies are unregulated financial assets that are difficult to regulate and that are subject to extreme volatility.
Cryptocurrencies have no intrinsic value, which means that you can’t use them as a store of value like gold or silver. You also can’t use them as a unit of accounts like the dollar or the euro. And they don’t have any utility like a car or an iPhone.
Since they don’t have any intrinsic value, their value is based on the supply and demand in the market. And their value can change at any time. Risk of investing in a cryptocurrency is that the value can suddenly drop if the demand falls, and it’s not possible to predict when this might happen.
Another risk of investing in a cryptocurrency is that it can be stolen, just like money from a bank account. Even though the risk of investing in cryptocurrencies is generally lower than the risk of investing in stocks or mutual funds. It’s still important to weigh the benefits against the risks before making the decision to buy or sell a cryptocurrency.
In conclusion, investing in cryptocurrencies can be a smart move for savvy investors looking to diversify their portfolio with an asset that has soared in value over the past year.
However, it’s important to understand exactly what investing in cryptos entails and what risks you might be taking on by buying them. Moreover, it’s important to note that cryptocurrencies are extremely volatile and that they have no intrinsic value.