Crypto Currencies: Smart Investment Or Risky Gamble?

Investing in cryptocurrencies has produced jaw-dropping returns for some, but it is also very possible to lose all of your money. Cryptocurrency is a good investment if you want direct exposure to the demand for digital currency. It gives consumers greater choice, independence, and opportunity in their finances. However, it is a risky investment due to potential high losses from security breaches and fraud.

The pros of investing in crypto

Potential for high returns

Cryptocurrencies can increase in value dramatically over short periods of time. For example, in 2023, Bitcoin's value rose from C$22,473 on January 1st to C$29,103 on February 12th. However, this can be very unpredictable.

Decentralization

Most cryptocurrencies operate independently of central banks, which can give investors more freedom.

Accessibility

Thanks to its decentralized nature, your cryptocurrency funds can be accessed anywhere in the world at any time and converted into most major fiat currencies.

Potential hedge against fiat currency

For some investors, one of the biggest appeals of cryptocurrency is its decentralized nature. It’s not controlled by central banks or governments who like to print money and generate inflation in fiat currencies such as the US dollar or the euro. Cryptocurrency has been called “digital gold” by some investors who hold it because they think it will protect them from inflation.

Potential for outsized gains

Buying cryptocurrencies creates the potential for large gains on your investment. Several cryptocurrencies have seen their prices skyrocket since first being introduced.

Growing number of coins

In the early days of cryptocurrencies, there were just a few coins that could be invested in, but the speculative interest has changed that. New coins are introduced regularly and there are now thousands to choose from.

Wide interest in digital currencies

There seems to be a growing interest in cryptocurrencies from investors, companies and governments. Tesla holds Bitcoin on its balance sheet and briefly accepted the digital currency as payment. El Salvador adopted Bitcoin as legal tender in 2021.

The cons of investing in crypto

Investing in cryptocurrencies is risky and volatile. Here are some of the cons of investing in crypto:

High Volatility and Risk

Cryptocurrencies are highly volatile and risky investments. The value of crypto can swing wildly in either direction in the blink of an eye, making it a poor choice for conservative investors. The price is based purely on speculation, and there is no pattern to the rise and fall of its value. This volatility is further fuelled by influencers with large online followings.

Security and Fraud

Crypto exchanges are vulnerable to hacking and other criminal activity, and there is a high risk of fraud. In the first three months of 2023, hackers stole $400 million worth of cryptocurrency. Additionally, there is a risk of losing your private key if you choose to store your crypto in cold storage, such as a hardware wallet.

Regulatory Risk

The regulatory environment surrounding cryptocurrency is constantly evolving, and new regulations could significantly impact the crypto space. Some countries have already banned crypto, and others are seeking ways to regulate it. There is a possibility that crypto could become illegal, rendering any investments worthless.

Lack of Understanding

Only a small percentage of people truly understand blockchain technology, which crypto is based on. This lack of understanding makes investors vulnerable to making uninformed investment decisions.

Competition and Failure

The crypto space is highly competitive, with thousands of blockchain projects vying for success. Many projects are scams, and only a small percentage will ultimately flourish.

Tax Implications

Investing in cryptocurrency has tax implications, and you will be required to pay taxes on any profits made from buying or selling crypto.

In conclusion, while investing in crypto can offer high returns, it is a risky and volatile endeavour with many potential pitfalls. It is crucial to carefully consider the cons and conduct thorough research before investing in cryptocurrencies.

Crypto as a long-term investment

The Pros

There are several advantages to investing in cryptocurrency for the long term. Firstly, it offers consumers greater choice, independence, and opportunity in their finances. The decentralised and open-source nature of cryptocurrency helps to eliminate the weak points of the modern banking system by bringing access directly to consumers. This makes it easier to buy, sell, store, and trade the best-performing assets. Additionally, cryptocurrency is still in its infancy, so investing now could mean getting in on the ground floor, even though the prices seem high. There is also the potential for massive gains, as demonstrated by Bitcoin's performance over the past decade, where it has appreciated over 31,000%.

Furthermore, the increasing adoption of cryptocurrency by companies suggests a maturing industry and safer investments. Financial giants like Block and PayPal are making it easier to buy and sell cryptocurrency on their platforms, and some companies are pouring hundreds of millions of dollars into Bitcoin and other digital assets. This indicates that cryptocurrency is being integrated into the financial system and is here to stay.

The Cons

However, there are also significant risks associated with investing in cryptocurrency for the long term. Cryptocurrency is highly volatile, and its value can swing wildly in a short period. This makes it a risky investment, especially for those who cannot afford to lose money. The crypto market experienced a crash in 2022, causing many Bitcoin millionaires to lose a significant portion of their wealth. Additionally, there is the risk of fraud and security breaches, as cryptocurrency exchanges are vulnerable to hacking attempts. The lack of regulations in the crypto space also makes it ripe for fraudsters, and there is no guarantee that a crypto project will succeed due to the fierce competition among blockchain projects.

While investing in cryptocurrency can offer potential gains, it is essential to approach it with caution due to the high risks involved. It is crucial to do your research, understand the technology, and carefully consider your risk tolerance before investing in cryptocurrency as a long-term investment.

Crypto as a short-term investment

There are several types of short-term trading:

• Scalp trading or scalping involves buying and selling crypto in very short time frames (from 1 to 15 minutes) to profit from small price movements. The profits usually go from 1% to 3%.
• Day trading focuses on higher price movements and longer time frames (from 15 minutes to 1 day). Day trading profits usually go from 5% to 15%.
• Swing trading focuses on even higher price movements than day trading and involves buying and selling crypto assets over a couple of days to a couple of weeks.

Short-term crypto trading requires a lot of time and effort, and there is a high level of risk involved. It can be difficult to make successful short-term investments in crypto because the market is extremely volatile and unpredictable. Skill is not the only thing you need for short-term trading, as luck also plays a pretty important role.

However, short-term crypto trading can be profitable. It allows investors to capitalise on the potential for rapid gains in the dynamic world of cryptocurrencies.

Crypto's impact on the future of finance

Cryptocurrencies are slowly but surely making their way into the world's traditional financial systems. The number of cryptocurrency users grew by 66 million between 2018 and the last quarter of 2020, and both the private and public sectors are increasingly adopting them in their financial dealings.

The Dawn of Decentralized Finance (DeFi)

Decentralized finance or DeFi is a system that offers more transparency and better transactional security. It is gaining traction in investing, trading, borrowing, and lending, and is set to replace some conventional financial processes. DeFi is built on a public blockchain, making it a more viable alternative financial system that offers greater access to financial services. Anyone can connect to it, and it also offers transparency as all transactions are publicly visible.

Varied Values of Cryptocurrency

Cryptocurrency has value in the following ways:

• Payments: It can be used to buy goods or services without requiring a trusted third party.
• Value Storage: The limited supply of most cryptocurrencies influences their value.
• Stable coins: Cryptocurrency can be attached to commodities such as gold or oil or currencies such as the USD.
• Privacy: The technology that cryptocurrency is built on ensures security and allows users and owners to remain anonymous during transactions.
• Digital Access and Ownership: Even people without access to traditional banks can enter the financial system with the help of cryptocurrency.
• Digital Gold: Cryptocurrencies share attributes with money, such as being a medium of exchange, a store of value, and a unit of account.

More and More Actors Are Becoming Receptive

Cryptocurrency is becoming a more acceptable financial system. Institutional investors, technology-focused corporations, and even national central banks have started to incorporate it into their operations. New policies and regulations are being put in place to create regularized practices for the future.

Transactional and Banking Benefits

As the use of cryptocurrency grows, so does its acceptability and accessibility. The cryptographic technique and technology continue to evolve, leading to the creation of a better and stronger cryptocurrency financial system. Some of the benefits of this system include:

• Anonymity: The system is powered by the use of different cryptographic techniques that ensure data protection to avoid information falling into the wrong hands.
• Security: Transactions carried out using cryptocurrency can't be changed or forged, and they are transmitted over extremely high-security networks.
• Access and Efficiency: Cryptocurrency offers a viable and concrete solution for the large population worldwide that does not have access to formal financial services due to a lack of personal identification documents, account opening and operating funds, or proximity to an institution. It offers instant access from anywhere, lower transaction costs, and fast processing of transactions.

Frequently asked questions