Cryptocurrency: Worth The Investment Risk?

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known and most commonly traded today. There are now thousands of cryptocurrencies, with Ethereum being the second most popular.

Cryptocurrency is not issued or regulated by any central government authority, rendering it theoretically immune to government interference or manipulation. Instead, it runs on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.

Cryptocurrency can be bought and sold via crypto exchanges, brokers, or traditional brokers. It can be stored in a digital wallet, either through an exchange or an independent wallet provider.

While cryptocurrency can be a good investment for those who enjoy speculating and can afford to lose everything invested, it is not a wise investment for those seeking to grow their retirement portfolio.

How to buy cryptocurrency

Investing in cryptocurrency is risky, so it's important to do your research and not invest more money than you can afford to lose. Here is a step-by-step guide on how to buy cryptocurrency:

• Choose which cryptocurrency to buy: The most well-known cryptocurrency is Bitcoin, but there are thousands of others to choose from, including Ethereum, Altcoin, and many others.
• Decide where to buy crypto: You can buy crypto on a crypto exchange, through a broker-dealer, or on an app. Some popular crypto exchanges include Coinbase, Binance, and Kraken.
• Choose how you'll pay: You can pay with fiat money or other cryptocurrencies. Most exchanges allow debit and bank transfers, and some also allow credit card funding, although this can be risky due to high interest costs.
• Store your cryptocurrency: You can store your crypto on the exchange or platform where you bought it, or in a digital wallet. Digital wallets can be hot (always connected to the internet) or cold (offline). Hot wallets are more convenient but less secure, while cold wallets are more secure but harder to access.
• Place your cryptocurrency order: Choose how much cryptocurrency you want to buy, taking into account that you can purchase fractional shares of most cryptocurrencies.
• Review and confirm your order: Double-check the details of your order before confirming the purchase.
• Monitor your investment: Keep track of how your cryptocurrency investment is performing, and consider rebalancing your portfolio as needed.

The risks of investing in cryptocurrency

Cryptocurrency is a highly speculative investment that comes with a substantial degree of risk. The market is still young and emerging, with many projects in the stage of explosive price discovery, resulting in unusually high price volatility. The 24/7 nature of the crypto market, driven by a global community, also contributes to dynamic price movements. The high degree of automation in the market further adds to the volatility. As such, cryptocurrencies are not suitable for investors who are uncomfortable with market risks.

Another significant risk associated with cryptocurrency is the lack of regulation. Cryptocurrencies are not regulated like stocks, and governments and regulatory bodies worldwide are still figuring out how to manage them. This lack of regulation creates uncertainty and the potential for sudden regulatory changes that could negatively impact the market.

Cryptocurrency exchanges and wallets are also vulnerable to cybersecurity threats and hacks, which could result in the loss of investments. Additionally, the technical complexity of using and storing crypto assets can lead to mistakes, such as sending funds to the wrong address, which is irreversible.

The decentralised nature of cryptocurrencies also comes with risks. The lack of central authority means there is no way to reverse or cancel a transaction, and the responsibility for keeping private keys safe falls solely on the individual. The lack of coherent regulations also leaves investors vulnerable to deceptive or unethical management practices.

Furthermore, the price of cryptocurrencies is highly volatile, and investments require accurate price monitoring. The environmental impact of mining activities, the use of cryptocurrencies in criminal activities, and the potential for market manipulation by influential entities are also notable risks.

Overall, investing in cryptocurrency carries a high level of risk, and individuals should carefully consider these risks before deciding to invest.

The benefits of investing in cryptocurrency

Inflation protection

Cryptocurrencies such as Bitcoin have a limited supply, which means that as the growth of the money supply outpaces the growth in the Bitcoin supply, the price of Bitcoin will increase. This makes it a good hedge against inflation.

Transaction speed

Cryptocurrency transactions are much faster than traditional bank transfers, which can take up to five days. In contrast, cryptocurrency transactions can be completed in a matter of minutes.

Transaction costs

The cost of transacting in cryptocurrency is relatively low compared to other financial services. For example, domestic wire transfers can cost upwards of $25, while sending money internationally can be even more expensive. Cryptocurrency transactions are usually much cheaper and can be done for a fraction of the cost.

Accessibility

Anyone with an internet connection can use cryptocurrency. All that is needed is a computer or smartphone, and there is no need for ID verification, background or credit checks. This makes cryptocurrency a good option for those who are unable or unwilling to use traditional banking services.

Security

The decentralised nature of blockchain technology means that cryptocurrency transactions are very secure. In order to modify the blockchain, enough computing power would be needed to confirm multiple blocks before the network can verify the ledger's accuracy. For popular blockchains such as Bitcoin, this would be prohibitively expensive.

Privacy

Since there is no need to register for an account at a financial institution to transact with cryptocurrency, users can maintain a level of privacy. Transactions are pseudonymous and only show wallet addresses, meaning that no specific information about the user is included.

Transparency

All cryptocurrency transactions take place on a publicly distributed blockchain ledger, which means that anyone can look up transaction data, including where, when, and how much cryptocurrency was sent from a wallet address. This level of transparency can help to reduce fraudulent transactions.

Diversification

Cryptocurrency can offer investors diversification from traditional financial assets such as stocks and bonds. The prices of cryptocurrencies do not appear to be correlated with other markets, so they can be a good source of portfolio diversification.

The future of cryptocurrency

The number of cryptocurrency investors has been steadily increasing, and the profile of investors has evolved. In the past, investors were typically anti-establishment and wanted to shake up the exclusive, institutionalized world of finance. Now, everyday consumers are investing in cryptocurrency, seeing it as a way to pad their portfolios with potentially more rewarding, albeit riskier, assets. Older consumers, in particular, are backing crypto, with nearly half of those in the U.S. over 35 years old expecting to invest in the next 6 months.

The involvement of corporations and institutions in the crypto market has also changed the power structure. A few companies have ring-fenced the mining network, making it difficult for independent users to get involved. At the same time, massive corporate investments, like one by Tesla, have cast doubt on how democratic the market is.

While the future of cryptocurrency is uncertain, there is a lot of potential for it to become a more legitimate way to invest. Brands and individuals have the opportunity to take on the task of balancing the risks and rewards and shaping the future of this asset class.

How to store cryptocurrency

There are several ways to store cryptocurrency, each with its own pros and cons. Here is a detailed guide on how to store your cryptocurrency safely:

Custodial Wallets

A custodial wallet is a wallet managed by a third party, such as a cryptocurrency exchange like Coinbase. The custodian stores your private keys, guaranteeing their safety and sometimes providing insurance on holdings. Custodial wallets are convenient and often used by new crypto traders, but they have been the target of many attacks.

Non-Custodial Wallets

Non-custodial wallets are those you use to store your keys without any third-party involvement. These wallets can be hot or cold. Hot wallets are software that stores your keys and have internet connections, making them vulnerable to hacking. Cold wallets, on the other hand, are not connected to the internet and are considered safer.

Hardware Wallets

Hardware wallets are small devices similar to USB drives that connect to your computer and store your cryptocurrency offline. They are considered one of the safest options for storing your keys, especially commercial non-custodial cold wallets like the Ledger Nano X or Trezor Model T. These wallets usually support multiple cryptocurrencies and have security features like PIN codes and two-factor authentication.

Paper Wallets

A paper wallet is a free, simple, and convenient way to store your cryptocurrency offline. It involves printing out your public and private keys, usually as QR codes, and storing them in a safe place. However, paper can deteriorate over time, and there is a risk of losing or having the paper stolen.

Web-based and Mobile Wallets

Web-based and mobile wallets are applications that store your cryptocurrency online. They are convenient and easy to use, but they carry a high security risk as they are susceptible to hacking.

Desktop Wallets

Desktop wallets are programs that reside on your computer. They are not considered very safe, as they are vulnerable to hacking and malware.

Security Precautions

To enhance the security of your cryptocurrency storage, it is recommended to back up your wallet regularly, use strong passwords, and keep your software and operating systems up to date. Additionally, consider using a multi-signature or shared wallet, which requires transaction approval from multiple people, adding an extra layer of security.

In summary, the best way to store your cryptocurrency is by using a combination of wallets. For example, you could use a hardware wallet for most of your holdings and a hot wallet for smaller amounts that you want to use for trading. Always remember to keep your recovery phrases and private keys secure and never share them with anyone.

Frequently asked questions