Crypto Investment: Good Or Bad?

Investing in cryptocurrencies has become increasingly popular in recent years, with some people making millions. However, it is not without its risks. Cryptocurrencies are incredibly volatile and vulnerable to security breaches, and there is also the possibility of huge losses. On the other hand, crypto can offer protection against inflation, and it is a cost-effective way to transfer money globally. So, is buying crypto a good investment?

Crypto volatility and risk

Cryptocurrency is a highly volatile and risky investment option. Its value can fluctuate dramatically in a short period, and it is not suitable for investors who are averse to risk or seek stable investments.

Volatility

The cryptocurrency market is extremely volatile, and the value of cryptocurrencies can swing wildly in either direction. For example, the crypto market was worth $2.9 trillion at its peak in November 2021 but lost more than two-thirds of its value by mid-2022 due to rising inflation and aggressive rate hikes. By June 2024, the market had rebounded to over $2.5 trillion.

Bitcoin, the most well-known cryptocurrency, provides an illustration of this volatility. In May 2016, it traded for about $500, but its price had risen to around $56,902 by September 2024, representing an increase of 11,280%. However, it is not uncommon for Bitcoin's value to fluctuate by thousands of dollars in a matter of days or even hours.

Risk

Investing in cryptocurrencies carries significant risks due to their speculative nature, lack of regulation, security concerns, and potential for fraud and theft.

Speculation

The value of cryptocurrencies is based purely on speculation, as there is no underlying asset or company performance influencing their price. This makes it challenging to predict their value and increases the risk of losses for investors.

Lack of Regulation

Cryptocurrencies are not regulated by central authorities, and their value can be highly unpredictable. The lack of regulatory oversight also means that investors have limited recourse in the event of fraud or other issues.

Security and Fraud

Cryptocurrency exchanges are vulnerable to security breaches and hacking attempts, which have resulted in significant losses for investors. Additionally, the decentralised nature of blockchain technology, which cryptocurrencies are built on, makes it easier for fraudulent activities to occur.

Theft

Cryptocurrency theft is a significant risk, with hackers stealing millions of dollars worth of crypto assets. In the first three months of 2023, hackers stole $400 million worth of cryptocurrency, a 70% decrease from the same period in 2022.

While investing in cryptocurrencies can offer high returns, it is crucial to approach this asset class with caution due to its inherent volatility and risks. Diversification, thorough research, and risk management strategies are essential when considering investing in cryptocurrencies.

Crypto safety and security

While crypto investing has become increasingly popular, it is important to be aware of the security measures you should take to protect your digital assets. Here are some tips to help ensure the safety and security of your crypto investments:

• Research Crypto and Blockchain Technology: Before investing in cryptocurrency, take the time to understand how it works, including the different types of cryptocurrencies and blockchains. Stay informed about the latest scams and safety tips.
• Use Secure Wallets: Store your crypto in a secure wallet to protect your investments and make transactions. There are different types of crypto wallets, such as software or hardware wallets, each with its own advantages and disadvantages. Hardware wallets, for example, are USB devices that store your key vault offline, making them more secure but less convenient.
• Enable Two-Factor Authentication (2FA): Protect your crypto exchange account by enabling 2FA, which requires you to enter a code from your phone in addition to your password when making withdrawals or logging in. This adds an extra layer of security to your account.
• Regularly Monitor Your Crypto Accounts: Keep a close eye on your crypto accounts to detect any suspicious transactions or bots monitoring your wallet. Stay up-to-date with crypto news to promptly report any losses in the event of a breach.
• Be Wary of Suspicious Emails: Hackers often use phishing emails and social engineering tactics to gain access to crypto accounts. Be cautious of emails with odd spelling and grammar, links, or attachments. Avoid supposed giveaways on social media, and always verify crypto websites or apps.
• Use Strong and Unique Passwords: Create long and complex passwords with a combination of uppercase and lowercase letters, numbers, and special characters. Avoid using the same password across multiple platforms, and change your passwords periodically.
• Avoid Public Wi-Fi for Crypto Transactions: When conducting crypto transactions, avoid using public Wi-Fi as it may expose your internet traffic to potential interception by nearby individuals. Instead, use secure internet connections and ensure your firewall, anti-malware software, and router security settings are up to date.
• Back Up Your Seed Words Properly: When setting up a crypto wallet, back up your seed words (secret recovery phrase) by writing them down on a piece of paper and storing it in a safe place. Avoid taking screenshots or storing them digitally, as this can compromise their security.
• Avoid Entering Seed Words on Websites: Be cautious of any website or browser extension that asks for your seed words, as this could be a malicious attempt to steal your crypto. Only enter your seed words during the initial installation of a trusted wallet.
• Use a VPN: Subscribe to a reputable VPN service to encrypt your communications and hide your online activities from potential intruders. This can help protect against man-in-the-middle (MITM) attacks, where a hacker intercepts your connection to a website.

By following these safety and security measures, you can help protect your crypto investments from hackers, scammers, and cybercriminals.

Crypto regulation and legality

The legality of cryptocurrencies varies across the world. As of January 2024, some governments have created frameworks to provide protection for users, while others are still considering their approach. Cryptocurrency is legal in 33 countries, partially banned in 17, and generally banned in 10.

In the US, cryptocurrencies are not considered legal tender, but cryptocurrency exchanges are legal, and the regulatory approach varies by state. The Financial Crimes Enforcement Network (FinCEN) considers cryptocurrency exchanges to be money transmitters, and the Internal Revenue Service (IRS) defines crypto as "a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value". Cryptocurrency exchanges fall under the regulatory scope of the Bank Secrecy Act (BSA), and service providers must register with FinCEN, implement an AML/CFT program, maintain records, and submit reports to the authorities. The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have also been given powers to regulate the sector.

Canada takes a similar approach, with cryptocurrencies not considered legal tender but able to be used to buy goods and services. Cryptocurrency exchanges are legal and must register with FinTRAC. Cryptocurrencies are treated as commodities for tax purposes.

In the UK, cryptocurrencies are not legal tender, but exchanges are legal and must register with the Financial Conduct Authority (FCA). Cryptocurrency exchanges must also comply with AML/CFT reporting obligations.

Australia has a progressive approach to crypto regulation. Cryptocurrencies are legal and treated as property, meaning they are subject to Capital Gains Tax (CGT). Cryptocurrency exchanges are also legal and must register with AUSTRAC, as well as meeting AML/CFT obligations.

Japan has a similarly progressive attitude, recognising cryptocurrencies as legal property under the Payment Services Act (PSA). Crypto exchanges must register with the Financial Services Agency (FSA) and comply with AML/CFT obligations.

Singapore permits the use of cryptocurrencies, though they are not considered legal tender. The Monetary Authority of Singapore (MAS) regulates exchanges and has issued guidelines to crypto service providers to discourage advertising their services to the general public.

In the European Union, cryptocurrencies are broadly legal, though individual member states have their own approaches to exchange governance and taxation. The EU's Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) have tightened KYC/CFT obligations and standard reporting requirements.

Other countries take a more hardline approach, with China and India, for example, imposing strict bans on the use of cryptocurrencies.

Crypto investment diversification

Investing in cryptocurrencies is risky due to the potential for high losses from security breaches and market volatility. Diversification of your cryptocurrency investments is a way to reduce your crypto investment risk.

• Diversify by coins and tokens: You can diversify your direct ownership of digital coins by investing in different types of crypto coins, such as payment tokens (e.g. Bitcoin, Ethereum), security tokens (e.g. HoneyBricks), utility tokens (e.g. Filecoin), governance tokens (e.g. Uniswap, Compound), basic attention tokens (e.g. Brave browser network), gaming tokens (e.g. Decentraland’s MANA), and non-fungible tokens (NFTs).
• Diversify by industry focus: Invest in cryptocurrency projects that focus on different industries. Blockchain technology is being applied to and disrupting many sectors, including healthcare (e.g. MediBloc, Dentacoin), supply chain (e.g. VeChain), transportation (e.g. Mass Vehicle Ledger, ParkinGo), entertainment (e.g. ApeCoin, Reef), and climate change (e.g. Climatecoin).
• Diversify by asset class: Crypto and blockchain investors have many options across asset classes to diversify their crypto portfolios. These include stocks (e.g. companies focused on the crypto sector or with large crypto holdings), bonds (e.g. blockchain-based or crypto bonds), and real estate (e.g. blockchain-based real estate tokens).
• Diversify by investment vehicle: If portfolio security is a concern, investors can diversify their crypto holdings across various investment vehicles and account types, such as digital wallets, taxable brokerage accounts (e.g. Robinhood), cryptocurrency IRAs, and decentralized financial products (e.g. decentralized savings accounts, staking platforms).

It is important to note that while diversification can reduce risk, it does not eliminate it completely. Additionally, diversifying your crypto portfolio may require more research and could potentially lower your absolute investment returns.

Crypto investment long-term outlook

Investing in cryptocurrencies is risky due to the potential for high losses from security breaches, fraud, and volatility. However, it can also be lucrative, with some people making millions. The extreme volatility of the crypto market is due to its lack of regulation and its dependence on speculation. This makes it similar to gambling.

Despite the risks, cryptocurrencies and the blockchain industry are growing stronger. Crypto is having a moment in 2024, with the market worth over $2 trillion as of June. The increasing pace of crypto adoption is a sign of a maturing industry, and it is gaining more acceptance among mainstream investors.

Bitcoin and Ethereum are the two best-established cryptocurrencies and are in a league of their own. Bitcoin, the first cryptocurrency, has the most mainstream acceptance and benefits from the network effect. It is also considered "digital gold" by many investors due to its fixed supply, which is capped at 21 million coins. Ethereum, on the other hand, has inherent utility as the native token of a widely used blockchain platform that supports smart contracts, decentralised finance tools, and non-fungible tokens (NFTs).

The long-term outlook for crypto investments depends on several factors, including the continued adoption and maturation of the industry, regulatory developments, and the performance of individual cryptocurrencies. While the success of any cryptocurrency project is not assured, early investors in a successful project can be richly rewarded over the long term.

Overall, investing in cryptocurrencies is a risky proposition, but it can be a good investment if done properly and as part of a diversified portfolio. It is crucial to do your research and understand the risks and potential rewards before investing in crypto.

Frequently asked questions