Crypto's Long-Term Safety: A Smart Investment?

Investing in cryptocurrencies is a highly debated topic. On the one hand, crypto has delivered tremendous profits for some investors, but it has also caused others to lose significant sums of money. Crypto is a very volatile asset, and investors need to understand that owning it involves taking on a great deal of risk. However, for investors who understand how to manage risk, crypto could present great opportunities.

Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalization and are more established than many other crypto options, making them a safer bet for most investors. Additionally, the increasing pace of crypto adoption is a sign of a maturing industry, and individual investors and companies are seeking to gain direct exposure to crypto, considering it safe enough to invest large sums of money.

However, there are several risks associated with investing in cryptocurrencies, including loss of capital, government regulations, fraud, and hacks. Crypto exchanges are vulnerable to being hacked, and unless investors store their crypto in a hardware wallet, their investments are not completely safe from bad actors. Furthermore, cryptocurrencies are still largely unregulated, and there is a chance that governments could ban them, as has already happened in China.

Despite the risks, some people consider crypto a good long-term investment. Bitcoin, for example, is seen as a store of value, and some believe it can replace gold in the future. Additionally, because there can only ever be 21 million bitcoins in existence, it is impervious to inflation. Ethereum, the second-largest cryptocurrency by market cap, also has huge growth potential as it enables decentralized apps and smart contracts.

In conclusion, while crypto has the potential to be a good long-term investment, it is essential to approach it with caution and only invest what you can afford to lose.

Crypto's volatility

Cryptos Volatility

Cryptocurrencies are still a new and highly volatile asset class. They can gain or lose significant value in a single day, making them a risky investment. For example, it's not uncommon for Bitcoin to dip by 80-90% in a bear market. However, as more institutions and long-term players enter the market, volatility is likely to decrease.

The extreme volatility in the crypto market is driven by various factors, including:

• Adoption and speculation: The price of cryptocurrencies is influenced by demand and speculation. As more people adopt and invest in cryptos, the prices tend to rise, and vice versa.
• News and sentiment: Positive or negative news, such as regulatory changes or comments from industry influencers, can impact market sentiment and trigger price movements.
• Market manipulation: Due to the decentralised nature of cryptos, it is easier for large investors or groups to manipulate prices by buying or selling large amounts, creating a bandwagon effect.
• Technical factors: The performance of the underlying blockchain technology, security breaches, and network upgrades can also affect crypto prices.

To manage the volatility, investors can consider:

• Dollar-cost averaging: Making small, regular investments over time to smooth out the impact of price swings.
• Diversification: Spreading investments across different cryptos and other asset classes to reduce the impact of any single investment.
• Long-term horizon: Taking a long-term view and holding through short-term volatility, as crypto prices have historically recovered and trended upwards.

While crypto volatility can be daunting, it also presents opportunities for investors who understand the market and are willing to take on the associated risks.

Security and fraud

Cryptocurrency exchanges are vulnerable to hacking and other criminal activity. Security breaches have resulted in significant losses for investors who have had their digital currencies stolen, prompting many exchanges and third-party insurers to offer protection against hacks.

Storing cryptocurrency safely is also more challenging than owning stocks or bonds. Many people avoid keeping their digital assets on exchanges due to the risk of allowing any company to control access to their assets. Storing cryptocurrency on a centralised exchange means you don't have full control over your assets. An exchange could freeze your assets based on a government request, or it could go bankrupt, leaving you unable to recover your money.

Some cryptocurrency owners prefer offline cold storage options, such as hardware wallets. However, cold storage comes with the risk of losing your private key, without which it is impossible to access your cryptocurrency.

Cryptocurrency fraud is also common. In 2022, fraud in the cryptosphere soared, and the lack of regulatory oversight left many thousands of investors out of pocket.

To protect yourself from fraud and hacks, you can store your cryptocurrency in a secure wallet or with a trusted custodial service. Leading hardware wallets include Trezor and Ledger, and some software-based wallets like Electrum are considered secure. These wallets provide reinforced security protections like offline storage, encryption, PIN codes, multi-signatures, recovery phrases, and anti-tampering mechanisms.

It is also important to keep your recovery phrase somewhere safe, like a locked vault or bank vault. Do not electronically store your recovery phrase; if you must, encrypt or password-protect it. Be careful when entering sensitive wallet data on devices, and use complex and unique passwords.

Additionally, insurance options are available for some crypto-related investments. For example, coincover offers insurance to cryptocurrency wallets and exchanges, insuring their users' cryptocurrency for theft and, in some cases, if they lose their private keys. There are also decentralised insurance options that operate on the blockchain, such as Nexus Mutual, a leading decentralised insurance protocol.

Government regulations

The growth of cryptocurrency from a speculative investment to a new asset class has prompted governments worldwide to explore ways to regulate it. As of 2024, some governments have created frameworks to protect users, while others are still deliberating. The varying approaches to regulation are due to the decentralised nature of cryptocurrencies, which are not issued or backed by central banks.

The European Union was the first to adopt measures requiring crypto service providers to detect and prevent illicit cryptocurrency uses. The EU's Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) have tightened Know Your Client (KYC) standards and Combating the Financing of Terrorism (CFT) obligations, as well as standard reporting requirements. The EU is also exploring further regulations, such as the Markets in Crypto-Assets Regulation (MiCA), which aims to increase consumer protection and establish explicit industry conduct rules.

In the United States, the Securities and Exchange Commission (SEC) has been battling it out with users, issuers, businesses, and regulators in court. The SEC considers cryptocurrencies to be securities and has filed enforcement lawsuits against many players in the industry. The Commodity Futures Trading Commission (CFTC), on the other hand, has taken a more lenient approach, describing Bitcoin as a commodity and allowing crypto derivatives to trade publicly. The US Treasury has emphasised the urgent need for crypto regulations to combat criminal activities, and various proposals and rules have been put forward to that end.

Canada has been more proactive than other countries in crypto regulation. Cryptocurrency is not considered legal tender, but it can be used to buy goods and services. Crypto trading platforms and dealers are required to register with provincial regulators, and all crypto investment firms are classified as money service businesses (MSBs), which must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). From a taxation standpoint, cryptocurrency is treated similarly to other commodities.

The UK has a measured approach to crypto regulation. Cryptocurrencies are not considered legal tender, and exchanges must register with the Financial Conduct Authority (FCA) and comply with anti-money laundering and counter-terrorism financing (AML/CTF) reporting obligations. The UK government has published proposals for crypto-asset regulation, aiming to "manage" the risks of the industry and create a level playing field between traditional and emerging financial services.

Other countries have also implemented various regulations regarding the use and trading of cryptocurrencies. Japan, for example, has a progressive regulatory climate and recognises cryptocurrencies as legal property under the Payment Services Act (PSA). Singapore has taken a friendly position, and while cryptocurrencies are not legal tender, the city-state's tax authority treats Bitcoins as "goods" subject to Goods and Services Tax (GST). Australia has legalised cryptocurrencies and treats them as property, subject to capital gains tax.

On the other hand, China has a reputation for harsh cryptocurrency regulation, with the People's Bank of China (PBOC) banning crypto enterprises from operating in the country. Cryptocurrencies are also illegal in Bolivia, while Ecuador previously banned all cryptocurrencies except for the government-issued SDE token.

Crypto adoption

The integration of crypto payments by major companies is a significant driver of crypto adoption. For example, PayPal and Venmo's recent integration of Ethereum Name Service (ENS) is expected to boost mainstream crypto payment adoption. ENS simplifies crypto transactions by replacing complex Ethereum-based addresses with simple usernames, enhancing security and reducing the risk of human error.

Additionally, an increasing number of companies are gaining direct exposure to the crypto sector. Financial giants like Block and PayPal have made it easier to buy and sell cryptocurrency on their platforms. Tesla, MicroStrategy, and other companies have also invested hundreds of millions of dollars in Bitcoin and other digital assets, signalling their belief in the long-term potential of cryptocurrencies.

While crypto adoption is on the rise, it is important to note that the majority of businesses still do not accept cryptocurrencies as a form of payment. As of 2019, only about 2,300 U.S. businesses accepted cryptocurrency for payments, out of more than 35 million businesses in the country.

Furthermore, the volatile nature of cryptocurrencies and the lack of regulatory frameworks continue to pose challenges to wider crypto adoption. Nevertheless, the increasing institutional and long-term investor interest in crypto suggests that the industry is maturing, and the potential for crypto to become a more widely accepted form of payment and investment in the future remains a possibility.

Blockchain technology

However, it is difficult to predict which blockchain projects will last and which will fail. Most blockchain technology companies are in their early stages, so investing in them carries the same risks as investing in a start-up. Due diligence is required to understand the "problem" a blockchain project is trying to solve and the solution it is offering, both from a technological and business perspective.

For those who believe in blockchain technology, cryptocurrency can be a great long-term investment. Bitcoin, for example, is seen as a store of value, and some think it could replace gold in the future. It is also the only leading crypto project with an anonymous creator, making it the most meritocratic cryptocurrency on the market.

Ethereum, the second-largest cryptocurrency by market cap, also has huge growth potential as a long-term investment. It hosts decentralised apps (dApps) that allow for more complex financial transactions, such as loans, insurance, and derivatives.

However, it is important to note that investing in cryptocurrencies is not the same as investing directly in blockchain technology. New forms of blockchain technology could emerge and dominate the industry, rendering Bitcoin and Ethereum obsolete.

Additionally, while blockchain technology is secure, crypto exchanges are still vulnerable to hacks, and investors are not completely safe from bad actors unless they store their crypto in a hardware wallet.

Frequently asked questions