Crypto Investment: Keep Crypto A Good Bet?

Cryptocurrency is a highly debated topic, with some calling it the future of finance and others labelling it the biggest scam of all time. But is it a good investment?

Cryptocurrency can provide eye-popping, astronomically high returns overnight, but it is also extremely volatile and vulnerable to security breaches, so it is possible to lose all your money. It is a risky asset that should be approached with caution and a good understanding of the technology and the market.

Bitcoin, the largest cryptocurrency by market cap, is once again making headlines. After gradual gains throughout 2023, it hit new record highs in March 2024, rising above $70,000 for the first time. But it's not all good news. In 2022, it fell more than 75% from its all-time high.

If you choose to invest, it’s important to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure. As a rule of thumb, don't invest more than 5-10% of your portfolio in risky assets like Bitcoin.

Crypto's extreme volatility

Cryptos Extreme Volatility

Cryptocurrencies are known for their extreme volatility, which can be a major concern for investors. Volatility refers to rapid changes in the price of an asset, and in the case of cryptocurrencies, these changes can be highly unpredictable and occur within a very short time frame. This volatility is driven by various factors, including news developments, speculation, and the actions of influential individuals like Elon Musk.

The extreme volatility of cryptocurrencies, such as Bitcoin, can be attributed to their lack of intrinsic value. Unlike traditional currencies or commodities, cryptocurrencies are not backed by tangible assets, government guarantees, or widespread acceptance as a medium of exchange. As a result, their market value is based primarily on speculation and investor sentiment, making them highly susceptible to rapid and significant price fluctuations.

For example, in just one day, Bitcoin's value dropped by 30%. Additionally, the crypto market as a whole experienced a significant downturn in 2022, losing over $2 trillion in value due to rising inflation and aggressive monetary policies. This volatility can be further exacerbated by the actions of institutional investors and the emergence of derivatives markets, which can amplify price movements.

However, it's important to note that not all cryptocurrencies exhibit the same level of volatility. Stablecoins, such as Tether (USDT) and USD Coin (USDC), are designed to maintain a consistent value relative to fiat currencies, providing a level of stability in the crypto market.

While extreme volatility can be concerning, it also presents opportunities for profit. Traders can take advantage of both upward and downward price movements by buying low and selling high. Additionally, the volatile nature of cryptocurrencies can drive innovation and the development of new blockchain technologies, such as the creation of decentralised applications (dApps) and smart contracts.

The extreme volatility of cryptocurrencies is a double-edged sword. It attracts speculative investors seeking quick profits but also deters risk-averse individuals who prefer more stable investments. As the crypto market continues to evolve, it is likely that volatility will remain a defining feature, particularly for newer and smaller cryptocurrencies. However, as the market matures and institutional adoption increases, we may see a gradual shift towards more stable price movements in established cryptocurrencies.

Crypto's mainstream acceptance

The mainstream acceptance of cryptocurrencies is an ongoing process, with some countries already embracing the technology more than others. Bitcoin, the original and most well-known cryptocurrency, has seen a phenomenal rise in value since its introduction in 2009, and its popularity as a method of payment is growing, particularly among younger consumers. This growing consumer adoption is driven by the security and privacy offered by cryptocurrencies, as well as the acceptance of financial institutions that now offer customers the ability to buy and sell Bitcoins. The law of supply and demand also plays a crucial role in the rise of Bitcoin's value, as there is a maximum number of Bitcoins available – 21 million. As the popularity of Bitcoins increases and their perceived potential as an investment vehicle soars, the demand for the limited number of Bitcoins drives up the value of each coin.

The integration of cryptocurrencies into the existing payments ecosystem is expected to increase in the coming years, with consumers gaining increased access to crypto assets within their existing financial accounts or through exchanges and wallets that accept credentials from established financial institutions. Crypto platforms will become more integrated into the existing payments ecosystem, and consumers will be able to easily convert crypto into fiat currency and spend that value with merchants.

Stablecoins, which are fiat-backed digital currencies, have emerged as an innovative payment technology that combines the stability of fiat currencies with new public blockchain networks. They make it easier to access and move money around the world, providing an alternative to international bank wires. Businesses are looking to leverage stablecoins as a new type of treasury infrastructure that can power global payment flows.

The wide acceptance of the credibility and usefulness of cryptocurrencies is now seen as a matter of time, with governments and financial institutions recognizing the potential of this technology. However, there are still challenges to be addressed, such as anti-money laundering (AML) and know-your-client (KYC) issues, as well as the volatile nature of the crypto market, which has been plagued by compliance problems and criminal activity.

Despite these challenges, the mainstream acceptance of cryptocurrencies is inevitable, and it will be interesting to see how the market and regulations evolve to accommodate this new asset class.

Crypto's regulatory risks

Investing in cryptocurrencies is not for the faint of heart. Crypto is an incredibly nascent asset class with extreme volatility. The crypto market is also highly speculative, and investors should be aware of the regulatory risks associated with this new type of digital currency.

The regulatory environment for cryptocurrencies is still evolving, and the lack of clear guidelines poses a significant risk for investors. Here are some key considerations regarding the regulatory risks of investing in cryptocurrencies:

Cryptocurrencies and Taxes:

Government tax authorities' views on cryptocurrency holdings are evolving, and investors need to stay updated. In the US, the IRS has defined cryptocurrencies as property, subjecting investors to capital gains tax laws. This means that profits from cryptocurrency trading are taxable, and failing to report them can result in severe penalties.

Cryptocurrency and Foreign Bank Account Regulations:

As of August 2023, US federal law does not consider a foreign cryptocurrency account as a "reportable account." However, this could change at any time. FinCEN, the Financial Crimes Enforcement Network, intends to propose amending the filing requirements to include cryptocurrency holdings. This means that owners of cryptocurrency wallets may soon be required to file FinCEN Form 114, the same report used for substantial holdings in foreign bank accounts.

Cryptocurrency's Decentralized Status:

The decentralized nature of cryptocurrencies, which means they have no physical presence and are not backed by a central authority, is both a benefit and a potential legal risk. Without a central authority, investors may face complications with transactions or ownership disputes, and the path of legal recourse in these cases can be challenging to determine.

Cryptocurrency Registration and Licensing:

The legal status of businesses operating in the cryptocurrency market is complex and evolving. Companies that only accept cryptocurrencies may not need to register or obtain licenses, but they may also be subject to special considerations depending on their jurisdiction. The responsibility falls on business owners to ensure they comply with legal procedures at both the local and state levels, which can be challenging due to the evolving nature of crypto regulations.

Fraud and Money Laundering:

There is a perception that cryptocurrencies provide criminal organizations with new means of committing fraud and money laundering. While this may not directly impact most investors, it is essential to recognize that the decentralized nature of crypto can limit legal options in the event of financial crimes, such as hacks and theft of holdings.

In conclusion, while cryptocurrencies offer unique opportunities, investors should carefully consider the regulatory risks outlined above. The evolving regulatory landscape of cryptocurrencies can have significant implications for investors, and staying informed about the latest developments is essential for making informed investment decisions.

Crypto's investment risks

Investing in cryptocurrencies is risky and highly speculative. Here are some of the main risks:

Volatility

Cryptocurrencies are highly volatile, and their value can drop by hundreds or thousands of dollars in a short space of time. For example, in May 2022, the Keep Network's coin, KEEP, plunged 9% in a day. Bitcoin has also experienced wild swings in value, and in February 2018, its price dropped to under $7,000, just a few months after reaching an all-time high of over $20,000.

Regulatory Risk

Cryptocurrencies are currently unregulated by governments and central banks, but this is likely to change as they attract more attention. For example, there are questions about whether they should be classified as a commodity or a virtual currency. The evolving regulatory landscape could impact the value of cryptocurrencies.

Susceptibility to Error and Hacking

There is no perfect way to prevent technical glitches, human error, or hacking, and cryptocurrency exchanges are frequently targeted by hackers. When a cryptocurrency exchange is hacked, there is often no standard practice for recovering the missing funds, leaving customers out of pocket.

Forks and Discontinuation

Cryptocurrency trading carries the additional risk of hard forks or discontinuation. A hard fork occurs when a cryptocurrency's protocol is changed, resulting in the creation of two separate versions of the coin. This can cause substantial price volatility and affect the value of your investment.

High-Risk, Speculative Products

Spread betting and trading cryptocurrency contracts for difference (CFDs) is a high-risk activity. With these products, you only need to deposit a small percentage of the value of a trade to open a position, but profits and losses are based on the full value of the trade. This means that the volatility of cryptocurrencies, combined with trading on margin, could lead to significant losses.

Gapping

Market volatility can cause cryptocurrency prices to "gap", moving from one level to another without passing through the levels in between. This can result in your stop-loss being executed at a worse level than you requested, worsening your losses if the market moves against you.

Charges and Pricing Variations

Charges for spread betting or trading CFDs on cryptocurrencies may be higher than for other asset classes, and there can be significant variations in the pricing of cryptocurrencies used to determine the value of these products.

Crypto's potential as a safe investment

Cryptos Potential as a Safe Investment

Cryptocurrency is a digital currency that exists solely in digital form. It can be used to make purchases online or held as an investment. While it has been around since 2009, it is still considered a nascent asset class.

Volatility

One of the biggest risks of investing in cryptocurrency is its extreme volatility. The crypto market has seen dramatic rises and falls in value over the years, and individual cryptocurrencies can see huge price swings in the space of hours. For example, in 2021, the crypto market was worth upwards of $2.9 trillion. By mid-2022, due to rising inflation and an aggressive rate-hiking cycle, the market had dropped to below $900 billion.

Scams and Security

The relative newness of crypto, as well as its lack of regulation, means that it is prone to scams and security breaches. Cryptocurrency exchanges are vulnerable to being hacked, and investors have lost large sums of money as a result. Storing cryptocurrency securely is also a challenge, and there is a risk of losing your private key and being unable to access your crypto.

Lack of Consumer Protections

Another risk to consider when investing in cryptocurrency is the lack of consumer protections. For example, if you pay for something with crypto and it doesn't arrive, or you are a victim of fraud, you may not be able to get your money back.

Regulatory Risk

The regulatory landscape for cryptocurrency is also evolving. While this could bring more security to the market, it could also mean increased restrictions on the use of crypto, which could impact its value.

Diversification

Despite the risks, some financial experts believe that cryptocurrency can be a good investment as part of a diversified portfolio. Cryptocurrencies such as Bitcoin and Ethereum have become increasingly mainstream, and some companies are gaining direct exposure to the crypto sector.

Long-Term Potential

Some cryptocurrencies, such as Bitcoin and Ethereum, have been around for a while and have established objectives that may be achieved over long time horizons. While there is no guarantee of success, early investors in these crypto projects could be richly rewarded over the long term.

Final Thoughts

In conclusion, while cryptocurrency has the potential to be a safe investment, it is essential to approach it with caution. Investors should do their research, understand the risks involved, and only invest what they can afford to lose.

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