Cryptocurrency investments are risky. Are they worth it?
While you might strike it rich if you invest in cryptocurrency, you might also lose your shirt, your pants, or even your life savings if you’re not careful. The point is that cryptocurrency investments are SUPER risky, but they can also be incredibly profitable.
Cryptocurrency might be an excellent investment for risk takers with lots of money that they can afford to lose. Most of us don’t fit that description, so it really depends on your situation and your objectives. But, we must understand that risk and return often go together.
There are ways to get on the crypto bandwagon without a high level of risk. For example, you can indirectly invest by purchasing stock in companies that own cryptocurrency. That’s called “exposure.” It’s a much “safer” way to go, but it won’t earn you the same level of returns.
This blog post will examine some of the risks and rewards of cryptocurrency investment, so you can decide if investing in it is right for you.
But, before we get started, it’s probably a good idea to know where the word “crypto” comes from and why it’s called cryptocurrency. You may want to check out this awesome two-minute video we made that explains what it is in simple terms.
Is Cryptocurrency a Safe Investment?
By most indications, crypto isn’t going anywhere, at least for now. Still, several different factors make investing in cryptocurrency risky in a way that might make you shake in your boots a little. Some of these risk factors include:
- Hacking and Cyberattacks (seriously, attacks?)
- Cryptocurrency Competition (who the heck are you competing against?)
- Crypto Market Volatility (that means lots of ups and downs)
- Future Cryptocurrency Market Regulations (it’s the wild west out there)
The Risks Associated with Cryptocurrency
Investors should seriously consider these risks when it comes to investing in cryptocurrency. In the end, you’ll need to decide if you can live with yourself if things take a tumble or if your friends can live with you if things take off like a rocket. You have to see if the benefits outweigh the risks because no one can do that for you, not even me!
Let’s take a closer look at some of those risks.
Cryptocurrency Cyber Attacks are Real
While all companies and industries can be the target of a cyberattack, criminals like to go after the place where you can buy and sell cryptocurrency because it’s anonymous and it’s MONEY!!! This place is called an “exchange.” A cryptocurrency exchange is where you exchange your US dollars for, say, Bitcoin. You do the same thing when you go to the New York Stock EXCHANGE to trade money for a share of stock of Ford (yep, the truck maker). Cryptocurrency exchanges are all online, and stealing money online with no ownership records like they keep for stocks on the NYSE makes it a bit easier. So, it’s quite a bit more vulnerable than the stock exchange.
Security breaches in the cryptocurrency market have already led to some crazy significant losses for those who’ve had their currency stolen. You don’t hear about those on the NYSE… Research shows that investors lose hundreds of millions of dollars each year as cybercriminals hack into online trading platforms. So, beware.
As a result of these cybersecurity threats, it’s difficult for investors to find ways to store their cryptocurrencies safely online, and many prefer to use cold storage (offline) options to keep digital assets safe.
One of my faults is that I tend to trust people a bit too much.
Six years ago, I became interested in cryptocurrency. I had an acquaintance who filled in some missing portions of crypto, like storing the currency offline. His knowledge seemed to confirm my basic understanding. I was super excited about the opportunity, and being a bit of a risk-taker, I moved forward. We entered into a contract where he would get a portion of all the gains, and I would put up the money. After two months of semi-weekly conversations, he fell off the grid. I couldn’t find this guy anywhere! However, he tweeted his escapes at the Stanley Cup finals (total jerk).
I later got a letter in the mail telling me that he went bankrupt and stole the investment in Etherium. Since he stole the money, I sued him, and I won! It was a horrible situation that had me hunting him down and calling relatives, doing background searches, and more. I’d like to forget about that part of the story.
Anyway, that investment would’ve been worth over $6 million today. $6 MILLION. I definitely had the right idea but lost. One moral of the story is that you have to be careful who you trust, but the other is that you can’t look back when investing. Words like SHOULD’VE, WOULD’VE, COULD’VE cause stress, make you do stupid things and only bring you down.
Be clear on why you want to invest, but be honest about the risks, because things can change quickly, and you can be left licking your wounds for a long time.
Fierce Competition in the Crypto Market Makes Cryptocurrency a Risky Choice
A lot of competition exists in the cryptocurrency market. Some are complete crap, but some have a lot of value (who knew?). While some currencies have maintained value over time, others have lost most of their value and never recovered.
There’s no way to know if the cryptocurrency project you decide to invest in will yield success. When I did one of my first videos on the subject, there were less than a thousand, and a quick search today says there are over 8,000 and GROWING. So, there are a lot of opportunities, and many of them are scams, so you need to be careful. In the end, not every crypto project will end up flourishing. Who knows if Bitcoin will be here? It’s still too early to know.
CHECK OUT THIS PODCAST
Cryptocurrency is Still New, and the Crypto Market is Volatile
Cryptocurrency is volatile, just like the cutting-edge investments that came before it. Cryptocurrencies rely on tech, and tech changes often. The applications and use of crypto are still in the development phase. We can’t be sure about all of the real-world situations it will be used for or if something else will come out to replace it.
Remember the Black Swan events I talked about in a previous post? (The dot-com bubble should come to mind).
Future Cryptocurrency Regulations May Negatively Affect Current Investments
The cryptocurrency market is like the wild west right now, with little to no regulation or oversight. Some people think that’s a good thing, and others think it’s terrible. Sometimes I like to think of myself as a gunslinger, but carrying a gun would definitely make me a bit nervous. Some of the potential regulations could be very nerve-racking. What about taxes? Will it be “allowed” (it competes with actual US currency)? Can you get in trouble for having it? Who the heck knows what will happen.
When the government does decide to impose regulations, it could negatively affect your investment. Yes, regulation can be a good thing, but some governments already feel threatened by cryptocurrency, and if that trend continues, it can mean some bad news for investors, and it could come really quickly.
Cryptocurrency Adoption Continues to Grow
Even with these inherent risks, blockchain technologies and the cryptocurrency market continue to grow. With each day that passes, additional infrastructure is built while investors acquire new tools necessary to effectively manage crypto assets and keep them safe and secure.
To learn more about blockchain technology (the amazing technology behind cryptocurrency), you may want to check out this video that we created.
We also continue to see the establishment of crypto-based futures markets, and many well-known companies, like Square and Paypal, are starting to take cryptocurrency very seriously. Even Tesla invested $1.5B in cryptocurrency (Bitcoin) last year but pulled back because of some of the effects on global warming. Yes, GLOBAL WARMING. Yet another unforeseen issue with crypto.
While there are still so many risk factors associated with crypto investments, the increased pace of cryptocurrency adoption may signify some maturity in the industry. After all, if major corporations consider cryptocurrency a safe enough investment to dump large amounts of money into it, maybe they’re onto something.
Cryptocurrencies as Long-Term investments
Is Bitcoin Good for Long-Term Investing?
When people think of cryptocurrency, they usually think of Bitcoin. Why not, it was the first and it’s one of the most widely recognized. Bitcoin’s popularity (and value) benefits from what’s called a network effect. That means more people look to invest in Bitcoin because it’s Bitcoin which is the cryptocurrency that most people invest in.
Is that a tongue twister? Are we talking in circles here?
Many investors consider Bitcoin to be “digital gold.” However, it’s also used as digital cash.
Investors expect Bitcoin to gain value as government-backed currencies depreciate. Just ask El Salvador. Bitcoin investors believe that its value will increase long-term due to its fixed supply. Bitcoin was capped by its inventor at 21 million (which is really cool), and there have been quite a few cases where coins have been lost!! As Bitcoin gains popularity as a form of digital cash, some investors say it could become the world’s first global currency.
Is Ethereum Good for Long-Term Investing?
If you have stayed with me so far, please don’t leave yet, because this is interesting.
Ether, in crypto speak, is the cryptocurrency of a platform known as Ethereum that would’ve made me rich. This cryptocurrency is the second most popular, behind Bitcoin from a market capitalization (please tell me you remember our previous lessons on this!!!) standpoint.
Ethereum is a global digital platform supporting many different cryptocurrencies and a giant ecosystem of DApps, which stands for decentralized applications. Wow, that is a mouthful, but get ready for this next sentence…. The platform’s smart contract functionality automatically executes contracts based on the terms written into their code. These smart contract technologies are believed to have the potential to disrupt huge sectors of industry, from real estate to banking, and the ability to create whole new markets. Ok, that means lots of people are using it, and it’s really helpful for big industries. In some sense, it’s like iTunes. A platform was created, many people put apps on it as well as music, movies and lots of other stuff, which turned radio, movie theaters, and just about any industry on its head because you could now download and use an app for bank accounts, YouTube, going on a run, ordering stuff, and so much more.
Like Bitcoin, Ether benefits from a network effect due to the many cryptocurrencies inside Ethereum and the blockchain’s open-source nature. The use of the platform continues to grow worldwide, and with that growth, Ether continues to increase in both utility and in value. Because of this, many investors see a great deal of potential in Ether as a long-term investment.
Is Investing in Cryptocurrency a Good Idea?
Well, that’s the $6 million-dollar question, isn’t it (yes, I have to poke fun of myself, right)?
After all, you probably wouldn’t be reading this article if it wasn’t.
Here’s the bottom line:
Owning a modest amount of cryptocurrency can undoubtedly increase the diversification of your portfolio (have you taken our Stocks and Bonds course yet? click here for the course). Historically, cryptocurrencies like Bitcoin and Ether have shown no real stock market price correlation (No. Seriously. You SHOULD take our Stocks and Bonds course!). There are many investors out there who believe that the use of cryptocurrency will continue to increase over time and become more widespread. If you share that belief, it would probably make sense to check it out and possibly buy some as a part of your investing plan in a diversified portfolio.
As always, you have to have a solid investment plan and decide how (and which) cryptocurrency makes sense to invest in if any. This is a pretty big idea of how to set up your investment plan, but we have to re-iterate it here. We’ll have more content on that subject for sure.
If directly investing in cryptocurrency is a bit too risky for your taste, I can’t blame you. Thankfully, there are other ways investors can profit from cryptocurrencies and the crypto market through traditional stock investments.
How to Make Money from Cryptocurrency Without the Risk
Purchasing stock in companies that are associated with cryptocurrency may be your best bet if you want to get in on the crypto game without too much risk. Some accept it as payment, others buy it, others trade it, others build equipment for the industry and the list keeps going.
We’re not recommending any of these companies, but we want to give some examples to think about.
Some of those companies include:
- Paypal (NASDAQ: PYPL): Paypal has embraced cryptocurrency, which means that the company could potentially profit from a rise in blockchain technologies and crypto popularity. Currently, Paypal customers can use four different cryptocurrencies on the Paypal App, including Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
- Coinbase (NASDAQ: COIN): Coinbase is a popular cryptocurrency exchange platform that describes itself as a secure all-in-one platform for buying, selling, transferring, and storing digital currency.
- Square (NYSE: SQ): Square is a popular financial services and digital payments company that offers payment processing solutions to millions of businesses worldwide. The company’s CEO is a crypto fanatic and the company recently changed its name to Block (think blockchain) and has created a side project under the company umbrella known as Square Crypto. If nothing else, they’re creative 🙂
- CME Group (NASDAQ: CME): CME Group, the world’s leading and most diverse derivatives marketplace, has joined the cryptocurrency revolution and is now involved in crypto futures trading. The term “derivative” is a scary one for a lot of people. To put it another way, this group is BIG and puts together investments that “derive” their value from stuff like crypto. The key here is that they’re big, they’ve moved into crypto which means they believe they can make money in it.
Although investments in the companies mentioned above may not make you rich overnight, they are certainly not as risky as investing directly in cryptocurrency, and the potential for profit does exist.
Making an Informed Decision About Cryptocurrency Investments
As I mentioned earlier, only you can decide whether or not investing in cryptocurrency is the right financial move for you based on your research and comfort level. I really want to demystify information about money and give you as many facts as possible so that you can make an informed decision. I hope this article helped, and we’ll keep at it! If you need more information on cryptocurrency investments, check out this great video where we discuss cryptocurrency investments in a bit more detail..0