Does all of the hype around Bitcoin get you asking yourself: Should I invest in cryptocurrency?
Cryptocurrency or “crypto” for short has been all the rage over the past decade. In fact, it’s become so popular that it’s believed nearly 50 million people will buy crypto for the first time by next year.
When you look at the money some people are making on cryptos like Bitcoin, it’s easy to see why it’s receiving so much attention. If you had known about Bitcoin back in 2010, then you could have bought it for $0.08. In April 2021, Bitcoin rose to its highest price ever of $63,729. That means an investment as small as $100 would be worth over $79 million today.
However, the ride hasn’t been pretty. Crypto prices have been pretty dramatic over the years and can sometimes fluctuate rather violently. On top of that, critics warn that those pouring money into cryptos are experiencing what’s called FOMO or “fear of missing out”.
Before you decide to invest in crypto, it will be helpful to better know what it is and why prices move the way they do. That’s why in this post, we’ll explore how you should approach crypto as a potential investment opportunity.
What is Crypto?
The easiest way to describe crypto is that it’s a digital form of currency. Despite the stock photo we used in this article (and many others found in the media), there are no physical Bitcoins. It exists only as computer code.
When you consider that the money in your nest egg or bank account is also just computer code, this is not much different. However, the main thing that sets crypto apart from other fiat currencies (the money you use every day) is that it’s not backed by any government institution. It’s decentralized and not controlled by anyone.
Crypto is built on something called blockchain technology. Blockchain is an open ledger spread across a network of computers around the world whose job is to review and validate each block of transactions. Having multiple copies of the same ledger protects it from hackers and makes it virtually impossible to steal.
What Makes Crypto Valuable Then?
The recent run-ups in crypto prices are mainly due to investor speculation. Just like a hot stock that’s multiplied several times over, investors will experience FOMO pouring in even more money and driving its price up even higher.
However, the fundamental reason crypto has any value at all is that you believe it does. Just as money is really nothing more than paper dollars and gold is nothing more than a rock, these things have value because we know that they can be traded for goods and services.
Crypto got its start in much the same way. In the early years of Bitcoin, it was used primarily on the dark web as an anonymous way to pay for things on the black market. However, today crypto is accepted by many legitimate retailers and has become a trendy way to invest in start-up companies (something called DeFi or decentralized finance).
How Does Someone Actually Buy Crypto?
Don’t worry about having to go to the dark web to purchase crypto. These days, there are many reputable brokers (Coinbase, Gemini, Binance.US, etc.), and they each adhere to the IRS regulations for verifying user identities and reporting capital gains for tax purposes.
If you’re already using any of the major stock trading apps, then you can purchase crypto through them as well. Check out platforms like Robinhood, TradeStation, and eToro. As of 2021, some well-known banks and retirement plan providers are even starting to consider making crypto a possible investment option.
So … Should You Invest in Crypto?
Like any investment, the real question you should be asking yourself is what value you think putting money into crypto would bring to your portfolio? Or, consequently, what risks could it present?
This could be answered by considering these points:
Continuing to Go Up in Price
If you think blockchain is here to stay and will be more widely used in upcoming years, then maybe you think crypto prices have a long way to go. Billionaire investors such as Tim Draper have predicted that Bitcoin could reach $250,000 by the end of 2022.
Finding the Next Bitcoin
Maybe you’re skeptical that Bitcoin has received too much attention in the media and that its price has bubbled out of control. Regardless of if that’s true, it’s important to keep in perspective that there are at least 4,500 other types of crypto available on the market such as Ethereum and Litecoin. If you believe one of them could be the next Bitcoin, then getting them now while their prices are low could be a very strategic investment.
Acceptance in Society
As cryptos have gone from being virtually unknown to more mainstream, their presence among consumers will become more evident. Even payment companies like PayPal have announced that they will begin accepting Bitcoin for merchant payments.
We can also see them finding support among traditional bankers. Deutsche Bank has been quoted stating that they think “digital currency could become mainstream within the next two years”.
An alternative way to look at crypto as an investment is to see it as a potential hedge against inflation (similar to gold and silver). Companies like Tesla have used this approach adding $1.5 billion in Bitcoin to their balance sheet.
This is because unlike government currency, which is constantly losing value due to inflation, cryptos are usually fixed in quantity. In the case of Bitcoin, it was stipulated that only 21 million of them would ever be created. That means as their demand goes up, so will the price since there will be no new ones to put into circulation.
Could They Become Obsolete?
While the technology that cryptos are built on might have a promising future, it’s possible that the ones we know today might not be usable in the next few years. Many countries like Russia and China have decided to make crypto illegal.
The U.S. is taking a different approach and considering making its own central bank digital currency. If that happens, it’s unclear what this would mean for existing cryptos and their place in the market.
Perhaps the biggest challenge right now to investing in cryptos is that they are incredibly volatile. Over the past decade, Bitcoin has crashed at least three times losing as much as 80 percent of its value in each cycle.
That’s not at all the kind of asset you’d want to pour your 401k or IRA dollars into. In fact, Time interviewed five financial advisors and they each recommended that not more than 5 percent of your portfolio should be invested in cryptos. Most recommended keeping their allocation as low as 1 to 2 percent.
If you do end up investing in cryptocurrencies, then keep an eye on it using an app like Buxfer. Buxfer’s Investment feature lets you consolidate your investment information from over 20,000 different financial institutions into one real-time report. That means you can check on your cryptos as well as see how retirement funds and other investments are doing all from one convenient place.
Image credit: Unsplash