Just like some people invest money in particular companies by purchasing stock and then selling it again for profit at a later stage, some investors nowadays may choose to invest in cryptocurrencies. This page will sum up some things to bear in mind when investing in cryptocurrencies, as well as some advantages and disadvantages of this particular type of financial asset.
Reasons to invest in cryptocurrencies
Firstly, many cryptocurrency enthusiasts invest in particular cryptocurrencies because they believe a system of decentralised, transparent, cheap and fast transactions to be the financial future and wish to support this ideal with their money. Users might quite simply want to be a part of what they consider to be a revolution.
At the same time, however, other factors also come into play, most specifically the expectations of high profitability. Cryptocurrencies tend to be much more volatile than traditional currencies, and many of them – such as Bitcoin – have known a meteoric rise over the course of the past few years. Bitcoin, for example, has known a rise in value of over 2500% between 2011 and 2017, and Ethereum knew a 2700% rise. Clearly, those who invested early are reaping huge rewards.
Important is this regard is the understanding that cryptocurrencies are really still at the very start of their journey and have only been around for approximately a decade; even in 2017, less than 1 in 4 American adults knew what Bitcoin was and only 2% of American adults owned any. Investors can therefore hope that once cryptocurrencies become more mainstream, they will receive huge returns on their investment.
However, users must also bear in mind a few risks.
Firstly, of course, it is important to thoroughly research the cryptocurrency one is investing in, in order to examine if it is a healthy investment rather than a scam. In this regard, users can seek information online or track down forums specifically for users of the cryptocurrency of their choice.
Secondly, and more broadly, investors must bear in mind the fact that the volatility of cryptocurrencies can also be a downside; many cryptocurrencies, including Bitcoin, tend to see huge surges in price followed by equally huge crashes. As an example: between 2010 and 2014, the annual year-to-year volatility of Bitcoin was over 100%, which is eighteen times greater than that of the US dollar.
Cryptocurrencies are thus a high-risk investment, particularly because of persistent fears that they are an example of an economic bubble. This is a situation in which the price of a particular product or service sharply exceeds its intrinsic value, which then causes the price to rise and rise until it inevitably collapses and leaves investors facing a loss of funds.
A cryptocurrency portfolio
The safest approach to cryptocurrency investing is thus the compiling of a varied portfolio, featuring a number of different, well-researched cryptocurrencies. Bitcoin is the oldest cryptocurrency and is thus a go-to for investors, but it is also worth investigating newer cryptocurrencies and learning about their particular emphasis in terms of security, decentralisation, use of smart contracts, and so forth. A successful cryptocurrency will attempt to solve a particular problem; if it does this well, it can surge hugely in price and thus provide a good return on users’ investments.