Run a quick Google search and you’ll find all kinds of conflicting opinions out there about cryptocurrency. “Gamblers and speculators are the best candidates for the cryptocurrency market,” writes US News and World Report. “These kinds of returns are impossible to acquire within the realm of traditional investments,” crows one pro-cryptocurrency site.
Cryptocurrency, and the underlying blockchain technology, has been part of mainstream consciousness for the last few years. Today there are over 2,000 cryptocurrencies being traded. Bitcoin, Ethereum, and Ripple may be the top three by market cap, but there are all kinds of variations, including some seriously weird ones like Dogecoin and Whoppercoin.
Like any investment, cryptocurrency requires careful research and consideration before choosing to buy any type of coin. This market is extremely volatile, which is why it may not make the best investment option for many people. Here’s what you need to know about cryptocurrency as a new investment opportunity.
Cryptocurrencies have posted strong returns
If you invested in cryptocurrencies even a year ago, there’s a good chance your investment has skyrocketed. In comparison with the traditional stock market, cryptocurrencies are yielding massive returns in the last five out of six years. Here’s how Bitcoin has performed since 2011:
2011- Bitcoin +1500%
2012- Bitcoin +299%
2013- Bitcoin +5400%
2015- Bitcoin +37%
2016- Bitcoin +130%
Some of the bigger tech stocks, such as Facebook, Amazon, and Google, have all seen great returns as well – but none can compete with Bitcoin’s total returns of 22,004%. Of course, it would be foolish to expect that kind of exponential growth to continue, but historic performance shows cryptocurrencies have strong potential.
Crypto makes a great “global currency”
For those overseas, investing in a “global currency” is a particularly interesting opportunity. “With the very real ‘war on cash’ escalating in India, Australia, combined with an uncertain macroeconomic and geopolitical environment and a monetary crisis in Venezuela, conditions for Bitcoin’s demand-side reliability have heightened. Bitcoin can provide a superior alternative for people in the developing world looking for reliable digital payment channels,” writes The Balance.
Investing in equities or bonds can make it hard to access your funds when you need them. You need to wait for the stock market to swing in your favor, or for a bond to mature, before you cash out. With cryptocurrencies, you have the ability to transfer money quickly across borders to friends, family, or business partners.
Cryptocurrencies are speculative
While cryptocurrencies might sound like a great investment opportunity, there are some caveats to entering this volatile market. The biggest concern many analysts have around cryptocurrencies are the speculative nature of the marketplace. “A coin’s price ultimately depends on the supply & demand dynamics in the marketplace. The price goes up when people want to buy it, and there are not enough coins to be sold at the current price. The future price is entirely dependent on what other people will buy it from you at,” writes Hackernoon, a blockchain blog.
Investing in crypto is similar to gambling: coins like Bitcoin aren’t based on the gold standard, or any standard for that matter. Despite the value determined by economic concepts like scarcity and utility, cryptocurrencies remain dependent on market forces – which can be too big a risk for some investors.
There’s no federal protection for your investment
When a currency is based on the gold standard or tied to a national economy, there is some protection for investors should something go wrong. However, for those in the cryptocurrency market, the SEC can’t do much to protect investors from fraud. “A December 2017 statement from SEC Chairman Jay Clayton notes that decentralized exchanges and trading can often exist and occur outside the confines of the U.S. borders. And, since a number of digital currency transactions are designed to be anonymous, recovering your investment may not be possible,” writes the Motley Fool.
Investing in a global currency is a double-edged sword. On one hand, you gain the ability to make seamless transfers and protect your wealth from fees. On the other hand, you lose the protection of a national watchdog or federal banking regulations.
Cryptocurrency and blockchain may be the answer to high transfer fees
If you’re seeking to invest in your business, then cryptocurrency, and the underlying blockchain technology, might be a good tool to help you grow. Commercial payment fees cut into many merchant’s small profit margins. Credit card processing fees range from 0.9% to 2.9%, plus other hidden fees that can eat up revenue quickly.
Cryptocurrency facilitates direct transfer, circumventing the third party that often charges for processing payments from a bank, credit card, PayPal, or another payment method. “This crypto benefit reduces processing fees charged by banks and financial institutions for wire and other fund transfers. The widely adopted blockchain technology stores the online transaction ledger and reduces the threat from hackers, as every new block created must be verified by the ledgers of each user on the market,” writes US World News Report. For business owners, cryptocurrency can offer streamlined payment options to vendors and supply chain partners that might help their business grow in the long-run.
Best case? Crypto as part of a diversified portfolio
Perhaps the best use of cryptocurrencies for the everyday investor is as part of a larger, diversified investment portfolio. For those seeking to capture the benefits of this investment opportunity, while keeping their risk profile low, should consider allocation between 2% - 3% of your total investment budget in cryptocurrency. As the crypto market matures, levels out, and becomes more accessible, security should improve and federal protection may catch up.
Cryptocurrency is here to stay. As an investment opportunity, it’s worthwhile to consider growing your wealth while still managing your risk responsibly.
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