Before you ask should I invest in crypto, it is important to understand what cryptocurrency is, its mechanism and whether there are good investment opportunities in cryptocurrency.
Cryptocurrencies are digital assets designed to function in the same way as real-world currencies or government-issued currency (fiat currencies)– people use them as a medium of exchange to pay for goods and services.
The difference lies in the lack of central banks managing cryptocurrencies, unlike fiat currencies. The value of a cryptocurrency is based on supply and demand, which often lead to wild price fluctuations.
This factor alone allows anyone to prosper by investing in cryptocurrency as well as losing all their money. Investing in cryptocurrency is risky but can be a good investment if done properly as part of a diversified portfolio.
How safe is cryptocurrency?
Safety is key to determining if you should invest in crypto. Cryptocurrency transactions are cryptographically secured and recorded on a sequential public ledger known as the blockchain, which makes cryptocurrency secure as a protocol. However, as cryptocurrency is decentralised and does not have any central governing authority managing it, cryptocurrency owners have few protections in place.
There are multiple factors suggesting cryptocurrency is not always a safe investment and then, there are other emerging signs indicating that cryptocurrency is here to stay.
Storing cryptocurrencies safely is more difficult than owning stocks and bonds. Most cryptocurrency exchanges have made it easy to buy and sell crypto assets, but many people do not like to keep their digital assets with exchanges due to the fear of losing control over access to their digital assets. An exchange could freeze your assets following a government request or the exchange could even go bankrupt, and you would have no recourse to your money.
So, some cryptocurrency users prefer offline storage options in ‘cold wallets’ or hardware wallets. It too comes with its own set of challenges. Its biggest risk is losing your ‘private key’, without which it is impossible to access your cryptocurrency.
Besides, there is no guarantee that the cryptocurrency you invest in will succeed, as only a small percentage of all cryptocurrencies ultimately flourish. There is fierce competition among blockchain projects and many of them are nothing more than scams.
Moreover, if governments start viewing crypto as a threat rather than innovative technology, regulators may crack down on the entire crypto industry. Most of the technology in crypto is still being developed and is not yet proven extensively in real-world scenarios.
State of cryptocurrency adoption
Cryptocurrency has been on people’s radar, regardless of the views towards its growth or impact. While the consensus on its real societal impact is still evolving, the scale of crypto adoption is also fueling innovation across industries and attracting varied investors.
Crypto adoption is the market value of the entire crypto market or the number of active crypto wallets participating on blockchain networks. Although mass adoption in crypto is yet to take off, smart entrepreneurs and investors are working on innovative projects in the crypto space.
Innovative financial infrastructure is being built and investors can access institutional-grade custody services. They are gradually receiving the tools they need to manage and safeguard their crypto assets. Besides, futures markets for cryptocurrencies are being established and traditional Web 2.0 financial platforms are enabling cryptocurrency trading on their platforms.
Although the risks associated with cryptocurrency remain, the increasing pace of adoption is a sign of a maturing industry, as companies and individual investors are seeking direct exposure to the crypto space.
Can crypto be a long-term investment idea?
Many cryptocurrencies are launched with lofty promises. While some may be achieved over the long term, many of the cryptocurrencies do not generate enough trading volumes. So, should you invest in crypto?
While the success of any cryptocurrency is not assured, early investors in a crypto project that reaches its goals can be richly rewarded over the long term. Widespread adoption is key for the long-term success of any cryptocurrency project.
Can I invest in Bitcoin for the long-term?
Bitcoin is the most widely known cryptocurrency and gains from the network effect. More people want to own Bitcoin because Bitcoin is owned by more people in crypto. As the dominant cryptocurrency, Bitcoin is viewed by some investors as ‘digital gold’ but it could also be used as a digital form of cash in some cases.
Bitcoin investors believe it will gain value over the long term because of fixed supply, unlike fiat currencies. While fiat currencies can be printed at the will of central banks, Bitcoin supply is capped at fewer than 21 million coins. Many investors expect Bitcoin to appreciate, as fiat currencies depreciate. Bullish Bitcoin investors believe it has the potential to become the first truly global cryptocurrency.
Is investing in Ethereum a good idea for the long-term?
Ether is the native token of the Ethereum blockchain. Investors can purchase it to gain portfolio exposure in Ethereum. While Bitcoin is viewed as ‘digital gold’, Ethereum is building a global computing platform that supports many other cryptocurrencies and a huge ecosystem of decentralised applications, thereby creating a potential network effect too.
The Ethereum platform enables the use of smart contracts. The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has huge potential to disrupt many industries and create entirely new markets.
As the Ethereum platform is increasingly used worldwide, the Ether token increases in value and utility too. Investors bullish on the long-term potential of Ethereum can gain by owning Ether, as Ethereum is still the most broadly adopted platform for using smart contracts.
However, Ethereum has competition too. Other blockchains such as Solana, Polygon and Avalanche, to name a few, are capable of processing more transactions per second. Higher speed means lower costs for users.
Should you consider investing in cryptocurrency?
Cryptocurrency investment can diversify your portfolio since cryptocurrency like Bitcoin has historically shown few price correlations with the US stock market. Buying crypto directly makes sense if you believe cryptocurrency usage will become widespread over time.
However, before investing in any cryptocurrency, understand as to why that cryptocurrency will stand the test of time. Doing your own investment research can help you manage the investment risk.
Meanwhile, if you find investing directly in cryptocurrency too risky, then you can consider investing in stocks of companies that are into cryptocurrencies.
Although investing in cryptocurrencies can be considered as part of a diversified investment portfolio, the risk appetite of each individual should be kept in mind before allocating funds for investment in this digital asset. Investment risks in cryptocurrencies are high owing to its volatile nature but proper research and prudent investment in cryptocurrencies can also fetch high rewards.