Should You Invest in Cryptocurrencies?

Should You Invest in Cryptocurrencies?

Should You Invest in Bitcoin or Cryptocurrency?
Reading Time: 6 mins
Cryptocurrency refers to decentralized digital money based on blockchain technology, a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat Think of it as a digital ledger of transactions that is duplicated and distributed across an entire network of computer systems. Some of the most common versions include Bitcoin and Ethereum, but there are more than 5,000 different types of cryptocurrency in circulation. Cryptocurrency has been around since the end of the 00s, but it has come into the spotlight in recent years. In fact, over the past 12 months, Bitcoin has surged more than 370%, and its soaring price makes it look like an attractive investment. 

Many people invest in cryptocurrency just like they would other assets, but you can actually use it to buy regular goods and services. Cryptocurrency is an exciting asset class. However, purchasing it can be risky.  If you’re thinking about investing in Bitcoin or cryptocurrency, it’s vital to look past the dollar signs and consider all the risks involved. You’ll want to do some thorough research to understand how cryptocurrency works. This guide will help you learn more about cryptocurrency, how to invest in it and how to protect your investment.

What Is Cryptocurrency? 

A cryptocurrency is an exchange medium that’s decentralized, encrypted and digital. Unlike for regular currency, such as the U.S. dollar or the Euro, no central authority manages cryptocurrency or maintains its value. These tasks are distributed among the users of a particular cryptocurrency via the Internet. The first cryptocurrency was Bitcoin, with Satoshi Nakamoto mining the first block on January 3, 2009. Mining refers to the process of how new units of cryptocurrency are released—by solving cryptographic equations through the use of computers.. 

What Kind Of Investment Is A Cryptocurrency? 

Cryptocurrencies go up in value every year, but this doesn’t necessarily make them a good investment. Many investors don’t look at them as real investments but instead see them as a form of speculation. Cryptocurrencies don’t generate cash flow, so for you to make a profit, another investor needs to pay more for the cryptocurrency than you did.  But this doesn’t mean there’s no money to be made with cryptocurrency. The most important thing to keep in mind is that cryptocurrency investing is not conventional, so you should be prepared to lose some or all of your money. 

Advantages of Cryptocurrency Investments 

The unprecedented performance of Bitcoin both as a currency and as an investment has attracted lots of investors in recent years. And cryptocurrency investments have other advantages over traditional investments: 
  • Lower inflation risks—Unlike world currencies that are regulated by governments, cryptocurrency is immune to inflation. Since the blockchain system is virtually infinite, you don’t have to worry about cryptocurrency losing its value through inflation.
  • Liquidity—Established cryptocurrencies such as Bitcoin are among the most liquid investment assets thanks to the multitude of trading platforms, exchanges and online brokerages. It’s actually possible to trade Bitcoin for cash or assets instantly and with very low fees. This makes cryptocurrency an excellent type of investment for those who are interested in short-term profit. But you should remember that cryptocurrency can also be a long-term investment due to the high market demand.
  • Minimalistic trading—Unlike stock trading, which requires investors to hold a license or certificate, cryptocurrency trading is minimalistic. All you have to do is buy and sell Bitcoin or another cryptocurrency from exchanges and place it in your digital wallet. What’s even better, cryptocurrency transactions are instant, which is never true of stock trading orders.
  • New opportunities every year—Cryptocurrency is still the new kid on the investment block. New types of cryptocurrency rise in popularity every day, which bring unpredictable swings in volatility and price, creating opportunities for massive gains.

Disadvantages of Cryptocurrency Investments 

Cryptocurrency may have lots of tempting advantages, but it’s also important to be aware of the concerns surrounding this modern type of investing. Here are some of the main disadvantages of cryptocurrency investments:
  • Difficult to understand—The world of cryptocurrency can be difficult to comprehend. This is perhaps the biggest obstacle to large-scale adoption. Even for tech-savvy individuals, the idea of a decentralized financial system that operates via blockchains is not always easy to grasp. Because the terminology is not user-friendly, investors are often put off by cryptocurrency even if they sense that lots of benefits come with it.
  • No security in case of loss—With any emerging technology, there will always be people who take advantage of inexperienced users through scams. It’s essential to treat cryptocurrency just like real money when it comes to security. 
  • Market fluctuations—Market fluctuations can bring excellent growth opportunities, but they can also cause losses. For this reason, it’s important to pay close attention to market fluctuations when buying and selling cryptocurrency.

What Are the Risks of Owning Crypto?  

If you have decided to invest in cryptocurrency, you may be interested in learning about the risks associated with owning crypto. There are quite a few, but that shouldn’t put you off from investing. Instead, focus on learning how to minimize these risks:
  • Online hacking—Hacking is perhaps the biggest risk associated with owning cryptocurrency. The exchanges allow you to buy and sell crypto such as Bitcoin using a website or mobile app. Using any app can leave you susceptible to hacking. It’s important to note that cryptocurrency held on exchanges isn’t FDIC-insured.
  • Limited use—Currently, only a few online merchants accept cryptocurrency such as Bitcoin. Numerous companies don’t recognize cryptocurrency as a legitimate exchange.
  • Corruption—You can lose your cryptocurrency if a virus corrupts your virtual wallet or your hard drive crashes. 
  • Little regulation—The cryptocurrency market operates with little or no regulation. Governments don’t have a clear stance on it, and transactions aren’t taxed. This could leave you exposed to malpractice and fraud. 

Can These Risks of Investing in Crypto Be Minimized? 

The cons described above might have made you wary of investing in cryptocurrency. The good news is that there are things you can do to protect yourself before investing to minimize your risk. 
  • Don’t make decisions based on hype—Investing based on what the crowd recommends is highly risky. Instead, take your time and always invest based on calculated risks.
  • Only invest what you’re willing to lose—If you’re not a risk taker, investing might not be a good option for you. It’s really not something for the faint of heart. If you do decide to invest, always invest what you’re willing to lose.

How Do I Buy Cryptocurrency? 

If you want to buy Bitcoin or another cryptocurrency, you will need a cryptocurrency exchange account, a form of ID, a secure Internet connection and a method of payment.   Bitcoin experts recommend that you have a personal wallet outside your exchange account. You can use multiple methods of payment to buy cryptocurrency, including debit cards, credit cards and bank accounts.  It’s important to keep in mind that anyone who gains the private key to a public address on the blockchain can make transactions. This means that criminals might attempt to steal keys, especially if they know the public address has large holdings.  It’s also possible to get Bitcoin via peer-to-peer P2P exchanges or even from Bitcoin-specialized ATMs. For the latter option, you typically have to show a government-issued ID.   P2P exchanges provide a more direct connection between users than decentralized exchanges. All you have to do is create an account and post a request to buy or sell Bitcoin. You can also browse through listings of offers and choose from a list of highly rated trade partners.

Are Cryptocurrencies Legal? 

Cryptocurrencies are legal in most countries, including Canada. However, China has banned the use of cryptocurrency.   The status of cryptocurrencies varies from one country to another, and the fact that cryptocurrencies are legal doesn’t necessarily mean that they are considered legal tender.     Canada allows the use of most cryptocurrencies, but they are not legal tender in the country. All virtual currencies are treated as money service businesses in Canada to prevent money laundering. 

How Do I Protect Myself? 

The best way to protect yourself when buying cryptocurrency is to secure your digital wallet. Just like with real-life wallets, it’s your responsibility to take measures to protect your money.  Be careful when you’re using online services. Multiple online wallets and exchanges have suffered security breaches, which means that you should choose the services you use very carefully. It’s always a good idea to use two-factor authentication.  If you want to use Bitcoin for everyday transactions, try to keep only small amounts on your computer, server or mobile and the rest in a safer environment.  Make regular backups for your wallet and encrypt your online backups to make them less vulnerable to theft. You should also encrypt your wallet or smartphone with a password required when fund withdrawal is requested. This won’t protect your wallet against keylogging software, but it still helps protect against thieves. It goes without saying that you should use a strong password that is at least 16 characters long and contains letters, numbers and punctuation marks. Because such passwords are difficult to remember, you should memorize or safeguard yours. Finally, think about protecting your investment in the event of your death. Cryptocurrency is lost forever in the absence of a backup plan, so take some time to decide how you want to go about leaving your Bitcoin in your testament. Remember that the funds cannot be recovered if no one knows the location of the wallets or the passwords.

Final Thoughts

Cryptocurrency comes with a higher degree of risk than other types of investments. Even though there’s potential for dramatic gains with crypto such as Bitcoin, the losses can be equally dramatic.  To get good returns on cryptocurrency investments and minimize your risk, it’s essential to do some proper research. Bitcoin is currently a volatile asset, which means that you should only invest what you’re willing to lose. Make sure you know your risk tolerance before adding Bitcoin to your investment portfolio.

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