Decisions about investing your hard-earned money can be overwhelming, especially for first-time investors. You may find yourself mulling over options from Real Estate to the stock market to your neighbor’s promising startup company, wondering where to start.
Theories of investment run from the extremely conservative “play it safe” approaches to the “high risk, high reward” moves we tend to think of with big-time investors and entrepreneurs.
Whether you’re a college grad looking to open a 401k at your first job or a newly married couple wanting to try your hand as rental property owners, there is one investment category you will hear more and more about in the future: cryptocurrency.
While it is still relatively new, those who have jumped into digital currency have certainly created some success stories. And with roughly a decade or so of data to consider, we can also spot trends and outline some pros and cons of cryptocurrency.
If you are on the fence about virtual currency and whether to take the digital plunge, read on to weigh the pros and the cons and decide if this investment is right for you.
What is Cryptocurrency?
Before I jump into the pros and cons, I want to share a basic definition of cryptocurrency and how it works. Honestly, most people are extremely confused by cryptocurrency but often do not want to admit it, especially if it is in a scenario where savvy investors are discussing it.
The worst thing you can do is dive in and invest in something you do not fully understand, so do not be ashamed when it comes to asking questions! The more you know about crypto, the more informed your investment decision will be.
Cryptocurrency is a decentralized digital currency with every crypto transaction recorded using blockchain technology. In layman’s terms, the blockchain is something like a shared checkbook ledger that anyone can view. Transactions are validated by the technology to prevent or eliminate fraud.
Crypto can be used to purchase goods or services or to invest; many people think of Bitcoin as a term interchangeable with cryptocurrency, as it was the first. However, there are numerous other types of cryptocurrency, including Cronos, Dogecoin, and Ethereum, to name a few.
If cryptocurrency was purely for investment purposes then it wouldn’t actually be a good investment. If something exists without inherent value behind the asset, that investment should be avoided at all costs. Crypto however has plenty of use cases beyond being just a currency. Check out Top Crypto Use Cases Beyond the Hype.
The security associated with blockchain technology is an attractive feature for would-be investors.
The transactions cannot be hacked or deleted; once an entry is made in the blockchain, you could consider it cast in digital stone. The currency is secure, and its storage ledger is ultimately impenetrable. These are cryptocurrency’s biggest selling points.
Transparency and Fairness
This decentralized currency is free from the red tape associated with a traditional financial institution. The transactions are not subject to intermediaries, and no financial institution has authority over crypto or blockchain; it can be accessed by anyone, anywhere across the globe.
Cryptocurrencies place a cap on coins, which means a level of control involved that eliminates the possibility of inflation. This built-in regulation model prevents the cryptocurrency from potentially spiraling out of control. Investors find this a reassuring aspect when getting involved in this digital market.
Crypto Never “Closes”
Unlike the New York Stock Exchange, the crypto market never closes. You can buy and sell on the cryptocurrency market round the clock, another attractive feature to investors.
In the digital age, people are moving away from what you might consider traditional “office hours.” Investors can purchase crypto any time it suits them, no matter where she is in the world. There is no more waiting for a bell to ring or a market to open since crypto currency never closes.
Just as you hear about volatility with other traditional investments (and it is a word that sends some conservative investors running in the opposite direction), cryptocurrency investment has its fair share of volatility as well.
This is a market that can see extreme highs and the lowest of lows and one that is rooted in speculation. The value of coins can change quickly, and investors should not jump into cryptocurrency looking for stability.
The extreme volatility that can be seen with cryptocurrency makes it a nonstarter for some would-be investors.
Lack of History
Even Jeff Bezos had trouble convincing people in the early days that his idea to “sell books on the internet” would work; he did not have the history to back up his idea, which still seemed like a risk to some investors.
Crypto is still relatively new, so we simply do not have enough data to convince some people of its long-term promise. Those with a “high-risk high reward” mentality may not be afraid to dive right in, but others remain skeptical until we have more time and experience to consider.
Stock market analysts have centuries of data to use when predicting outcomes; thus far with cryptocurrency we only have a little more than a decade of history to consider, which in the grand scheme for potential investors probably feels more like a nanosecond.
Issues with Scalability and Speed
Just because this currency is a digital asset does not mean it always moves at the speed of light. We expect everything in the digital age to happen instantly (cursing our devices when Netflix takes more than 3.3 seconds to load), but blockchain does have its limitations.
It will simply slow down in transaction speeds when it hits certain capacities, meaning an investor’s transactions may not be processed as quickly as she likes and ultimately causes losses.
It is possible, of course, that this could change in the future, but for now, it is certainly one of the “cons” of cryptocurrency.
Investor Knowledge Gaps
Unless you are immersed in the digital world and a “tech head” so to speak, you may struggle to fully understand the crypto exchange and the cryptocurrency market. It’s a challenging industry, even for some with a fair amount of digital know-how.
Just as you would be leery of investing in rental properties without any experience managing one, you may be reluctant to jump into crypto without the right knowledge and skill set.
On the other hand, if you are willing to put the time and effort in, there are many great resources available online to learn more about cryptocurrency.