Pros and Cons of Cryptocurrency
What is Cryptocurrency
Cryptocurrencies have become this decade’s most successful financial disruptor. Despite being a speculative digital currency, Pew Research states that 16% of all Americans have invested and traded crypto. This helped spur a massive global adoption, which includes over 100 million crypto users. All in all, this has created a worldwide crypto market cap of more than $2.6 trillion.
These impressive numbers have continued to attract more investors to the crypto boom. However, while new crypto traders may want to focus on its recent growth, it’s important to remember to look at the whole picture.
- Cryptocurrency trading can be high risk, but can also lead to high rewards.
- A cryptocurrency is a digital currency created by blockchain technology.
- Cryptocurrency scams have cost investors over $7.8 billion to date.
A cryptocurrency is a form of digital currency. Called crypto for short, this currency is virtually impossible to overspend, double-spend, or counterfeit given that it’s secured via cryptography and based on decentralized blockchain technology.
The denomination used in cryptocurrency is called a “token”, and these can be given more specific names depending on the provider. For instance, Bitcoin’s token is called Bitcoin, Ether’s token is called Ether, and Ripple’s token is called XRP. Crypto can be bought, sold, or hodled (the industry term for hold) by traders through secure online exchanges. Any crypto owned is then held in crypto wallets which are deemed safer and more private—though not impenetrable—than other online financial options. There is no limit or minimum for crypto trading, and virtually anyone can invest in it.
Cryptocurrency Pros and Cons
Cryptocurrency has become increasingly popular in recent years, gaining more media attention, but also more scrutiny from governments. Whilst cryptocurrency may or may not displace traditional currencies, it has at the very least become a lucrative trading platform. Whether it suceeds as a digital currency going forward will depend largely on how governments regulate them. With that said, let us look at the pros and cons of cryptocurrency as they stand to date.
Annonymity and Flexibility
Cryptocurrency offers anonymity and flexibility, which traditional investments don’t give. When investing in other assets like stocks or gold, for instance, traders must declare their personal information and banking details. This is for identity verification but this practice also puts confidential data at risk. For this reason, many younger traders are drawn to crypto since you can even trade with just your crypto wallet number.
A huge benefit of cryptocurrency is its de-centralized nature. Having no central authority, cryptocurrency cannot be manipulated or monopolized. Unlike traditional currencies which often have controlling entities and red-tape, cryptocurrency allows traders to equally access each token and currency movement. This means that so long as you have the capital and the time, you can have the same profitable opportunities without any third-party interference.
Easy of Access
Unlike other traditional investments, crypto investors have easy access to their investments remotely. Because cryptocurrency is a digital asset, crypto traders who want to check on their tokens only need to log into their crypto wallets or exchanges, and can do so anytime from anywhere with a stable internet. Because of this accessibility, any transactions are reflected immediately with little to no transaction fees.
Return on Investment
Although crypto can be very volatile at times – the long term trend has been positive. For example, Bitcoin was selling at roughly $300 in 2016. In the subsequent years, it has marched up to over $30,000 – a return of 10,000 percent. Whilst many experts suggest that the bubble will burst, the value of crypto continues to defy expectations.
Conversely, digital currencies by nature are volatile. As we discussed previously in our post Are Cryptocurrencies Worth the Risk?, crypto does not guarantee profit and is subject to sudden dips in value. In fact, it’s not unheard of for cryptocurrency traders to lose significant amounts of money over a short period of time. Even leading coins like Bitcoin are subject to rapid valuation drops. Just this November, Bitcoin and other top coins dropped by over 5% over the course of a single day. In such cases, investors have no choice but to hold or sell at a lower price. Since many new crypto investors are day traders or those with more modest capital, having to sell or hold a token can mean ruining their investment strategy and delaying ROI (return on investment).
Lack of Security
Because it’s unregulated, it also doesn’t offer any safety nets for investors. This means in the event that your crypto investments crash or you get scammed or hacked, there are no contingencies for your benefit. Since crypto is also unregulated, governments and federal agencies can choose to suddenly prohibit or limit transactions. In these cases, local crypto investors have no choice but to give up or reduce their crypto transactions for smaller returns.
It’s still taxable
Despite the fact that crypto is unregulated, it’s still taxable in many countries like the United States, the United Kingdom, and Japan. Because any positive movements in crypto can increase a trader’s income, this automatically makes it part of their taxable income. Plus, should crypto be used to make purchases, it can also be susceptible to sales taxes.
Prone to Scams
With the rising popularity of cryptocurrency, there has been an equal rise in the number of scams as they look to take advantage of a booming market. According to the Financial Times, scams involving cryptocurrency cost investors $7.8 billion in total and roughly $3.2bn worth of cryptocurrency was stolen in 2021.
Because of crypto’s undeniable risks, many investors with more modest capital or with conservative investment strategies may feel uncomfortable taking part. Thankfully, there are alternative ways that investors can still use currencies to generate a profit, without actually investing in the volatile coins themselves:
1. Forex trading
Although digital coins have been dominating the news lately, they don’t have the largest daily trading volume—forex does. Short for foreign exchange, forex is also known as FX or currency trading. According to FXCM, forex is another decentralized global market that involves the buying and selling of different fiat currencies.
As mentioned earlier, forex has the largest and most liquid market that trades over $5 trillion daily. And because forex is tied to currencies backed by government’s there is little chance of them failing completely. On top of this, forex runs 24/7, which means that investors looking for the remote accessibility of crypto will also enjoy the convenience of forex.
2. Gold Markets
Another alternative form of currency trading that is much more stable, gold trading is much more legal, transparent, and secure than cryptocurrency. Although both crypto and gold are pretty equal in terms of liquidity and rarity, gold is considered a better hedge against inflation.
To take part in the gold markets, you can choose to either invest or trade in gold. The former includes actually owning the asset and earning money from increases in its value. The latter, meanwhile, involves staking a position on the asset’s underlying price movements. There are many ways to dip into gold depending on your preference. These include physical gold bullions, gold futures, and gold options. Each one has varying benefits that complement different investment strategies. Just like forex, investors can also plot and try out their investment schemes with a gold demo trading account first.
3. Blockchain stocks
Though blockchain is linked to cryptocurrency, as a system of digitally distributed and decentralized public ledgers, blockchain supports more than just crypto transactions. Reports from U.S. News state that many companies have also begun using blockchain technology, thereby upping its value and credibility.
Therefore, by investing in blockchain providers, investors can be part of the system which supports crypto without being tied to its rapid changes. For instance, investors in IBM can leverage its blockchain stakes that also support companies looking to strengthen supply chain networks. This means that even if crypto should dip, IBM blockchain investors still have private companies to hold up its value.
4. ETFs in crypto-investing companies
If the currency exposure you want is really crypto, but you can’t afford to risk any money, purchase a diversified exchange-traded fund (ETF) from a company that invests in cryptocurrencies instead. For instance, financial advisor Suze Orman told CNBC that she safely dabbles in Bitcoin via shares in companies like MicroStrategy and Square. Both companies have invested millions in Bitcoin.
This approach diversifies an investor’s portfolio by hitting two birds with one stone: you get to invest in a company you believe in and get to dabble in crypto, too. Although it seems like cryptocurrency is aggressively taking over, investors shouldn’t feel pressured to follow suit. As much as crypto has its strengths, if it doesn’t complement your personal strategy, it won’t be worth investing in. Instead, investors who want to trade in the bustling world of currencies are better off looking at other options that may be a more comfortable, and profitable, fit.
FAQs on Cryptocurrency
1. Trading cryptocurrency can be extremely risky as markets are very volatile. However, that can also open up opportunities for swing traders.
2. Crypto lacks the same security as other markets, with investors losing billions in scams.
3. The market could face severe regulations at any point, which could cause its value to tank.
Investing in cryptocurrency is high risk, high reward. There are many factors at play in the market and because the currency is not backed by the government, it’s value could diminish completely over night.
Cryptocurrency is not necessarily a bad investment, but it is not without huge risks. With that said, you are best to contact a legal investment advisor who can help with such decisions.