Should I Invest in Cryptocurrency? Is Crypto a Good Investment for Investors
Cryptocurrencies might be making all the major headlines right now on mainstream media like CNN, Newyork Times, Washington Post, Bloomberg, and not forgetting Forbes, but should you invest your money in them?
This article will do justice to that question that lingers on every cryptocurrency beginner’s mind.
Chris Rotham, a young engineering graduate, has been watching the meteoric rise of the cryptocurrency investing boom in the USA. The popularity and growth of cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Tether, Dogecoin have compelled investors and skeptics alike to take a second look. Around 13% of Americans are said to have invested in private crypto assets. Young investors like Chris are excited about the prospects of strong returns. He is planning to open a crypto trading account. However, he would like to understand each and every aspect of the crypto market before he starts investing in cryptocurrency.
What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money that is carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database that describe specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. You store your cryptocurrency in a digital wallet.
Cryptocurrencies work using a technology called a blockchain. Blockchain is a decentralized technology spread across many computers that manage and records transactions. Part of the appeal of this technology is its security.
So, where the heck do we get the word cryptocurrency from, anyway? Glad you asked. Cryptocurrency got its name because it uses encryption to verify transactions.
This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
How does Cryptocurrency work?
The concept of digital money that people spend online is not that complicated in itself. After all, most of us will be familiar with transferring money from one online bank account to another.
Cryptocurrency works a lot like PayPal or a credit card, except you exchange digital assets for goods and services instead of US dollars. To make a transaction with cryptocurrency, you must exchange currency with a peer using a digital wallet known as a cryptocurrency wallet.
Cryptocurrency runs on blockchain technology, but what exactly is a blockchain? The term has become so commonplace, its meaning and significance are often blurred. A blockchain is simply a digital ledger of transactions.
This ledger (or database) is distributed across a network of computer systems. No single system controls the ledger. Instead, a decentralized network of computers keeps a blockchain running and authenticates its transactions.
A cryptocurrency wallet is a software that allows you to transfer funds from one account to another. To complete a transaction, you need access to a password, known as a private key.
The private key is much like a bank account. You can own multiple keys and own all the funds sent to those keys. Transactions are recorded on a public ledger, which shows the transaction totals without revealing the identities of the parties involved.
While cryptocurrency trading is the current rage and may even yield potentially high returns, Chris must understand that cryptocurrency is an incredibly speculative and volatile buy. The market is still in its infancy. Investing in something that’s new comes with challenges, so she must be prepared for ups and downs, including some dramatic swings. If his investment portfolio or risk appetite can’t handle that, cryptocurrency might not be a wise choice for him.
Best Cryptocurrency to Invest Today
There are the 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap, a cryptocurrency data, and analytics provider.
Bitcoin is on top of the food chain that everyone knows about, but it’s not the only kind of cryptocurrency out there. There’s Litecoin, Polkadot, Chainlink, Mooncoin . . . and, oh, just about 10,000 other kinds of weirdly named coins coming up the ranks. Let’s emphasize the top contenders:
1. Bitcoin (BTC)
Theories on Bitcoin’s utility differ, but there’s no denying that it’s been the dominant player in its field since its creation. Bitcoin’s growing adoption is its saving grace; both retail and institutional investors are primed to dip their toes into cryptocurrencies with Bitcoin first. Plus, some of today’s smartest business minds are increasingly gravitating toward the “digital gold.” Twitter Inc. (ticker: TWTR) and Square Inc. (SQ) CEO Jack Dorsey has said he doesn’t think there’s anything more important in his life to working on, seeing it as a way for poor countries to guard against currency depreciation and for faster, cheaper funds transfers across borders. And although Bitcoin’s price lost more than half within two months of hitting all-time highs of about $65,000, Tesla Inc.’s (TSLA) decision to put Bitcoin on its balance sheet earlier this year could serve to usher in more corporate treasury inflows over time.
2. Ethereum (ETH)
The Scottie Pippen of cryptocurrency, Ethereum has been capably playing second fiddle to Bitcoin for years now. With a market capitalization of about $276 billion, Ethereum’s share of the overall crypto market is about 18% — a far cry from the 47% commanded by Bitcoin but more than four times the next-closest token. The native currency on the platform is technically called ether but is colloquially referred to as Ethereum. The leading platform for decentralized finance, or Defi, Ethereum allows users to create smart contracts that automatically execute when certain conditions are met. The potential to cut out third parties such as banks, brokerages, and clearinghouses makes Ethereum an exciting, money-saving platform. The rising tide of Defi should continue resulting in higher usage of this platform, which can be used to issue new cryptocurrencies or create and exchange nonfungible tokens, known as NFTs, among other things.
3. Cardona (ADA)
Like Ethereum, Cardano is a decentralized blockchain platform that uses a native cryptocurrency, in this case, Ada, to enable secure peer-to-peer transactions. It was founded in 2015 by Ethereum co-founder Charles Hoskinson, who left what is now the leading platform for decentralized finance to found Cardano, which is designed to use a fraction of the energy demanded by Bitcoin and Ethereum. One way Cardano does this is by using a “proof-of-stake” protocol that doesn’t incentivize high energy usage and is an increasingly popular way for blockchains to validate transactions for security reasons. Cardano, which at $43 billion is the fifth-most valuable cryptocurrency, is transitioning toward enabling smart contracts that should be fully operational by fall 2021.
4. Binance Coin (BNB)
One of Binance Coin’s chief advantages is that, like Bitcoin, it has a strict limit on the number of tokens in circulation. The limit is 200 million, and it’s a big reason BNB has soared to become to become the fourth-most valuable cryptocurrency in the world. The native currency of the popular Binance exchange, the coin is up more than 700% in 2021 alone. It has a different model than many of the other cryptocurrencies in the market, destroying, or “burning,” much of its currency on a quarterly basis, using one-fifth of its profits to do so. With a market capitalization of more than $50 billion, Binance Coin is no longer the instrument of pure speculation that it once was, and as long as the wildly popular Binance platform continues to grow, the BNB crypto has a bullish outlook.
5. Dogecoin (DOGE)
Named for the popular “Doge” internet meme of a Shiba Inu dog, Dogecoin was created as a lighthearted take on the blockchain craze. The cryptocurrency has surged about 4,000% this year, making it the eighth-largest cryptocurrency by market cap. Its price peaked in early May at more than 70 cents, though it has since pulled back. Dogecoin’s price remains well below a dollar because of its larger circulation and unlimited capacity to mine more. While Bitcoin is capped at 21 million coins, there are 130 billion Dogecoins in circulation already, with new blocks available to mine each year. Although wildly speculative, Dogecoin has a much faster mining rate, or hash rate, than Bitcoin, giving it some quantifiable advantage over the premier cryptocurrency.
6. Dogecoin (DOGE)
Unlike stocks, cryptocurrencies have debatable and subjective measures of “fundamentals.” Because of that, there are other credentials that are important to consider with crypto, with one of those being who began the project in the first place. Enter Gavin Wood, whose credibility as a co-founder of Ethereum helped drive DOT to one of the top 10 most valuable cryptocurrencies. One advantage of DOT is that it can be used as a bridge between networks, meaning applications can be built on Polkadot that work on both the Ethereum and Bitcoin networks, for instance. As one of the cryptocurrencies built after the pioneers in the industry, its features make it both more scalable and faster than its predecessors.
Should I invest in bitcoin?
Cryptocurrency falls into the “high risk, high reward” category of investments.
Bitcoin is extremely volatile and speculative, but if you are willing to take the risk, first make sure you understand what you are investing in and have a crypto investment strategy.
That doesn’t necessarily mean the cryptocurrency is a bad investment or that you shouldn’t buy it. If it does find real-life utility, it could potentially change the world — and those who invested early on could make a lot of money. But it’s important to consider your tolerance for risk before you invest in cryptocurrency.
If you’re a risk-averse investor and are worried about losing money on your investments, cryptocurrency may not be the best fit for you. There’s a chance that it may not succeed over time, and if that happens, you could lose all the money you invest.
Similarly, cryptocurrency is famous for its volatility. Bitcoin has lost roughly 80% of its value in the past, and Ethereum once lost nearly 95% of its value over the span of a year. If you know you’d lose sleep if your investments plummeted, crypto may not be for you.
If you’re willing to take on the risk, Bitcoin and crypto is a great investment. Bitcoin aims to replace gold as a store of value, and Ethereum has the potential to disrupt the entire financial services industry. Although ambitious, the growth potential for cryptocurrencies is unlike any other investment.
The biggest advantage of investing in cryptocurrency is its upside potential. If Bitcoin replaces gold as a store of value, each coin would be worth over $320,000 (market cap of gold / total Bitcoins issued). Some investors are calling for Bitcoin to reach $1 million, as it will be a better and more accessible store of value than gold.
- If you had invested in bitcoin at the start of 2020 and sold on 31 December 2020, you would have made a 300% profit
- If you had invested in bitcoin at the start of 2018 and sold on 31 December 2018, you would have made a 73% loss
Bitcoin is extremely volatile so the trick is not to panic and crystallize your losses by selling when its value inevitably falls. This is the same with all investments.
Is Cryptocurrency a Good Investment in 2021
With cryptocurrency being young, and the market being historically volatile, there is no ‘yes or no’ answer about the wisdom of investing in cryptocurrency.
While the success of any cryptocurrency project is not assured, if a cryptocurrency project achieves its goals, then early investors could be richly rewarded over the long term.
Fiona Cincotta, the senior markets analyst at City Index, thinks the bitcoin price could rise to about $80,000 this year, but notes that forecasts are notoriously tricky because bitcoin is so hard to value.
Several crypto-market experts have tipped bitcoin to hit $100,000 or more by the end of 2021. Though its recent falls have dampened its prospects.
If you’re willing to take on the risk, crypto is a great investment. Bitcoin aims to replace gold as a store of value, and Ethereum has the potential to disrupt the entire financial services industry. Although ambitious, the growth potential for cryptocurrencies is unlike any other investment.
Even if cryptocurrency is in a bubble, the trend could very well be toward cryptocurrency being an important medium of exchange and store of value in the future. If the current price is lower than the highest price we will ever see. That makes it a good long-term bet. Meanwhile, for day traders, cryptocurrency is a very risky (but potentially rewarding bet).
There are a thousand reasons to be excited about cryptocurrency, but also reasons to be conservative in your investment strategy. Don’t dump your whole 401k into cryptocurrency, but don’t be scared to get a toe wet with a small investment you are comfortable losing (to join in the fun and to learn more now, so you have the know-how later).
The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.