Should you invest in Cryptocurrency?
Cryptocurrency has become the focus in the investing world and business media recently. And it can be easy to feel left out if you have not invested in this seemingly trendy investment.
Although cryptocurrency has been around for a few years now, it has recently become more mainstream due to greater interest and speculation from investors and companies as they adopt cryptocurrency.
We’ve seen companies like Tesla and Square hold bitcoin instead of cash on their balance sheet. Online payment company PayPal is allowing customers to checkout using Bitcoin. And even big banks are softening their stance on Bitcoin, after calling it a fraud just a few short years ago.
What is Cryptocurrency?
A cryptocurrency is a form of digital currency, that is secured. The network by which it is secured is called the blockchain.
A unique feature of cryptocurrency is that unlike other types of currency we use today, cryptocurrency is not issued by a government.
There are different cryptocurrencies in circulation today, each of which is at different stages of adoption. Bitcoin is the most popular, followed by Ethereum.
Supporters of cryptocurrency see it as a way to revolutionize finance. Bitcoin can be a way to transfer money across the world, and Etherum’s goal is to allow smart contracts to provide a cheaper, safer alternative to executing financial contracts.
While developers work using cryptocurrency and blockchain to create these solutions, much of the focus at the moment has been on cryptocurrency and its store of value.
Or the potential returns from holding cryptocurrency as an investment.
Cryptocurrency as an Investment
Today, cryptocurrencies can be bought and sold, making them a digital asset that you can own. Typically one owns these coins via brokerages, or in their own wallet.
In Canada, CoinSquare is one the most popular exchanges to buy and sell cryptocurrency. In the US, there are several options like CoinBase and Binance.
Users can purchase their preferred from these exchanges, and then either store them with. the exchange’s wallet (if they provide it), or transfer it your own digital wallet.
Although these coins can be used as a form of payment online in some cases, many people own them strictly as a form of investment.
The value of the cryptocurrency that you may choose to buy can fluctuate significantly.
Cryptocurrency is often highly volatile and is driven by the supply and demand of the coins.
What risks are involved?
Although cryptocurrencies have gained popularity and turned more mainstream, there are still LOTS of risks associated with investing in cryptocurrencies.
Cryptocurrency in general is still highly speculative. It is very difficult to assign the true value to a particular currency.
There are several types of cryptocurrency in the market today, including Bitcoin, and Ethereum being the most popular.
Cryptocurrency tends to swing wildly. The value of these coins is purely based on the collective value placed on them.
Of course, this is what makes this lucrative. Cryptocurrencies have made millionaires, but there are also lots of people who have lost significant wealth.
Different currencies have seen major swings based on a tweet, or the actions of a select few.
An Uncertain Future
Cryptocurrency has an uncertain future. Bitcoin is currently the most popular, but there is no certainty that it will continue to be popular.
Each type of cryptocurrency is only as good as the value that is placed on it. Today, there are few mainstream ways to spend them, and no guarantee that these coins will be adopted as the coins of the future.
Should you buy Cryptocurrency (or Bitcoin)?
Cryptocurrency is a highly risky investment, and you should take that into consideration if you plan to invest in cryptocurrency.
That being said, there may be a spot for it in your portfolio, IF it aligns with your overall investing strategy and financial goals.
Here are some questions to consider:
Do you have an emergency fund?
An emergency fund should be one of the first few steps when getting your finances together. Focus on that, before investing into speculative assets like cryptocurrency.
Are the rest of your investments fairly diversified?
All cryptocurrency has been extremely volatile for the last few months. Sometimes, there is no reason for the values to fluctuate.
If you are looking to buy cryptocurrency, make sure it fits within the risk profile of your overall portfolio.
What other speculative/volatile investments do you own?
Cryptocurrency is speculative at best for now, and potentially just as risky, or riskier as derivatives and options. Evaluate whether adding significant risk via cryptocurrency is the right move for your portfolio.
How quickly might you need to liquidate your cryptocurrency?
Investing in cryptocurrency is a wild ride.
Values can drop 10–20% or more within a day. Ask yourself if you would be okay sitting on this roller coaster? Or do you need the funds soon?
Can you afford for your cryptocurrency investment to go to zero?
This is likely the biggest question you have to ask yourself. You may not be happy about an investment nosediving to a value of zero. BUT can you afford that to happen?
Cryptocurrency has seen more mainstream acceptance, especially over the last year. This does not mean that it can only gain value, nor that it will hold its value forever. Your finances are personal, and only you can make the best decision on whether an investment in cryptocurrency has a spot in your portfolio.
Originally published at https://mintandgoldstory.com on April 27, 2021.