Bitcoin and crypto have been in the news a lot of late—cryptocurrency has finally gone overground. Coinbase’s listing on the NASDAQ, Elon Musk’s ambiguous pronouncements and concerns over the carbon footprint of crypto have all pushed this once anti-authoritarian alternative to traditional currencies into the spotlight.
Meanwhile, uptake of cryptocurrencies amongst investors is still soaring, with around 73 million users worldwide at time of writing, an increase of 53% in the last two years. For those wondering how to invest in bitcoin, or other alt coins, here’s our brief rundown of crypto pros and cons.
What is Cryptocurrency?
Crypto is a suite of digital currencies not tied to any nation’s fiscal reserves, facilitated by a technology called blockchain. Blockchain is a database constructed from linked blocks of immutable data, timestamped, and created in sequence. For crypto, blockchain acts as a transaction ledger, recording the slices of crypto which have been mined so far.
“Mining” crypto entails the solving of complex mathematical puzzles to uncover solutions which free up crypto coins. The computations are made deliberately intricate to slow production and thereby limit the supply of Bitcoin and other crypto currencies. When you buy Bitcoin, you are purchasing coins freed for circulation by this mining process.
Are Cryptocurrencies a Good Investment?
There are significant pros and cons to adding cryptocurrencies to your portfolio. Which way the argument tilts may depend on your political beliefs because much of the value of crypto is linked to their libertarian or anarchist origins. You may also be wary of environmental concerns aired recently. Let’s delve a little deeper.
Advantages of Cryptocurrency Investments
Cryptocurrencies aren’t tied to a national currency reserve, which means their value may survive drastic currency devaluation. Or at least, that’s the theory.
They also have the proven potential to soar in value, which means that if you get in on the ground floor early enough, you can make some serious profits. If you invested in Bitcoin a year ago, then sold at its peak value, your investment would have risen by 660%. Even other alt coins regularly gain up to 20% in value daily.
Disadvantages of Cryptocurrency Investments
The volatility of crypto is both a strength and a weakness. If you’re an attentive trader, you can buy, sell and trade crypto to maximize profit. However, if you take your eye off the ball, its value can suddenly crash, taking your investment with it. You then have the choice of hanging on in the hope that it’s a temporary downturn or selling quickly.
There’s also the significant carbon footprint of the massive digital farms generating data for the blockchain. The Independent in the UK reported recently that Bitcoin mining draws as much electricity worldwide as Argentina (121 terawatt hours). If you find this morally repugnant, you may not consider crypto a sufficiently green investment.
Finally, crypto is not as easy to spend as regular cash or even precious metal. Although there has been an expansion of vendors and platforms including PayPal taking Bitcoin in payment, others have taken a stance against it. This may not be a consideration if you use crypto for pure revenue generation, rather than as a spendable currency.
What Are the Risks of Owning Crypto?
There are two primary risks. The first is that, as with any investment, you may lose your cash if you don’t monitor the fluctuations of these currencies. Secondly, there has been an increasing move towards regulating crypto, which would reduce some of its autonomy and potentially affect its value for non-traditional investors.
It’s important to keep on top of news stories about crypto if you decide to invest in it, because these may affect the value of the top performing alt coins, for good or for ill.
Is There a Less Risky Way of Investing in Crypto?
Using a trading platform like Coinbase or Binance, diversifying your crypto portfolio to include a range of coins and limiting your exposure, are all ways to minimize risk.
How Do I Buy Cryptocurrency?
Crypto can be bought via a range of trading platforms and apps. These provide an easy way to keep tabs on the process of your investments, as well as trade between alt coins and turn your crypto back into cash, all at a few touches or swipes.
Five of the best crypto trading platforms and apps include Coinbase, Binance, Cash App, Bisq and Kraken.
Are Cryptocurrencies Legal?
The cryptocurrencies available for trading on reputable exchanges such as Coinbase and Binance are perfectly legal. So long as you are using a commercially available platform for trading, you should be fine.
However, do note that some countries have made investing in crypto illegal, including Pakistan, Vietnam, and Morocco, so make sure you check what’s allowed where you are. The Library of Congress maintains a list of current global Crypto legislation.
How Do I Protect Myself?
As with all investments, diversification is key. Crypto shouldn’t be your only investment and you’re best advised not to trade more than you can afford to lose.
Within your crypto portfolio, don’t just go for the “big names” like Bitcoin and Ethereum. At time of writing, Coinbase lists nine alt coins performing better than Ethereum and 27 doing better than Bitcoin (which is plummeting).
There are no two ways about it— crypto is volatile. Investment in digital assets requires a high tolerance for risk and an attentiveness that might not suit casual investors. If you’re building a steady pension pot, crypto might not be right for you.
Cryptocurrencies are best seen as a fun addition to a diversified portfolio with the potential to score quick gains (or dramatic losses).