Cryptocurrency is the most exciting investment class now. New forms of money, technologies, business models, and millionaires seem to be popping up all over the place. It seems like a no-brainer to start investing in cryptocurrency.
However, as with every investment, the benefits of cryptocurrency are balanced out by associated risks that you need to be aware of. Here are some of the key benefits and risks of cryptocurrency and how they relate to each other and to you. So, spend a little time reading this article over before you climb on the bandwagon and buy Bitcoin or any other cryptocurrency for future use. After all, it’s your money and you are in charge of protecting it.
Benefit: Crypto is an emerging market with huge potential
Investors love emerging markets because that’s where so much economic growth happens. By the time a technology is well-established and its true value is ironed out by the market, there isn’t too much room for massive growth. Think of the early internet, nobody had any idea how to value shares in internet companies or how much they would be worth one day. Many companies like Google, Microsoft, Facebook, and Amazon were worth tiny fractions of what they are now. Those who invested in those days made a huge return for their belief that the internet would change the world.
With only 10 years since its invention, cryptocurrency is in a similar position now. Decentralized networks still aren’t well understood and the technology is being rapidly developed. This means that the crypto market has a lot of room to grow. If you can pick the right projects now, there’s potential for bigger returns already seen in the cryptocurrency industry.
Risk: The price is unpredictable
The flipside to the benefits of an emerging market is that it also makes the prices unpredictable. The early internet also had the dot-com bubble, where prices for all internet companies skyrocketed to unrealistic values and then plummeted back down again.
We’ve seen this many times with Bitcoin and cryptocurrencies as well. It’s still difficult to put a price on crypto assets, which means nobody really knows if they are under- or overvalued. The value of the different cryptocurrencies and tokens representing shares in blockchain projects can swing wildly from day-to-day and month-to-month. If you invest a lot in crypto one day, the price could easily collapse the next.
Benefit: You can truly own cryptocurrency
One of the key benefits of cryptocurrencies like Bitcoin is that they are decentralized. In other words, they are free from the control and manipulation of any central authority. In contrast, most fiat currencies are centralized, so a bank or government can step in to freeze your assets, and there’s nothing you can do about it.
With Bitcoin and many other cryptocurrencies, this isn’t possible. As long as only you have control of your private keys, nobody can take money off of your ‘crypto wallet’. They can’t even stop you from spending it either. In this way, cryptocurrency is like digital cash or gold.
Risk: Once it’s gone, it’s gone forever
Of course, the downside to cash and gold is that you can lose it or have it stolen. With cryptocurrency, the risk is exactly the same. If you lose your private keys to your Bitcoin or Ethereum wallet, there is no bank to help you recover your funds.
There’s also the possibility of theft. In fact, in many cases, stealing cryptocurrency is even easier than stealing gold or cash, because you don’t have to physically steal anything, just a key or password. Anyone who has had even a remote interest in crypto over the last few years will know that the industry is constantly under attack. Hackers have stolen hundreds of millions worth of Bitcoin from cryptocurrency exchanges. Social engineering attacks are also widespread, trying to trick crypto users into giving up their private keys to malicious websites or emails.
In the case your crypto is stolen, you can’t get your bank to reverse the transaction.
Benefit: Crypto hasn’t gone mainstream yet
Cryptocurrency has surged in popularity over the last few years, but it is still far from mainstream. The vast majority of people in the world have still never attempted to buy or use cryptocurrency. This means there is still an incredible amount of room for user influx.
This is especially exciting when you combine it with the fact that most cryptocurrencies have a fixed or limited supply. No more than 21 million Bitcoins can ever be mined, and the majority of them are already on the market. The supply of Bitcoin in the future will stay very low while the demand may well go through the roof as everyone gets onboard.
In a ‘high demand – low supply’ situation, the only way for the price to go is up!
Risk: The infrastructure isn’t perfect
The disadvantage to this is that cryptocurrency doesn’t have all of the tools and infrastructure it needs yet for a mainstream audience. If you’ve bought or used much crypto, you’ll be especially aware of this fact.
Buying, selling and using cryptocurrency is still quite difficult and requires some research, skill and level of care to make sure you’re doing everything right. There’s always the risk of buying the wrong thing, using it in a way you didn’t intend, or simply being unable to use it. We see this all the time in the difficulty of actually spending cryptocurrency on everyday things. Crypto is often much more difficult to use than a credit card.
Make sure you know the balance
Every investment comes with its own unique balance of benefits and risks. Anyone trying to convince you otherwise is either a scammer or an incompetent investor.
With cryptocurrency, the benefits are extremely exciting, but the risks are also significant. Before you invest, it’s critical that you understand the balance. A good general rule of thumb for cryptocurrency is to only invest what you can afford to lose and don’t expect any big returns right away. Cryptocurrency is still in its early days and has a long way to go yet.