Everyone seems to be talking about investing in cryptocurrency these days. It’s all over the news and social media. Even the average layperson who doesn’t invest has heard about crypto. But, the challenge is that not many people truly know what cryptocurrency is or how it will potentially impact the financial market.
Undoubtedly, it has disrupted the way we interact with and think about money. Many financial analysts are betting that crypto will be the new form of global currency. And it appears to have the potential to be a major driver in the global economy.
As a digital asset, crypto is not tied to a central authority or government, so exchange rates and fees may be a thing of the past. Crypto exchanges are available 24/7, unlike banks and traditional financial institutions. And money can be moved within seconds or minutes when conducting crypto transactions. Crypto has far-reaching potential in terms of safety, cost, and international exchange.
But as with all investment vehicles, crypto has its risks. At present, crypto is very volatile. As we have seen over the past few months, it can take a person from rags to riches or vice versa within a matter of seconds. While crypto is regulated in the U.S., there have been clashes at the state level as new interest-bearing features emerge with this digital asset. Even with all the hype, many key players seem to have faith in digital assets.
Is Cryptocurrency a Good Investment?
In 2021, the Coinbase and Robinhood IPOs went live, which sparked more interest in these digital assets. These moves inspired good faith in the crypto market from buyers around the world. It indicated that crypto is here to stay and that it may be stabilizing in the near future.
Aside from that monumental play, a number of other events are encouraging for prospective crypto investors. Major companies like PayPal, Microsoft, Etsy, Starbucks, and Home Depot already accept Bitcoin as a form of payment. And in 2022, Amazon was seeking to hire a digital currency and blockchain expert.
But, of course, the recent bankruptcies and scandals surrounding the crypto market cannot and should not go unnoticed. A number of crypto exchange platforms have been the buzz in the financial world as they have deflated our trust in the market. Notwithstanding, promising tokens like Bitcoin, Ethereum, Dogecoin, and Shiba Inu took a deep dive at the end of 2022.
There are both encouraging and discouraging stories about digital currency adoption. And I can say that neither has shaken my faith. As a long-term investor, I know that patience is the name of the game. And, at the core of that principle is buying low and selling high. So, my answer to this question is “yes.” I think that crypto can be a sound investment for many reasons. But, of course, doing so requires caution and wisdom.
Benefits of Cryptocurrency
Aside from the obvious benefit of trading crypto, this digital currency has many other advantages. It has the capacity to become a global form of payment, eliminating the need for central governance. This ultimately means that every country will have equal access to these tokens. Thereby making it easier and cheaper to conduct international financial transactions.
Some cryptocurrency exchanges are also developing interest-bearing accounts that make this asset even more intriguing. Some popular exchanges now have interest-bearing tokens and debit card and credit card accounts that are conquerable to many money market and high yield savings interest rates. I saw interest rates of up to 17% on some crypto exchanges in 2022.
Crypto is even leveling the playing field in loan accessibility. Many of these same exchanges also offer crypto-backed loans. The unique thing about these loans is that they do not have the same requirements as traditional loan products. For instance, many don’t require credit checks or expensive collateral. Your crypto holdings (typically Bitcoin) are your collateral. Most of these loans lend an amount based on the borrower’s crypto balance.
This allows the borrower to maintain their crypto holdings without having to trade. Additionally, the interest rates on crypto-backed loans tend to be much lower than that of traditional loans. Repayment amounts and loan terms are also very flexible. Many business owners are taking advantage of these types of loans.
Strategies for Investing in Crypto
Understand that crypto has the same inherent risks as any other investment vehicle. You can potentially lose all the capital that you put into this asset. So, my number one rule for investing is only to invest what you can lose. This applies double to crypto because of its high level of volatility and current state of uncertainty.
Do Your Homework
Another important tip is to do your homework. Don’t just jump onto the crypto bandwagon without understanding what you are getting into. There are many resources available to help you do just that. One of the number one mistakes I see people making is buying tokens because “everybody” is talking about them. Many meme tokens like Dogecoin have brought much attention to the market.
So many people have told me that they have bought or wish to buy this token just because of the hype. This coin’s price had a major spike this past May but has subsequently decreased by more than 60%. Many people lost money because they bought the coin during this price hike, which ultimately cost them to lose money less than a week later. I am not trying to discourage you from buying Dogecoin or any other token. But I do want to caution you to do your research before you buy. Keep in mind that the market could go either way.
Invest in Stablecoins
Focus more of your crypto portfolio on stablecoins. Stablecoins are just that – stable. They are typically pegged one-to-one to an underlying asset such as a national currency or gold. For instance, the USD Coin is currently equivalent to the U.S. dollar. While you won’t gain much (or anything) by holding this coin, your risk for loss is also very low. You can and should still invest in other forms of crypto while holding stablecoins. However, be mindful of taking more risks than you can reasonably bear.
Maintain a Balanced Portfolio
When investing in crypto, be sure to maintain a balanced investment portfolio. Stock investments are still very viable funds that should encompass the bulk of your investment portfolio right now. Don’t make the mistake of only investing in crypto or allowing it to consume the majority of your portfolio. Diversification is key to any well-rounded investment strategy. And right now, it is definitely not wise to put all your eggs in the crypto basket.