Everything You Should Know Before Investing in Cryptocurrency
Cryptocurrencies have been big news in recent years, with digital currencies such as Bitcoin hitting the headlines after some unexpected and somewhat volatile dips and spikes in value. Cryptocurrency may have caught your eye during this media attention, and perhaps you are thinking of investing. Not sure where to start? Read on this Trading Education article for some essential information about adding cryptocurrency to your own investment portfolio.
What is cryptocurrency?
Cryptocurrency is a digital currency, which is money that does not exist in any physical form. Since the inception of the first digital Altcoin in the late 2000s, Bitcoin, cryptocurrencies have traditionally attracted cryptographers as investors, with their inside knowledge of blockchain technology. More recently, however, they have offered an alternative for many other mainstream investors, with the added bonus of being independent of government regulation: a big draw, especially for investors in countries with uncertain economies. The value of cryptocurrencies depends entirely on how much they sell for, which in the decade since they first became available has risen from absolutely worthless, to what Bridget Casey described in January 2018 as ˜quite a bit' which equates to several thousand in the case of Bitcoin.
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Where can I buy cryptocurrency?
Being a digital form of currency, Altcoin investment is only available via specialist cryptocurrency exchanges. One of the most popular of these worldwide is Coinbase, which offers a platform through which to buy, sell and track investments. The best-known Altcoin currencies are Bitcoin, Ethereum and Litecoin, and these have made the media headlines on a number of occasions in recent years. It is important to be aware that many other Altcoins are available and it is well worth doing a little research about these before you buy but always remember that the less well known the currency, the greater the risk in purchasing it.
Should I invest in cryptocurrency?
The decision of whether to invest in cryptocurrency is entirely yours, and it depends on your views on the future of digital money. There is no denying that Altcoins have seen a massive surge in value in recent years, but it is not necessarily a given that this growth will continue. The future of digital currencies is unknown, so it is fair to say that long-term investment plans involve a large element of risk.
Lack of government regulation of cryptocurrency attracts many investors, sometimes because they are looking for some financial security away from a shaky national economy and political instability. Cyprus saw a big rise in cryptocurrency investment on the back of their financial crisis in 2013, for example, when investors lost confidence in traditional banks. This lack of government regulation also attracts underground activity, however, and it should be noted that this sort of activity can add to cryptocurrency volatility and increase the risks associated with long-term investment. Also, you should note that sufficient cryptocurrency trading education is needed before you get serious.
Some financial experts suggest that digital currency will eventually replace traditional currency, and of course none of us knows if this is true. If this were to happen, governments would have to get involved, and while the future of digital currencies would then become more stable in one sense, this would change cryptocurrency use and value beyond recognition. So even if you believe this to be true, it does not negate the long-term risk when deciding whether to add cryptocurrencies to your financial portfolio.
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How much should I invest in cryptocurrency?
As with any investment, the old adage holds true about not putting all your eggs in one basket, and it is prudent to remember this if you are considering digital investment. Cryptocurrency has made big news in the decade since the launch of bitcoin, and it offers something a little different from traditional currency, making it potentially an exciting and fun addition to an investment portfolio. It is true that the long-term future of cryptocurrency is uncertain, but risky investments can certainly go up as well as down, and if you are willing to take an informed investment risk it could well pay off in the end.
Bridget Casey offers sound advice in her article for Money after Graduation: "Never put more than 3% of your investment portfolio into a single investment."
Of course, it is up to you how closely you follow this guidance, but any investor would agree that it is not wise to put the security of all of your long-term finances at risk. It may well pay off to have a percentage of your investments in cryptocurrencies so you don't miss out, but as with any investment only buy what you can afford to lose.
What are the advantages of cryptocurrency investment?
There are a number of advantages of cryptocurrency investment, which might help you make the decision of whether to invest.
1. Cryptocurrencies offer protection against political and economic instability
Cryptocurrency regularly sees surges in value due to a rise in investments in countries that are experiencing financial and political turmoil. The reason for this is that investors in these countries, such as those in Cyprus during their financial crisis in 2013, lose confidence in government-controlled traditional banking. They seek somewhere to place their investments that are separate from this economic instability and that will keep their money safe, and increasingly they turn to cryptocurrencies to keep their wealth away from government control.
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2. Cryptocurrencies offer anonymity and fraud protection
Cryptocurrencies are encrypted, making all transactions untraceable and anonymous. This is very appealing for many investors who wish to keep their personal wealth information private. This also means that cryptocurrencies are protected from fraud, as personal information is not available and the currencies cannot be copied or counterfeited.
3. Cryptocurrencies offer a global investment opportunity
Investing in cryptocurrency is a global opportunity. Not one single government regulates Altcoin investment, and this means that anyone, anywhere, can invest. All you need is funds with which to buy your cryptocurrency and an internet connection.
What are the disadvantages of cryptocurrency investment?
As an investor, you must also make sure you are aware of the disadvantage and risks involved with investment in cryptocurrencies.
1. Cryptocurrency value is volatile
Cryptocurrencies experience what are sometimes very large peaks and dips in value, and their worth can be very quickly influenced by media or financial events. Overall their value has seen huge growth during recent years, but during this time there have also been sizeable crashes in value that would frighten the most seasoned investor.
2. Cryptocurrencies are vulnerable to theft and accidental loss
Digital currencies are vulnerable in the same way as any other digital commodities, and over the years user error and hackers have contributed to loss of cryptocurrency which is then unrecoverable. It can equally be a problem if you take your own cryptocurrency security too seriously. It is not unheard of for investors to lock themselves out of their online accounts and, again, once Altcoins are lost, they cannot be recovered.
3. Cryptocurrency is not a commonly accepted form of spendable currency
What are you going to do with your cryptocurrency once you have bought it? Currency by its definition should be accepted as payment for goods or services, but there are still few places where cryptocurrencies can be spent. This is a turn-off for some investors. It also means that cryptocurrency investors have a tendency to hoard their assets, which may put the long-term value of cryptocurrencies at risk.
4. Cryptocurrency is used in many underground activities
The anonymity of cryptocurrency investment makes it inevitably appealing for underground investors involved in illegal and illicit activities such as drug and sex trades and terrorist activities. Investing in cryptocurrency does not mean that your own investment is illegal in any way, but investors should be aware of this black-market activity so that they can make their own moral judgement on whether to invest.
5. Cryptocurrency has an environmental cost
Cryptocurrency in general, and bitcoin, in particular, requires a lot of energy to mine. Investors with an environmental conscience should do their research about energy use, pollution, and long-term sustainability for the environment.
I've weighed up the pros and cons and I am ready to invest. What do I do next?
So you have decided you would like to invest some of your wealth in cryptocurrencies. In doing so you will be joining many other investors who have decided that the excitement of investing in modern blockchain derived currencies is likely to be worth the uncertainty of their long-term future.
There is a wealth of information online about cryptocurrencies and how to get started with adding them to your investment portfolio. One of the easiest ways to begin is by visiting an online exchange such as Coinbase, where you can make informed choices about when and how much to buy or sell, and which also help you manage your investment as you go along.
Alternatively, by opening an account with one of our online partner brokers, you could join speculators in trading or spread betting on cryptocurrencies. This enables you to speculate on the value of altcoins without actually taking possession of them, and has the potential for greater gains as well as losses.
With so many investors joining the cryptocurrency ride, the short-term future at least does look to be assured. Do your research, weigh up your risks, and only spend what you can afford to lose. And remember that risk doesn't necessarily mean loss, your investment could well pay off!
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