Investing in cryptocurrency is a way to make a lot of money, but it is also a very good way to lose all of your money. Putting money into crypto assets is risky, but it can pay off if you do it right and include it in a diversified portfolio.
Cryptocurrency is a good investment if you want to get a direct look at the demand for digital currency. Buying the stocks of companies that deal with cryptocurrency is a safer option that could be less profitable.
Is Crypto a Good Long-term Investment?
Many cryptocurrencies, like Bitcoin and Ethereum, start out with big goals that may not be reached for a long time.
Even though the success of a cryptocurrency project is not guaranteed, early investors in a successful cryptocurrency project can make a lot of money in the long run. For a cryptocurrency project to be a long-term success, though, it needs to be used by a lot of people.
Bitcoin as a Long-term Investment
As the most well-known cryptocurrency, Bitcoin benefits from the network effect, which means that more people want to own Bitcoin because most people already do. Many investors think of Bitcoin as “digital gold” right now, but it could also be used as a digital form of cash.
Bitcoin investors think that the value of the cryptocurrency will rise over time because the supply is fixed, unlike the supply of fiat currencies like the U.S. dollar or the Japanese yen.
Bitcoin is limited to less than 21 million coins, while central bankers can print as many of most other currencies as they want. Many investors think that the value of Bitcoin will rise as the value of fiat currencies falls.
People who think Bitcoin will be used a lot as a form of digital cash think it could be the first truly global currency.
Ethereum as a Long-term Investment
Ether is the native coin of the Ethereum platform, and investors can buy it to add Ethereum to their portfolios. Bitcoin is like digital gold, but Ethereum is building a global computing platform that will support many other cryptocurrencies and a huge ecosystem of decentralized applications (“dApps”).
Because there are so many cryptocurrencies built on the Ethereum platform and because dApps are open-source, Ethereum has the chance to also benefit from the network effect and create long-term value.
The Ethereum platform makes it possible to use “smart contracts,” which run automatically based on rules that are written into the code of the contract.
In exchange for running smart contracts, the Ethereum network takes Ether from users. Smart contract technology has a lot of potentials to change big markets like real estate and banking, as well as to create whole new markets.
As more people around the world use the Ethereum platform, the Ether token becomes more useful and valuable. Those who believe in Ethereum’s long-term potential and buy Ether can make money right away.
That doesn’t mean Ethereum doesn’t have rivals. Some “Ethereum Killers,” like Solana (CRYPTO: SOL), Polygon (CRYPTO: MATIC), and Avalanche (CRYPTO: AVAX), are designed to handle smart contracts and use a blockchain system that can handle more transactions per second.
The speed also has the added benefit of being cheaper for users. But Ethereum is the platform where smart contracts are used the most.
Is Cryptocurrency Safe?
Cryptocurrency is not always a safe investment, as shown by a number of things. Even so, there are more and more signs that cryptocurrency is here to stay.
Cryptocurrency Risks
More than stock exchanges, cryptocurrency exchanges are more likely to be hacked and used by criminals in other ways.
Investors who have had their digital currencies stolen due to security breaches have lost a lot of money. This has led many exchanges and third-party insurers to start offering protection against hacks.
Keeping cryptocurrency safe is also harder than keeping stocks or bonds safe. Cryptocurrency exchanges like Coinbase (NASDAQ: COIN) make it easy to buy and sell digital assets like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH).
However, many people don’t like to keep their digital assets on exchanges because it’s risky to let a company control access to their assets.
When you store your cryptocurrency on a centralized exchange, you give up some control over your assets. A government could ask an exchange to freeze your assets, or the exchange could go out of business, leaving you with no way to get your money back.
Some cryptocurrency owners like to store their coins offline in “cold storage” options like hardware wallets, but cold storage has its own problems. The biggest risk is losing your private key since you can’t get to your cryptocurrency without it.
There’s also no guarantee that a crypto project you invest in will be successful. There are thousands of blockchain projects, and there is a lot of competition between them. Also, many blockchain projects are just scams. Only a small number of cryptocurrency projects will be successful in the long run.
Regulators may also crack down on the whole crypto industry, especially if governments see cryptocurrencies as a threat instead of innovative technology.
The fact that cryptocurrency is based on cutting-edge technology also makes it riskier for investors. A lot of the tech is still being made and hasn’t been used a lot in the real world yet.
Cryptocurrency Adoption
Even though there are risks, the cryptocurrency and blockchain industries are getting bigger. Financial infrastructure that was badly needed is being built, and investors are getting more and more access to custody services that are good enough for institutions.
Professional investors and ordinary people are slowly getting the tools they need to manage and protect their crypto assets. Futures markets for cryptocurrencies are being set up, and many companies are getting direct access to the cryptocurrency market.
Block (NYSE: SQ) and PayPal (NASDAQ: PYPL), two of the biggest names in finance, are making it easier to buy and sell cryptocurrency on their platforms. Hundreds of millions of dollars have been invested by other companies, like Block, in Bitcoin and other digital assets.
At the beginning of 2021, Tesla (NASDAQ: TSLA) bought $1.5 billion worth of Bitcoin. By February 2022, the company that made electric cars said it had nearly $2 billion worth of cryptocurrency.
MicroStrategy (NASDAQ: MSTR), a company that makes software for business intelligence, has been collecting Bitcoin since 2020. By the end of 2021, it had $5.7 billion in cryptocurrency and said it would buy more with the extra cash it made from running its business.
Even though other things still make cryptocurrency risky, the fact that more and more people are using it is a sign that the industry is growing up. Individual investors and businesses want direct access to cryptocurrency because they think it is safe enough to invest large amounts of money in.
Should You Invest in Cryptocurrency?
Having some cryptocurrency in your portfolio can make it more diverse since the prices of cryptocurrencies like Bitcoin haven’t always moved in sync with the U.S. stock market. If you think that more and more people will use cryptocurrency over time, it might make sense to buy some cryptocurrency directly as part of a diversified portfolio.
For every cryptocurrency you invest in, you should have an investment thesis that explains why you think that currency will last. If you do your research and learn as much as you can about how to invest in cryptocurrency, you should be able to manage the risk as part of your overall portfolio.
If buying cryptocurrency seems too risky, there are other ways you might be able to make money from their rise. You can buy shares in companies like Coinbase, Block, and PayPal, or you can put your money into an exchange like CME Group (NASDAQ: CME), which lets people trade crypto futures.
Where to Invest $1,000 Right Now?
When our analyst team, which has won awards, has a tip about a stock, it can pay to listen. Motley Fool Stock Advisor, the newsletter they have been putting out for over a decade, has almost tripled the market.
Also Read:
Comments are closed.