Is It Safe to Invest in Crypto?

The world has been taken over by cryptocurrency. Since 2009, when Bitcoin, the first cryptocurrency, came out, the cryptosphere has been through both amazing and scary times.

In reality, cryptocurrency is a very unstable asset. Investors need to know that having crypto in their portfolios means taking on a lot of risks. But investors who know how to handle risk could make a lot of money with crypto.

Is It Safe to Invest in Crypto?

Some investors have made a lot of money with crypto, but others have lost a lot of money. Assistant professor of finance at Texas A&M University-Kingsville, William Procasky, CFA, says that new investors should stay away from crypto. But he also says that it could be a part of the portfolios of more experienced investors who know how to deal with risk.

“You might be fine if you’re building a diversified portfolio and want to add crypto to the 5–10% of your portfolio you set aside for alternative assets,” says Procasky.

Bitcoin and Ethereum have the most market capitalization and have been around longer than many other cryptocurrencies. For most investors, this makes them a safer bet.

Lauren Niestradt, CFP/CFA, senior portfolio manager at Truepoint Wealth Counsel, says, “Choosing options like Bitcoin and Ethereum, which are more popular, is a bit safer.”

What the SEC Says About Cryptocurrency?

The SEC has had doubts about cryptocurrencies. Gary Gensler, the head of the SEC, told Yahoo Finance that crypto companies need to “come into compliance” with the laws that are already in place.

After the FTX mess at the end of 2022, he said these things. Gensler hopes, among other things, that the SEC will protect consumers if crypto-holding companies decide to turn into lending companies.

Should You Invest In Crypto

“Just because the crypto market uses different technology is no reason to treat it differently. Gensler said in an April 2022 speech that we shouldn’t be tied to any one technology.

This means that not only new laws and rules, which Congress is talking about but also the rules that are already in place could change how cryptocurrency exchanges and other companies do business.

Risks of Investing in Crypto

Investing in cryptocurrency comes with a number of risks, such as loss of capital, government rules, fraud, and hacks.

  • Loss of money: Mark Hastings, a partner at Quillon Law, says investors need to be careful in crypto’s unique financial environment or they could lose a lot of money. This is a risk that comes with any investment, but the high volatility of crypto makes it an even bigger risk. Since the price of Bitcoin has dropped by more than 60% in the past year, these losses could easily add up to a big chunk of the original investment.
  • Government regulations: Michael Collins, CFA, a professor of financial planning at Endicott College, says that many governments haven’t fully regulated the use and trade of cryptocurrencies yet. This can make it hard to know what legal and financial risks to expect. Some people even want cryptocurrencies to be against the law in the United States. This is probably not going to happen, but it has happened in China before, so it’s not impossible.
  • Fraud: As in any industry without rules, there is a lot of fraud in the cryptosphere. Hastings says, “Cryptocurrency fraud went up a lot in 2022, and investors lost a lot of money because there was no government oversight of the industry.”
  • Hacks: When it comes to crypto, hacks happen a lot. Chainalysis says that in 2021, more than $3.2 billion worth of cryptocurrency was stolen. Even though many exchanges offer private insurance, if your crypto is stolen and you lose it, you may not be able to get it back.

Cryptocurrency Adoption

As of this writing, Bitcoin costs about $17,000. This is a long way from its high point, which was more than $65,000 in November 2021.

But Bitcoin was first praised not as a long-term investment but as a form of electronic cash. For this to work as promised, cryptocurrencies like Bitcoin would have to be able to be used to buy goods and services.

But even though there are more than 22,000 cryptocurrencies in use, only a small number of them are widely used to buy goods and services.

By the end of 2020, about 2,300 U.S. businesses were expected to accept cryptocurrency as payment. In 2019, there were more than 35 million businesses in the United States. This means that the number of businesses that accept cryptocurrencies is a drop in the bucket.

Could Crypto Become the New Global Currency?

With all the buzz around cryptocurrency, many of its supporters have talked up the idea that it could become a global currency.

Procasky says, “I don’t think governments will let a competing currency on that scale.” “A global currency needs to be very liquid and have a lot of depth, and the U.S. dollar is the only one that can compete.”

The rules and controls on money are very strict. As the scandals of 2022, like Terra Luna, Celsius, and FTX, showed, crypto in its current form can do a lot of damage to people’s finances. Most governments around the world would not let their financial systems take on that kind of risk.

Niestradt says, “I think it’s years away, and this is where some of the speculations comes from. It’s not for sure.”

Is Crypto a Hedge Against Inflation?

People who still think that Bitcoin and other cryptocurrencies could be a way to protect against inflation aren’t paying attention.

Should You Invest In Crypto

According to the U.S. Bureau of Labor Statistics, core inflation rose more than 7% from November 2021 to November 2022. During the same time, the price of Bitcoin fell by more than 65%.

“Crypto failed the test as a way to protect against inflation. “If you could give it a grade of F-, that’s how it did,” says Procasky.

Cryptocurrencies and Taxes

When investors make money from cryptocurrency, they have to pay taxes on their capital gains. This means that almost any time cryptocurrency changes hands, like when it is mined or staked, it is a taxable event. Capital gains taxes are usually around 15%, but they can go up to 20% or even more.

Most of the time, investors have to convert their cryptocurrency into fiat currency before they can use it to buy something. This means that you have to pay taxes when you buy most things with cryptocurrency, which makes it more expensive than buying things with cash.

Is Crypto a Good Long-Term Investment?

For cryptocurrency to gain long-term value, it would need to be used by a lot of people, and it is facing a lot of problems right now. Andrew Rosen, CFP, the president of Diversified LLC, says, “I think the technology behind blockchain is innovative and useful, but it’s too risky until it’s separated from the gamble of currency without regulation.”

But more risk-taking investors might want to give it a try. These investors may or may not make money in the short term, but that doesn’t mean that the right cryptocurrency couldn’t make them a lot of money in the long run. The total value of a cryptocurrency investor’s holdings could, of course, just as easily go to zero.

Should You Invest in Crypto?

You are the only person who can tell you for sure if you should invest in cryptocurrency or not. No matter what you decide, though, you should do your research, learn about the investment thesis behind each coin, and maybe even talk to a financial advisor.

“There are other things that you can bet on. It doesn’t have to be crypto, but if you think it has a role in the long run and you believe in blockchain technology, there’s a thesis for it,” says Procasky.

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