Cryptocurrency is all over the news almost as much as the old indexes such as the Nasdaq, S&P500 , and Dow Jones have been for decades. For those investors who love to take risks, crypto was a nice payoff. It’s made millionaires and billionaires and continues to do so.
However, there are many investors who are still skeptical, preferring to listen to the wisdom of investors like Warren Buffet who have denounced cryptocurrencies as passing fancies. It’s worth noting that investment banks are now closely following the currencies looking for opportunity, so the lines between good investment and bad investment may be fading.
What Are Cryptocurrencies-Should You Invest In Cryptocurrency
We’ll help you understand what cryptocurrencies are and whether they are a good investment for passive investors.
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrencies started just like any other currency: as a way to store wealth and as a medium of exchange to purchase goods or services. In practice, a currency should be backed by something relatively tangible in order to convey a sense of faith that your currency will still be worth something tomorrow. Cryptocurrencies are not backed by anything other than the community that currently supports it in many cases.
However, cryptocurrencies are built on something called blockchain technology. Let’s take a quick step back. Your money is supported by a complicated ledger system in the form of a central bank system. The central banks have various methods of providing a ledger system in order to track how much money you have, where it came from, and where you’re using it. Running a central banking system is ludicrously expensive, time-consuming, and not terribly efficient. Hence the reason cryptocurrencies came about.
The blockchain technology first introduced with Bitcoin provides an as-yet-un-hacked ledger system for each Bitcoin in existence. It is digital code built in with the rest of the code that makes up each individual token in the blockchain system. This blockchain builds on itself, continually updating with the current owner when a transaction takes place. While Bitcoin was the first to present the blockchain technology to the world, nearly all major cryptocurrencies are built on their own type of blockchain technology. It is because this blockchain has proven so secure that trust is building in cryptocurrencies.
RISKS OF INVESTING IN CRYPTOCURRENCIES
While the cryptocurrencies themselves have proven safe, the demand for cryptos has brought with it numerous exchanges to make obtaining cryptos much simpler. These exchanges are always at risk of being hacked, and the amount of computer infrastructure necessary to run an exchange makes them easier targets than actually hacking the cryptos.
Storing your cryptocurrencies may also open you up to risk. While there are now ways to artificially hold cryptocurrencies in your brokerage account, actually holding cryptos requires access to a digital wallet. By now, you may have heard several stories of those sad individuals who were early adopters of Bitcoin and had hundreds of tokens stored on their digital wallet. When the day came that Bitcoin cruised through $10,000, they pulled out their digital wallets to find they’d forgotten their password, and their early retirement was completely ruined.
Digital wallets have only one password, they only have a finite number of entry attempts until they’re locked forever, and there is no customer service line to help you gain access. If you’re not one to remember your passwords, you might be better suited with other investment opportunities.
SHOULD YOU INVEST IN CRYPTOCURRENCIES?
If you want to invest in cryptocurrencies for the long term, it might be a good idea in small amounts. As with any other investment, you should not invest more money than you’re willing to lose, especially in risky assets.
However, there are several cryptocurrencies whose management companies have a very particular focus they want to bring to the market. For instance, Ethereum was launched with the goal of deploying smart contracts and improve turnaround time for all kinds of contracts, all while reducing instances of fraud. There are others with ideas around them, so do some research and invest where you think the world could benefit most should they succeed.
So, is cryptocurrency a good investment? On a long-term horizon with the right amount of research, it can certainly be a good investment! However, cryptocurrencies are still in their infancy, and investors should fully understand the risks involved before diving in and putting their life savings into Bitcoin.