So You’re Thinking about Investing in Cryptocurrency…Is It Still a Good Investment?
The fear of missing out on an investment opportunity can be an overwhelming sensation. Although cryptocurrencies have been around for more than a decade, investor interest and media coverage has ratcheted up considerably in the last few years.
As a result, there is a good chance you’ve felt inclined to follow the cultural trend and start buying Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC)—maybe even Dogecoin (DOGE).
What exactly is cryptocurrency? In short, cryptocurrencies are digital currencies that can be used to trade goods and services. However, despite being currencies, coins are not always treated as means of exchange. Instead, many people view them as investments, purchasing cryptos in hopes of selling them at a later date for a profit.
But should you invest in cryptocurrency?
Perhaps you are considering adding crypto assets to your portfolio—or maybe you already have. Like all investments, it is important to understand what you are buying before taking any action. To help you parse fact from fiction, we outline the potential benefits, risks, and several expert recommendations below.
Are Cryptocurrencies “Solid” Investments?
You would be hard pressed to find a credible source willing to label cryptocurrencies as safe investments. However, that does not mean investors cannot apply tried and true investing principles to partially mitigate risk. For instance, it is paramount to understand your risk tolerance before dabbling in the crypto markets. Risk-averse investors will have a much more difficult time stomaching massive price fluctuations that often plague crypto markets. Investing in cryptocurrencies is probably a bad idea for risk-averse investors.
Are cryptocurrencies good investments?
To help determine whether cryptos might be a good fit for your portfolio, we list a few pros and cons of trading coins.
The pros of cryptocurrency investing
- Innovative and disruptive technology. There is no doubt that the blockchain technology underlying cryptocurrencies is changing the way several industries operate. It is still early, and we expect blockchain technology to have dramatic effects on many parts of society – from business to art to education and beyond.
- Cultural movement. Cryptocurrencies have become a cultural movement, spurring many non-investors to consider investing and planning their financial futures. Proponents’ marketing budgets are only getting bigger, famous people backing various crypto ventures are increasing by the day, and media attention is impossible to miss.
- Increasing adoption. A growing number of countries are recognizing Bitcoin as legal tender. More and more corporations are accepting digital coins, and many more are developing their own strategies around blockchain and cryptocurrency technologies. The crypto craze is not transitory.
The cons of cryptocurrency investing
- Highly speculative. Cryptocurrencies are extremely difficult to value, and some are even more difficult to understand. Therefore, uninformed buying of such coins can be more like placing a wager on black at the roulette tables as opposed to real investing.
- Volatile. Crypto investing is not for risk-averse investors, as coin prices can fluctuate drastically. Many investors have bought crypto thinking they were getting in early, only to see their investment plummet and never recover.
- Scams. Unlike the stock market, the crypto market is largely unregulated. It is more susceptible to scams and hackers. The SEC has even had to intervene on several occasions. For instance, a particular 2017 initial coin offering promised investors a 1,354% return in less than a month—a clear case of fraud.
Howland Capital’s Five Core Beliefs about Cryptocurrency
Cryptocurrencies continue to proliferate around the world, giving rise to new companies, coins, and products/services. So, we’ve developed five core beliefs to help frame this topic for our
We can make more general to refer to users who find the post in other ways if you prefer.
1. It’s still early.
Cryptocurrencies have been around for a while now. Bitcoin—the original and largest cryptocurrency by market capitalization—was devised in early 2009. That doesn’t mean it’s a mature, developed, or even sustainable industry. So much remains unknown that we are hesitant to even call cryptocurrency an asset class at this point in time. Keep that in mind as you learn more about this potentially promising field.
2. The crypto world is still uncharted territory.
Cryptocurrencies have spread faster than governments’ abilities to take action. While regulations will undoubtedly increase, the industry still lacks much supervision. This is a commonly cited benefit of crypto trading by crypto enthusiasts. Unfortunately, it is also somewhat of a catch-22 since oversight and standardization can help maintain a level playing field and fair market.
3. Cryptos are not a fad.
While the investment case for these digital assets at today’s prices is still up for debate, one thing is clear—these technologies and currencies are not going away. For instance, there are very real-world applications for blockchain and smart contracts. Financial institutions have incorporated blockchain into their operations. Corporations use smart contracts to automate and streamline legal processes. At the end of the day, functionality is integral to crypto’s sustainability.
4. Cryptocurrencies should not be viewed as a store of value…yet.
You may have heard that cryptos are reliable stores of value, which essentially means their purchasing power will hold for years to come. For example, many crypto enthusiasts equate bitcoin to digital gold—which is a logical argument and may someday prove true.
However, cryptos are far too volatile for this concept to be accurate right now. In addition, cryptos’ price actions in different market environments (in other words, correlations) do not support the notion that these are safe-haven investments.
5. Cryptocurrencies are speculative.
Cryptos are difficult to regulate and some coin prices are easy to manipulate, making them subject to extreme price movements. This volatility won’t be slowing down anytime soon. Just look at the price of Bitcoin on three randomly selected dates in 2021:
- March 12: $57,271
- July 3: $34,682
- December 9: $50,519
The above prices do not exactly scream stability. Nevertheless, you may still be drawn to these investments, so there are several best practices to keep in mind.
Top 7 Expert Recommendations for Investing in Cryptocurrency
While cryptocurrencies are far from straightforward, we’ve compiled a list of seven guidelines to follow as you explore the crypto world. By embracing these principles, you’ll increase your odds of minimizing risk and preventing financially questionable decisions.
1. Do your homework.
Whether you are pondering buying bitcoin or an altcoin, it’s important to understand exactly what you’re buying. Yes, cryptos lack traditional fundamentals, making it difficult to assign a realistic value to a coin. But that doesn’t mean investing in cryptocurrencies is purely a guessing game.
Established cryptos typically have websites that share an abundance of information, including educational resources and comprehensive technical documents called whitepapers. Cardano is a prime example.
2. Be wary of scams.
Cryptocurrencies and blockchain technology have garnered a significant amount of media attention. Many untrustworthy people have launched scams aimed at taking advantage of unsuspecting investors who are new to the space. That’s why it’s vital to only invest in credible offerings from verified, trustworthy sources. If you are skeptical of a certain crypto, seek the advice of an adviser who can help.
3. Take crypto picks with a grain of salt.
Without social media, cryptocurrencies wouldn’t be nearly as prominent as they are today. That said, it is generally not advisable to make investment decisions purely based on the insights of crypto “gurus” and anonymous social media accounts.
Just because a particular crypto has experienced an eye-catching 1,000% return in the last year doesn’t mean such a meteoric rise will continue. You can get burned by succumbing to social pressure and following momentum plays. Fear of missing out is not a viable investment thesis. Instead, before taking action, we recommend conducting in-depth research and building your own sense of conviction around why a certain cryptocurrency is more likely than not to go up in value.
4. Only use reputable cryptocurrency exchanges.
If you are going to invest in cryptos, it is wise to stay away from lesser-known, unregulated crypto exchanges. These trading platforms are more susceptible to hacking and market manipulation. Instead, consider more reputable exchanges that have significantly invested in cybersecurity and internal controls.
5. Invest strategically for the long-term.
Day-trading cryptos can come back to bite you. For starters, trading costs are very high and gains are taxable, which can erode paper gains and make for a heavy tax liability. Moreover, daily price fluctuations are more likely to evoke panic among investors, driving them to sell prematurely. That’s why it is generally better to adopt a long-term, diversified investing strategy. Diversification doesn’t guarantee a profit or protect you from losses, but it may help you weather the ups and downs a bit more smoothly.
6. Don’t risk more than you’re willing to lose.
Remember our gambling analogy? Well, it can help to view your crypto investments in a similar light: don’t bet more than you’re willing to lose. Adopting this mindset from day one can help you avoid stacking too many chips on cryptos.
7. Check performance routinely but not too frequently.
While it is prudent to monitor your investments—whether they be stocks, real estate, or cryptos—it may be important to draw a line in the sand in terms of frequency. Unlike other securities markets, cryptocurrencies can be traded 24 hours a day, seven days a week.
Are cryptos worthwhile investments?
Ask yourself, “Why do I want to invest in cryptocurrency?”
Although fear of missing out is a common and understandable feeling among investors, we reiterate – it’s not a viable investment thesis. Instead, you should know how cryptocurrencies work and have legitimate reasons as to why you believe their prices will rise over time.
If you are interested in cryptos but don’t feel equipped to evaluate various coins and the cryptocurrency market, consider talking with an adviser. They can help ensure your investment decisions align with your long-term financial plan.
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