With the recent upswing in cryptocurrency value during the pandemic, you might be feeling a sensation of intensifying FOMO if you don’t own some already. But are you really missing out, or is crypto an overhyped gamble? Well, the answer really depends on your investing strategy and your appetite for risk. Here’s a look at whether crypto is worth the investment.
What is cryptocurrency?
There are thousands of cryptocurrencies, but the big ones right now are Bitcoin, Ethereum, and Dogecoin. A cryptocurrency is a digital currency that is secured on a decentralized network of computers, allowing for peer-to-peer transactions free from government manipulation or interference. The currency is created through a convoluted software process known as data mining, which limits supply, and each coin is unique and nearly impossible to counterfeit.
Why do people invest in crypto?
When it was invented, crypto was meant to replace physical cash, and it’s true that you can buy certain things today with crypto. However, a lot of people invest in crypto for other reasons:
- It’s a hedge on inflation: If you think that the government will ultimately devalue the dollar by printing too much money, crypto as “store of value” can be an attractive hedge, especially if the crypto has a fixed amount, as is the case with Bitcoin (which is limited to 21 million coins)
- Portfolio diversification: If you think that the returns on bonds are currently too low, and that stock prices are inflated, you might want to put some of your money into crypto.
- It’s a long-term bet on mainstream acceptance: While crypto has volatile swings in value, over time it has picked up more and more interest from investors along the way. Who knows how valued it will be in, say, 2040.
- Incredible returns on momentum swings: If you can time it correctly or have incredible luck.
However, the big downside is volatility. Double-digit swings in value are not uncommon, and you could easily lose all of your investment at once. So, you want to make sure that crypto actually makes sense with your overall investment strategy, particularly in terms of your risk tolerance. For example, if you’re a passive investor with limited income, ploughing a large chunk of your savings into crypto probably isn’t a good idea.
That said, trading off momentum swings has made people very wealthy, but doing so is essentially gambling if you have no particular knowledge or insights about crypto as an intangible asset (indeed, a third of crypto investors admit that they don’t know what they’re doing).
If you have some appetite for high-risk investments, and are prepared to lose that money, a lot of financial planners will recommend a small stake in crypto, usually no more than 1-5% of your overall investments.
Is it too late to invest in crypto?
No one truly knows what the ceiling for any speculative investment will be, and crypto is no exception. It’s impossible to say it’s “too late” to invest, as the currency could continue to climb in value or bottom out at any moment.
Crypto can be a lucrative investment if you’re prepared to accept the considerable risks and are willing to lose it all. Before you invest, ask yourself if you truly understand how it works and whether it aligns with your long-term investing strategy.