The value of cryptocurrency is highly volatile and can fluctuate significantly in a short period of time.
The value of cryptocurrencies saw a significant increase in late 2017 and early 2018, with Bitcoin, the largest and most well-known cryptocurrency, reaching an all-time high of nearly $64,000 in April 2018. However, the market experienced a significant correction soon after, with the value of Bitcoin and many other cryptocurrencies dropping significantly. Since then, the value of cryptocurrency has continued to fluctuate, with several notable peaks and valleys.
However, it’s important to note that the cryptocurrency market remains highly volatile, and rapid price changes can occur at any time. Despite this, many experts believe that the long-term prospects for the cryptocurrency market are positive, with increasing mainstream adoption and improving infrastructure expected to drive continued growth.
Bitcoin was at $23,000 in January 2023.
Advantages and Disadvantages of Investing in Cryptocurrency
A large and varied asset class, cryptocurrency includes anything from the well-known cryptocurrency Bitcoin to the newest blockchain meme coin. From an investment standpoint, the majority of these initiatives are doomed to failure. These tokens, coins, and currencies don’t generate any income, rent, interest, or dividends. They are speculative assets by definition. It’s a good idea to be aware of the advantages and disadvantages of investing, regardless of your decision.
The Rewards of Investing in Cryptocurrency
To start, we’ll begin with the possible rewards of investing in cryptocurrency. Disclaimer: this is financial advice, and nothing is certain. There are just some of the possible benefits of investing in cryptocurrencies.
Possible Financial Gain
Let’s start by addressing the major issue. With wise bitcoin investment, it is totally doable to achieve extraordinary fortune. Purchase an asset before the market realizes its worth, hold it till the market does, watch the asset price rise as the hordes swarm in, and then sell it before the final crash. There aren’t many opportunities in the business world that can compare to successfully rinsing and repeating. It is undoubtedly difficult to predict successful efforts in advance, and this difficulty increases significantly when market timing is involved.
The other strategy is to purchase and HODL (hang on for dear life) in the expectation that the long-term trend will be positive. While this is not the case for the great majority of crypto projects, it is too soon to rule out the potential for some of the more established, long-term enterprises. In 2008, the Bitcoin white paper was published. Even if Bitcoin is down more than 60% from its high, it is still 61 times more expensive than it was in 2015. And 2015 was hardly an early year for Bitcoin. I had known about it for at least three to four years prior. Imagine you invested $100,000 in it in 2015 and you still have it now. You would have $6,100,000. That is plenty to retire from. If you had sold your business last year, you would have $21 million. That is plenty to retire, provide for your children’s future, and establish a philanthropic foundation.
You Will Learn More About The Cryptocurrency Industry
Want to study about this subject seriously? Invest some funds in it. Just enough to make you care a little bit more than you normally would. Consider it tuition. You may even receive a refund on your tuition. Perhaps you will receive more than your tuition back. But I can assure that you will get knowledge if you invest money in it. You will learn about cryptocurrency investment. You will discover your own strengths and shortcomings as an investor. You may even learn about frauds, market collapses, and other amusing topics.
Affluence Can Be Hidden
What do you think is the most compelling use case for crypto? Leaving a region of the world where abrupt disasters have occurred and taking your money with you. You may have seen that the United States government, among others, takes a great interest in any significant money transactions. Even if you intend to leave or enter the country with cash, you must disclose any amount over $10,000. And they are the purported nice folks. People have fled war-torn nations with nothing but the clothing on their backs for millennia. Imagine if they could also carry their clothing and their whole fortune. Incredible, right? Even taking only 5 percent of your money would provide you a significant advantage over other refugees in your new location.
Capital Gains Tax Treatment
It’s a mystery to me how it occurred, but crypto came out on top in this category. Crypto Asset sales may be eligible for the more favorable long-term capital gains (LTCG) tax rates, in contrast to sales of precious metals, whose earnings are subject to taxation at the higher collectibles rate.
Not a Single Wash Sale
But wait! It gets better. You not only receive treatment under the LTCG regime, but you may also reap tax losses from crypto assets. You are not permitted to purchase back stocks or mutual funds that you have sold in order to harvest tax losses for a period of thirty days. If you do so, this is considered a “wash sale,” and your loss will not be approved. The opposite is true for crypto. You can make an instant purchase of it, and you will be able to deduct the loss from your taxes even after doing so. This loophole will presumably be closed by Congress at some point in the future, but for the time being, it is wide open.
Low Statistical Correlation with Other Types of Assets
Despite the fact that 2022 was not kind to equities, bonds, assets, cryptocurrencies, or real estate (at least the publicly traded form of each), crypto has a relatively low connection to the more traditional investing asset classes. You will be well on your way to achieving your financial goals if you are able to construct an investment portfolio made up of different asset classes, each of which has a high potential return over the long run and a low correlation with the other asset classes. The overall volatility will be reduced, while at the same time the overall returns will see an increase. There is a mountain of information that suggests correlations are fairly low most of the time, but the verdict is still out on the long-term returns for cryptocurrencies. That is something that will benefit an investment.
Blockchain Protection
Blockchain is an insanely fascinating innovation since it enables decentralized ownership records. This feature makes it more difficult to steal assets because everyone can see who received the item. That is far superior to marked money stored in a bank vault.
The Risks of Investing in Cryptocurrency
now for the possible risks of investing in cryptocurrency. Disclaimer: this is financial advice, and nothing is certain. There are just some of the possible risks of investing in cryptocurrencies.
Speculative
As stated previously, the vast majority of crypto assets generate no revenue whatsoever. These are not businesses. They are producing nothing. There is no income. You hope to receive a higher price for the item in the future. The return on your investment is totally dependent on market conditions.
Volatile
Whether or not you believe in the long-term returns of a crypto asset, you must be prepared to tolerate extreme volatility to succeed. Does it upset you when the value of your investment falls by 30 percent, 50 percent, 70 percent, or 90 percent? I know that it affects me. This is another major reason why I do not invest. In addition to being inclined to sell at market lows, I would also be likely to sell at market highs.
Hard to Learn
These assets are complex. They make a regular bond or mutual fund appear straightforward in comparison. Don’t invest in anything you don’t understand, as the cliche goes. I assume that only a small percentage of crypto asset investors have a thorough grasp of their investment. According to the true experts in this field, it took them 1,000 hours of reading and research simply to get started. I don’t know about you, but I don’t have 1,000 hours to waste doing nothing.
Cross-Party Risk
When you purchase a mutual fund in a Vanguard brokerage account, the Securities Investor Protection Corporation protects the investment (up to $500,000) from fraud. If you purchase Bitcoin and leave it on Coinbase, and then Coinbase goes out of business (counterparty risk), it is unlikely that you would receive your Bitcoin back. While exchanges may have business insurance, it is not backed by the FDIC or SIPC. Your other option is to withdraw your asset from the exchange and store it in a cold wallet. That causes some inconvenience. There are several exchanges that are brand-new firms, sometimes with substantial levels of leverage. Two exchanges (Voyager and Celsius) filed bankruptcy in July 2022 alone. There is currently no way for investors to receive their monies back, and it is likely that they will never get all of their assets returned. Even if the underlying crypto asset was in good condition, the investor is still duped.
Scams and Scamers
Cryptocurrency investment is the Wild West, if we’re speaking of getting ripped off. There are plenty of maniacs and, perhaps more crucially, con artists out there. These individuals are not attracted to the Treasury bond market, but if you’re going to be around cryptocurrency, you should keep your head in the game.
Regulation Concerns
Governments are still determining how to regulate crypto assets. Some nations have an outright prohibition on Bitcoin, while others have a de facto ban. As regulations evolve over time, they can have significant implications on the value of your investment.
Uncertainty
The vast majority of crypto assets have only existed for a few years. Even Bitcoin is a relatively new phenomenon following the 2008 global financial crisis. Numerous really astute investors view this entire market as a massive tulip mania bubble, and there’s a good possibility they’re correct. Returns over the long run may be mediocre or even negative. We just do not know. While some may come out on top, many others may lose everything.
Scalability Challenges
Many of the wonderful things that can be done with cryptocurrencies cannot be performed simultaneously. Slow transactions incur costs and diminish value. This is a significant limitation on the everyday use of all crypto assets. Bitcoin was expected to be a common money years ago. It is still not accepted in restaurants, grocery shops, petrol stations, and even the majority of online retailers. The tax treatment and volatility are undoubtedly restricting, but the issue of scale is likely a greater obstacle to overcome.
Security Threats
While the blockchain lends some security to cryptocurrencies (particularly when protecting an asset from a centralized authority), there are several other hazards associated with cryptocurrencies. You can lose your private key (about 20% of Bitcoins have already been lost) and it can be stolen via hacking or phishing with no redress.
What Will Happen with Cryptocurrency?
Nobody can predict the future. Nonetheless, if compelled to speculate, one would expect its price to recover in tandem with the stock market. As prices rise, investors will re-enter the market, just as they did after prior catastrophic market declines. There are a sufficient number of nearly religiously devoted Bitcoin enthusiasts to maintain a floor under its price. They will be buried with their money, knowing that recovery is always only around the corner. This time, though, the notion that Bitcoin’s price cannot fall below its manufacturing cost was questioned. Apparently, production costs may and do decrease. They decreased from $20,000 to $13,000 in 2022.
Investing in crypto assets has its benefits and downsides. There are several prominent cryptocurrencies available. The drawbacks outweigh the positives in my opinion. If that’s not the case for you, please invest carefully and in a very restricted way. This is a high-risk area. Ask yourself, “Should I Invest in Cryptocurrency?” before being overly enthusiastic.
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