A few years back, cryptocurrency was considered a fringe investment. With more investors joining the fray (including Harvard and BlackRock), it raises the question of whether cryptocurrency should be considered an investment. If so, how much? Here are the facts.

Is cryptocurrency an investment?

Let’s start by asking the question: Is cryptocurrency legal? An investment is simply a property that you buy with the intent to earn income or increase its value over time. Although this may sound like it applies to cryptocurrency, experts differ on whether these investments are worthwhile.

Arguments for cryptocurrency as an investment:

  • Diversification.Diversifying means spreading your money across different investments so that even if one investment is lost, the impact on your entire portfolio will not be severe. As its value increases, cryptocurrency can be used to diversify your portfolio.Low correlationto the global stock exchange. Your cryptocurrency holdings might not be affected if the global stock exchange crashes.
  • DeFi may become more popular.Decentralised finance or DeFi refers to the transition from centralised finance (i.e. When money is controlled by a central authority like the government, Decentralised finance (or DeFi) refers to the shift from centralised finance (i.e. DeFi transactions without banks could theoretically be faster, cheaper, and more accessible than traditional finance. Many DeFi applications, many of which are based on Ethereum blockchain, have been developed.Popularity has risenOver the last year, there has been an increase in adoption.
  • DeFi may become more popular.Decentralised finance or DeFi refers to the transition from centralised finance (i.e. When money is controlled by a central authority like the government, Decentralised finance (or DeFi) refers to the shift from centralised finance (i.e. DeFi transactions without banks could theoretically be faster, cheaper, and more accessible than traditional finance. Many DeFi applications, many of which are based on Ethereum blockchain, have been developed.Popularity has risenOver the last year, there has been an increase in adoption.

Arguments against cryptocurrency as an investment:

  • It is highly speculative.According toS&P Global RatingsCryptocurrencies are “mostly about speculation”. They are volatile and could cause a large portion of your portfolio to be lost due to changes in regulation or a tweet by a.particular billionaire.
  • Market manipulation risk. The ownership of Bitcoin is highly concentrated. Around 13% of Bitcoin is held by over 100 individuals, while 40% is held by under 2,500 accounts. This makes it highly susceptible to market manipulation, as single trades by such users can cause drastic price changes.
  • Security concerns. Blockchain technology is the basis of most cryptocurrencies. Blockchains are considered secure but not the software or exchange that you use to store cryptocurrency. Insecurity breaches and fraud involving cryptocurrency have led to the theft of almost US$8 Billion over the last decade.

Potentially large gains and losses

Your investment portfolio is a mix of investments you have. You must balance risk and reward. Stocks, which are more risky investments than other types of investments, tend to yield higher long-term returns. Investors who are able to tolerate higher risk may allocate more of their portfolio for high-risk investments.
Consider the potential risks and rewards of including cryptocurrency in your portfolio.

Bitcoin is the most successful asset in the past decade. It’s not hard to believe. It would have a value of US$2,785,738 if you had invested US$1,000 into Bitcoin in July 2011. A US$1,000 investment in S&P 500 would have risen to US$4,060.

However, cryptocurrencies are not as successful as traditional investments such stocks. Bitcoin, the first decentralised cryptocurrency in the world, was created in 2009. It is not yet clear if the explosive growth of Bitcoin will continue in the long-term.

You also run the risk of losing a lot because cryptocurrencies can be volatile. Bitcoin lost 50% in less than a week in May 2021. Even that is a small amount compared to the 2017 crash, when Bitcoin lost 84%. You can expect huge returns if you invest in cryptocurrency. However, you must also be ready to lose your money.

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