Q: All I’m reading and hearing about in financial news lately is about investing in cryptocurrencies, like Bitcoin, Ethereum and Dogecoin. Should I invest in cryptocurrency?
A: Investing in cryptocurrency is all the rage, but that doesn’t mean it’s the financially responsible choice for everyone. Let’s take a closer look at cryptocurrency, its volatile nature, and explore the question of whether it’s a good idea to invest in what has been hailed by some as the “money of the future.”
What is cryptocurrency?
Cryptocurrency is digital money people use as investments and for online purchases. The investor exchanges real currency, i.e. dollars, to buy “coins” or “tokens” of a type of cryptocurrency. This digital money can only be used at select retailers and vendors, though that number is constantly growing.
Cryptocurrency is unique because it’s decentralized and is not regulated by any government or institution. Instead, every cryptocurrency transaction is verified through blockchains, a database of complex, unique codes. Cryptocurrency is stored in a digital wallet that can be accessed through a “key” that is another unique code.
What are the most popular cryptocurrencies?
There are approximately 10,000 kinds of cryptocurrencies, but you’ve likely never heard of most of them. Here are the top contenders:
- Bitcoin. The first and most valuable cryptocurrency by far, Bitcoin was created in 2009 by an anonymous person who goes by the code name Satoshi Nakamoto. As of this writing on May 24, 2021, one Bitcoin is valued at $37,742, though at its peak in mid-April, it was valued at $63,233.
- Ethereum. The second-most popular cryptocurrency is also mineable, which means it allows its users to use computers to solve complicated math problems to verify when other crypto transactions are complete. Miners are paid in Ether coins.
- Dogecoin. The crypto that started as a joke back in 2013 has been dominating financial headlines since the start of the year, thanks to its incredible YTD gains (6072.52% at the time of this writing) and frequent tweets by Tesla’s CEO, Elon Musk, about its future and current value.
Which retailers accept cryptocurrency as payment?
Most people still regard cryptocurrency as an investment in the future, but there are some major retailers that already accept crypto coins as payment. These include Whole Foods, Nordstrom, Etsy, Expedia, PayPal and more. Of course, cryptocurrency can also be used to pay for goods or services provided by any private vendor that values digital money.
Why is cryptocurrency so volatile?
Cryptocurrency’s decentralization also makes it extremely volatile; with no regulation, demand and supply can drive the price of a cryptocurrency through the roof or plummeting to the ground, practically overnight. Recently, viral tweets by billionaire investors, as well as new regulations by the Chinese government, have been dramatically affecting the cryptocurrency market.
Michael Saylor, CEO of MicroStrategy, says that volatility is a good thing. In a recent interview, Saylor told Stansberry Research, “I would much rather have a volatile 300% return than a non-volatile 15% return.”
Saylor explains further: “It’s like a Jedi-mind trick to convince you that you should be afraid of volatility. If volatility is going to return 200% pre-tax a year for 12 years, or for 10 years — and you’re afraid of it — you lost 99.5% of your wealth because you’re afraid of volatility.”
To put this into monetary terms, Bitcoin has increased by 612% from May 2020 to May 2021. A $1,000 investment held for just 12 months would be worth $7,100 if sold in early May 2021. A $1,000 investment made 10 years ago (when each Bitcoin sold for just $3.50) would have bought 285 full Bitcoins, and would have become a whopping $18 million (and then some) if sold at Bitcoin’s peak in mid-April.
Similarly, Dogecoin sold at less than half a cent per share at the end of 2020; a $1,000 investment made in December 2020 and sold at Dogecoin’s peak of $0.69 in the beginning of May, would have netted you $121,052, or a gain of more than 12,000% in just five months. Numbers like these make investors want to get in on the action!
Why did cryptocurrency perform so well this year?
Although the crypto market has recently dipped, the YTD gains are still remarkably high for the following reasons:
- The lockdowns of COVID-19 provided investors with time to consider alternative investments, stimulus checks that couldn’t be spent at their favorite retailers and a stock market that showed positive signs after its initial coronavirus crash.
- Large corporations, including Tesla, Square, Twitter and MicroStrategy, as well as several billionaires, have shown public interest in cryptocurrencies.
- More companies, including PayPal, now accept Bitcoin as a method of payment.
Why you may not want to invest in cryptocurrency
Before you pour your life savings into Bitcoin, Ethereum, Dogecoin or any of the thousands of cryptocurrencies, consider these factors:
- Cryptocurrency is inherently unstable. Cryptocurrency has bought major returns for investors over the past year, but it has recently performed bearishly, showing only small pockets of growth over several weeks.
- Cryptocurrency is still a big unknown. Though it recently passed its 12th birthday, the crypto market still holds many mysteries. No one even knows who founded Bitcoin!
- Cryptocurrency is often targeted by scams. The FTC warns that crypto’s decentralization means the U.S. government has no obligation to step in and help victims of crypto fraud.
Reasons to consider investing in cryptocurrency
With all the risks involved, you may still want to consider investing in Bitcoin, Ethereum, Dogecoin or another digital currency. Here are some reasons that may be driving your decision:
- Cryptocurrency provides investors’ portfolios with diversification. A small percentage of your total investments going toward cryptocurrency can be a good idea.
- Cryptocurrency has the potential for outstanding long-term performance. The cryptocurrency market has performed incredibly well over the past decade, which makes investors confident that similar gains will be enjoyed by those who put their money in Bitcoin and other digital currencies over the next decade as well.
If you do decide to invest in cryptocurrencies, it’s best not to touch your 401(k) or other long-term saving funds. Invest with caution and only invest what you can afford to lose. It’s also a good idea to wait for one of the frequent dips in the market so you can buy your crypto when they’re at a relatively low price. You can invest through a brokerage platform that sells cryptocurrencies like Robinhood, Coinbase or Binance.
Investing in cryptocurrencies is trending, but that doesn’t mean it’s the right choice for everyone. Consider every factor outlined here carefully, and make an informed decision before putting your money into the digital market.
Your Turn: Have you invested in cryptocurrency? Tell us about it in the comments.