You’ve probably heard of Bitcoin. Maybe you’ve started to hear about other digital currencies like Ethereum and Polkadot that are gaining popularity, too. When it comes down to it, it can feel overwhelming to sort through all the information about the myriad of digital currencies available. It doesn’t have to though. Read through this article to learn about the different kinds of digital currencies and the risk factors of cryptocurrency and digital assets to decide if they are a good investment for you.
What is cryptocurrency, and what are digital assets?
Digital currency is the umbrella term for any virtual currency that can be used to pay for goods and services. There are two different kinds of digital currency: digital assets and cryptocurrency. It’s common practice to conflate the two, as they can be traded for one another and exchanged on the same platform. However, important distinctions do exist. Let’s examine the definition of each term.
- Digital Asset: A finite, non-tangible digital file or asset that, when purchased, grants the owner the rights to it. One of the primary characteristics of digital assets is that they are finite, meaning the number of assets available does not change. Bitcoin is one digital currency that falls into this category. Digital assets also include non-fungible tokens (NTFs) for pictures, videos, or documents.
- Cryptocurrency: This more closely resembles traditional, physical currency. Cryptocurrency can be bought and sold, and the number of units available can fluctuate over time. The difference between cryptocurrency and standard currency is that cryptocurrency is operated independent of any centralized bank.
Digital currencies are borderless, meaning you can spend and receive them anywhere in the world where it’s legal to do so. They are also decentralized, meaning that they aren’t issued by a centralized body like the government or a bank—though companies like Ethereum often back their own currency (Ether is Etherum’s primary digital currency).
Instead, most digital currencies use digital ledger technology to control their creation and to verify the transfer of funds. It can be helpful to think of digital currency like a casino chip. You exchange money for the chip, which you can then use as currency to access goods or services at the casino.
- Distributed Ledger Technology: A database that is shared and synchronized across multiple channels, locations, and groups of people. Distributed ledger technology is how transaction records for some digital assets and cryptocurrencies are maintained.
- Blockchain: A form of distributed ledger technology. Blockchain is the technology used by Bitcoin to verify ownership and maintain records of transactions.
Digital currency is becoming an increasingly common form of payment. A recent survey estimates that at least one-third of small- and mid-sized businesses in the United States accept at least one form of cryptocurrency or digital asset. And with more than 10,000 currencies currently being traded, according to CoinMarketCap.com, it’s becoming more popular every year.
As with the stock market, the exchange rate of cryptocurrency and digital assets to US dollars varies significantly. View current exchange rates of popular currencies on Kraken.com.
Is cryptocurrency legal?
Owning digital currency is legal in the United States. But, it is important for investors to note that in recent years state governments and the federal government have started to examine digital currency more closely. During the 2021 legislative session, 31 states had pending legislation about it.
Outside of the United States, however, the legality of digital currency varies. Some counties, including Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam outright ban it. Perhaps most notably, China recently barred financial institutions and payment companies from providing digital currency services, making it all but illegal to use. Investors planning to use digital currency outside of the United States should research its legality before purchase.
Is cryptocurrency safe to invest in?
In short, digital currency is safe to invest in. Digital currency is secured using various technologies like blockchain and cryptography to help ensure the crypto can’t be counterfeited or double spent.
However, like most investments, there are risks associated with it. So, what are the risks of investing in cryptocurrency and digital assets?
- Exchanges are prone to hacking and other criminal activity. Since digital currency exchanges take place online, there is a risk of a security breach that could cause investors to see sizable losses.
- There is a potential to lock yourself out of your digital currency. Unlike historically common investments like stocks and bonds, cryptocurrency and digital assets can be more difficult to store. While there are digital wallets, some investors prefer to store their currency offline to guard against hacking. However, losing the password—or misplacing a hard drive—could lock you out forever.
- There is a risk that the currency you choose will fail. Digital currency is still a fairly new concept, and thousands of options are available to invest in. The risk? Just like new businesses, many digital currencies will fail and become financially worthless. While it hasn’t failed outright, Dogecoin prices tumbled by more than a third after Elon Musk called it a “hustle” on an episode of “Saturday Night Live” in May 2021.
The good news is, there are ways to minimize the risk factors of cryptocurrency and digital assets. Use these tips before investing to help secure your investments.
- Research currencies. There are thousands of cryptocurrencies and digital assets to choose from, and some have more risks than others. Those that are more stable, like Bitcoin, Ethereum, and Polkadot may be more expensive but they are less likely to be volatile. Know your comfort level with risk before investing.
- Research exchanges. There are dozens of platforms to buy and sell cryptocurrency and digital assets. Do research and read reviews before selecting one. A good place to start is Kraken, one of the most trusted exchanges available. It’s easy to use for new and experienced digital currency investors.
- Know how to store your digital currency. It can be stored in an online wallet or offline. Before investing, figure out what option you’re comfortable with.
Is cryptocurrency a good investment in 2021?
Digital currency can be a good investment, as long as you understand the risks (and rewards) associated with it. While many investors see cryptocurrency and digital assets as mere speculation—in large part because they’re so new—there are smart ways to invest in them. And although the market can be volatile, many people see digital currency as the way of the future. So getting in on the ground floor, so to speak, can benefit you in the long run.
However, just like all investments, it’s important to diversify. Digital currency, like most higher-risk investments, should be balanced with lower-risk investments, too. Although you may be able to afford more, we recommend investing at or below 1% of your net worth in digital currency.
Invest Smartly with Delta Wealth Advisors
Cryptocurrency and digital assets, like nearly all investments, come with risks. Our team of experienced financial planning partners can help you add digital currency to your portfolio in a way that makes sense for your goals. Whether you are just starting to think about investing or you’d like to diversify your existing investments, Delta Wealth Advisors can align your financial life to your vision of the future.
Contact us today to discuss your questions about digital currency, investments and how to invest smartly.