You’ve probably heard of Bitcoin. Maybe you’ve started to hear about other cryptocurrencies 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 cryptocurrency. It doesn’t have to though. Read through this article to learn about what cryptocurrency is and the risk factors of cryptocurrency to decide if it's a good investment for you.
What is cryptocurrency?
Cryptocurrency, or crypto, is a digital or virtual currency that can be used to pay for goods or services. Unlike standard currency, most cryptocurrency uses blockchain technology to control its creation and to verify the transfer of funds. It can be helpful to think of cryptocurrency 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.
Cryptocurrencies are 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 crypto (Ether is Etherum’s primary crypto). They’re also borderless, meaning you can spend and receive crypto anywhere in the world where it’s legal to do so.
Cryptocurrency 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 cryptocurrency. And with more than 10,000 cryptocurrencies currently being traded, according to CoinMarketCap.com, it’s becoming more popular every year.
As with the stock market, the exchange rate of cryptocurrency to US dollars varies between each cryptocurrency. View current exchange rates of popular cryptocurrencies on Kraken.com.
Is cryptocurrency legal?
Cryptocurrency 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 cryptocurrency more closely. During the 2021 legislative session, 31 states had pending legislation about cryptocurrency.
Outside of the United States, however, the legality of cryptocurrency 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 cryptocurrency services, making it all but illegal to use. Investors planning to use cryptocurrency outside of the United States should research its legality before purchase.
Is cryptocurrency safe to invest in?
In short, cryptocurrency is safe to invest in. Cryptocurrency 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?
- Exchanges are prone to hacking and other criminal activity. Since cryptocurrency 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 cryptocurrency. Unlike historically common investments like stocks and bonds, cryptocurrency can be more difficult to store. While there are digital wallets, some investors prefer to store their cryptocurrency 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 cryptocurrency will fail. Cryptocurrency is still a fairly new concept, and thousands of cryptos are available to invest in. The risk? Just like new businesses, many cryptocurrencies will fail and become financially worthless. While it hasn’t failed outright, Dogecoin prices tumbled by more than a third after Elon Musk called the cryptocurrency 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. Use these tips before investing to help secure your investments.
- Research currencies. There are thousands of cryptocurrencies to choose from, and some have more risks than others. Cryptos 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. 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 cryptocurrency investors.
- Know how to store your cryptocurrency. It can be stored in an online wallet or offline. Before investing in cryptocurrency, figure out what option you’re comfortable with.
Is cryptocurrency a good investment in 2021?
Cryptocurrency can be a good investment, as long as you understand the risks (and rewards) associated with it. While many investors see cryptocurrency as mere speculation—in large part because it’s so new—there are smart ways to invest in it. And although it can be volatile, many people see cryptocurrency 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. Cryptocurrency, 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 crypto.
Invest Smartly with Delta Wealth Advisors
Cryptocurrency, like nearly all investments, comes with risks. Our team of experienced financial planning partners can help you add cryptocurrency 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 cryptocurrency, investments and how to invest smartly.