Cryptocurrency is one asset that’s undoubtedly receiving the most hype at the moment. With huge companies like Tesla now investing billions in Bitcoin and the meteoric rise in crypto assets’ value over the past year — it’s definitely an appealing investment for many people.
But it’s also fair to say that cryptocurrencies are one of the most confusing investments in an already mind-scrambling world. To find out exactly whether you should still consider dropping some money into crypto or if you’ve missed the boat altogether, we spoke to Josh Gilbert, market analyst at the online trading platform eToro.
First thing’s first, it’s important to know that there are different ways to invest in cryptocurrencies and blockchain technology. “When investing in crypto assets you’re investing in blockchain,” Gilbert told Business Insider Australia. “You can also now invest in companies that are heavily investing in blockchain technology, such as Riot Blockchain.” He said that neither is inherently better , “but each comes with its risks and it’s key that you understand both before investing.”
As for deciding whether there’s still time to jump on the crypto train, Gilbert assured us there are still plenty of gains to be made, you’ve just got to do your homework and find the right investment for your budget. Ahead, we break down all the pros and cons of investing in cryptocurrencies, starting with what it actually means to enter this world in the first place.
What is cryptocurrency?
Crypto assets are digital or virtual currency. These assets use a technology called blockchain, which often uses decentralised networks. They were initially created to provide an alternative payment method, but this has since changed over the years and crypto assets are used for a variety of different purposes such as security.
The main crypto assets by market cap are currently Bitcoin (BTC), Ethereum (ETH) and Cardano (ADA). Recently Bitcoin has just reached a $1 trillion market cap. Their values have fluctuated a lot over the last few years, but within the last 12 months, these three assets have exploded. Bitcoin has increased by more than 1,000 per cent, Ethereum 1,400 per cent and Cardano an eye-watering 5,500 per cent (at the time of writing).
What are the main pros of investing in cryptocurrencies in 2021?
- You’re investing in the future: Crypto assets are continuing to evolve and we now have high profile businesses such as Tesla investing billions of dollars. This growing acceptance within the world means it’s here to stay for the future.
- Diversification: Crypto assets are a great way to provide diversification to your portfolio or even a hedging tool and as they’re classed as a high-risk product, they can add a different asset to your investment portfolio.
- Potential returns: Although past performance isn’t a guide to future performance, we can see that there is the potential for huge returns with crypto assets. The top two assets have returned more than 1,000 percent each in the last 12 months and look like they may continue to rise.
What are the main cons of investing in cryptocurrencies in 2021?
- High volatility: The price fluctuations in crypto assets are extraordinary and can’t be compared to any other assets. The price of Bitcoin has been known to lose as much as $10,000 in one day. Investors need to understand that investing in crypto assets is a bit of a roller coaster at times.
- Currently, there is limited regulation around crypto-assets: There is no official regulator that monitors the assets as [there is with] stocks. You can, of course, trade crypto assets with a regulated firm, but there is still further to go in the regulation of these assets.
- High risk: Due to the nature of the investment and the volatility that comes with crypto assets, they are described as a high-risk asset class. As an investor, this means that the risk of losing money on this investment increases. We experienced this in 2018 when Bitcoin lost more than 80% of its value in a year.
Is investing in crypto any more or less risky than other investments?
Overall, crypto can be classed as one of the higher risk investments available. It does also depend on the crypto asset that you’re investing in. For example, in stocks, if you invest in Apple or Facebook, this investment will be lower risk than investing in a penny stock.
When it comes to crypto, it’s key to make sure you understand what you’re investing in and the level of risk you’re taking. Education is key.
Can you still have financial wins with cryptocurrency if you’re investing for the first time in 2021?
There is certainly still an opportunity in the crypto market. We have now seen non-fungible tokens (NFT) come to market, with one NFT selling for $65 million just a few weeks ago. There are some huge price targets from analysts globally, with some even expecting Bitcoin to hit $1 million per coin [in the future]. Although this is a huge valuation at present, there is also huge potential within the crypto industry as our lives continue to change and adapt to digitalisation.
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