Is Cryptocurrency a Good Investment?
By now you have probably heard plenty about cryptocurrency and the stories of people becoming quite wealthy from speculating in this exciting and dynamic financial market. It is likely you have noticed numerous celebrities hyping up cryptocurrency to earn massive gains in the market. Perhaps this has resulted in you feeling anxious about missing out on a life-changing opportunity.
However, is cryptocurrency ultimately a good investment for you? This depends on various factors.
What is cryptocurrency?
Digital currencies that are not issued and controlled by a central bank are known as cryptocurrencies. These virtual currencies are created through a process known as “mining” which is usually performed through powerful computers that solve complex mathematical equations in exchange for a certain amount of cryptocurrency. Through cryptography the data of each transaction utilizing a cryptocurrency is stored virtually on a public ledger known as a blockchain.
One reason investors find cryptocurrency attractive is that these digital currencies are mostly decentralized. This means there is not one single entity, such as a central bank with its own biases and motives, controlling the issuance and governance of the virtual currency. The argument is that cryptocurrencies could potentially be a hedge against the U.S. dollar and other fiat currencies.
The price movements of the cryptocurrency markets are extremely volatile which means you can see prices move to extreme highs and lows quite rapidly. This means there is more risk than most investment assets. However, it also means there is opportunity to earn large gains in shorter periods of time.
Another aspect of cryptocurrency that is promising is the potential for continued growth in use as actual currency to buy and sell goods and services. The more society begins to start using
cryptocurrency in this way the more valuable the asset class will be. However, as of now, cryptocurrency is mostly not used as an actual currency and the future adoption in this manner is quite uncertain.
Although decentralization of cryptocurrencies can be a positive for investors looking for an opportunity, it also does come with a cost. Being largely unregulated can make consumers, companies, and governments hesitant to adopt the use of cryptocurrencies as a medium of exchange. This would inhibit cryptocurrency markets from growing on the basis of perceived utilitarian value.
Tech industry leaders
The technology industry has been bullish on the potential of cryptocurrency as a useful medium of exchange as well as its intrinsic value that makes it a potentially lucrative investment opportunity. Well known technology industry leaders such as Elon Musk and Gary Vaynerchuk have promoted cryptocurrency enthusiastically, providing upward pressure on the value of cryptocurrency assets.
It is widely known that most cryptocurrencies require significant amounts of computing power in order to mint cryptocurrency tokens. This large use of computing power requires huge amounts of electricity which means a large carbon footprint. Many investors worry about this being perceived as a negative argument regarding the practicality of cryptocurrency being used as a medium of exchange.
Understand risk and reward
There is no simple answer as to whether or not cryptocurrency is a good investment. Much has to do with how much risk you are willing to take on in your portfolio. It may be a good idea to talk to a financial professional to help you weigh the risk versus the reward of cryptocurrencies.
Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and does not constitute a recommendation. Cryptocurrencies are speculative investments and involve a very high degree of risk. Investors must have the financial ability and willingness to bear the risks of a potential total loss of their investment. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Securities that have been classified as Bitcoin‐related cannot be purchased or deposited in Raymond James client accounts. Prior to making an investment decision, please consult with your financial advisor about your individual situation.