Cryptocurrency is popular, and those who believe it’s a fad are surprised at how the market continues to grow. Cryptocurrency is a digital, virtual currency, unlike any other. The currency exists online and uses cryptography, blockchain technology and computer networks to track the value and ownership. First launched in 2009 by Satoshi Nakamoto, bitcoin was the first blockchain-based cryptocurrency and remains the most popular and valuable. But there are now numerous competitors to bitcoin. Those interested in trading in digital assets do so through an exchange. Here are few things to know about investing in cryptocurrencies.
The U.S. wants to regulate cryptocurrency.
Underscoring the significance of cryptocurrency, two bills in support of the digital currency were recently introduced to the U.S. House of Representatives. The bills are entitled the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2019 and the Virtual Currency Consumer Protection Act of 2019. The proposed legislation from these two acts are intended to regulate cryptocurrencies and protect consumers against bad actors. The federal government’s interest in digital currency indicates that there’s a future for cryptocurrency.
Buying cryptocurrencies may be a bad investment.
Gamblers and speculators are the best candidates for the cryptocurrency market. But some investing experts along with famous famous investors like Warren Buffett, Charlie Munger and T. Boone Pickens express distaste for cryptocurrency. “There are virtually no investment strategies that are worse ideas than buying cryptocurrencies. It is pure, unadulterated speculation in an unproven commodity,” says Robert Johnson, a finance professor at Creighton University in Nebraska. “There is no intrinsic value in bitcoin and speculators buy with the hope that someone will come along and pay more. Unlike traditional businesses, there is no way to value cryptocurrencies other than the greater fool theory,” he says.
Some say you can invest a small portion of your portfolio.
Mike Alfred, co-founder and CEO of Digital Assets Data in Denver, believes that bitcoin is the most important and misunderstood asset of our lifetime. He says that every investor should own up to 5% of this asset class. He is joined by David Tawil, president of Maglan Capital, who recommends investors allocate between 2% and 3% in crypto assets. Technology has disrupted every business and cryptocurrency is no different. There is a growing class of investors, advisors and regular folks who believe that digital currency will transform financial services. Tawil is certain of the crypto influence, but unsure which currency will prevail. While bitcoin is the clear leader, there’s no guarantee which digital asset will ultimately take hold.
Risk-adverse investors should steer clear.
Any investor who is uncomfortable with great investment volatility and risk should stay away from digital coin investing. The same goes for those who can’t afford to lose all their investment. One could choose the wrong cryptocurrency asset and watch their investment disappear. But Russell Korus, co-founder and CEO of EZ Exchange in Toronto, says that investors who are interested in dipping their toes into the crypto pool should focus on the blue-chip cryptocurreny: bitcoin. The oldest and largest cryptocurrency has demonstrated resilience to the threats of technology, community infighting and attempted government intervention. For crypto investors, research into the specific coins is necessary. “Mass adoption is inevitable,” Korus says.
Cryptocurrency may aid business transactions.
Money transfer currently needs a third-party portal, whether it is a bank, credit card, PayPal or another intermediary. Crypto proponents expect the industry will facilitate direct transfer between two parties, cutting out the trusted third party. The transaction would be facilitated through public or private keys. A user’s wallet or account address controls the public key and the private key is used to sign the transactions.This crypto benefit reduces processing fees charged by banks and financial institutions for wire and other fund transfers. The widely adopted blockchain technology stores the online transaction ledger and reduces the threat from hackers, as every new block created must be verified by the ledgers of each user on the market.
Cryptocurrency can vanish.
Blockchain is popular with a variety of financial institutions and other users. Since cryptocurrencies are virtual and lack a central storehouse, it’s possible for an account balance to be wiped out. A computer crash without a backup could destroy a stash of cryptocurrency. If a user loses the private keys, the cryptocurrency is unrecoverable. Scammers can also hijack someone’s mobile account by impersonating an account holder. The thieves contact the carrier and request for the the user’s phone to be transferred to a new device. This is what gives the scammer access to crypto accounts.
The cryptocurrency market is unpredictable.
Bitcoin has been extremely volatile in its pricing, from being valued at a few hundred dollars to more than $17,000 in December 2017. At this writing, bitcoin is worth nearly $5,900 and there’s no way to determine whether it will be worth more or less in the future. There are more than 2,000 types of coins, and cryptocurrency coin prices are unpredictable — especially among smaller coins. The cryptocurrency market cap shows the market value of all the coins. The smallest coin with a positive market cap is HarmonyCoin and its market is worth $32. While the bitcoin market cap is valued at more than $104 billion, the No. 2 player is Ethereum, worth $18 billion in market cap.
Invest in cryptocurrency with open eyes.
In the 1600s, Holland saw the value of tulip bulbs skyrocket and ultimately crash, leaving investors with great financial losses. Other market boom and bust cycles have followed including the dot-com crash and the more recent subprime mortgage market collapse in the wake of the Great Recession. But there are significant differences between previous booms and busts and the current cryptocurrency craze. All the prior enthusiasm for tulips, tech and subprime mortgages were focused on actual assets. Cryptocurrency cannot be touched or seen and is simply an entry in an online log. Those that invest must remain cautious, understanding that they’re buying into an asset class without a tangible product or history.
Know these facts before investing in cryptocurrency.
— The government wants to regulate cryptocurrency.
— Buying cryptocurrencies may be a bad investment.
— Some say you can invest a small portion of your portfolio.
— Risk-adverse investors should steer clear.
— Cryptocurrency may aid business transactions.
— Cryptocurrency can vanish.
— The cryptocurrency market is unpredictable.
— Invest in cryptocurrency with open eyes.
Author: Barbara Friedberg