Cryptocurrency became extraordinarily popular in 2017, when the landmark currency Bitcoin had a massive run of growth toward the end of the year.
Since then, the markets have cooled slightly, and the price of Bitcoin has stabilized. There are fewer people claiming cryptocurrency investment as a get-rich-quick scheme, which is actually a good thing, because it means the price of cryptocurrency is more stable, and crypto is being taken more seriously.
Millions of people now use Bitcoin and other cryptocurrencies as an investment strategy — putting money in with the hopes of growing that wealth over time. But is this a good investment strategy for newcomers to the world of investment?
The Problem With Cryptocurrency as an Investment
There’s a fundamental problem with thinking about cryptocurrency as an investment. The price of cryptocurrencies like Bitcoin is constantly changing in response to market conditions, much like shares of stock. But unlike shares of stock, you aren’t investing in something with standalone value. The value of cryptocurrency comes from its utility as a currency; in other words, it’s only valuable if it’s serving its purpose by being used to buy and sell goods.
Investing in cryptocurrency usually means buying up a fixed amount of a coin, then holding it with the hopes that crypto will increase in value. This is flawed because if too many people buy up and hoard coins, it won’t be used, and if it isn’t used, it isn’t going to increase in value. If you believe in cryptocurrency and you want to support it, you’re better off using it for as many purchases and sales as possible, and supporting its acceptance at local businesses.
General Weaknesses Compared to Other Investments
Let’s set that aside for a moment and assume that you’re interested in “investing” in cryptocurrency the conventional way.
There are a few weaknesses of crypto as an entry-level investment when compared to other investment types:
- Lack of flexibility. With other investment options, there are multiple potential approaches. For example, if you’re investing in real estate, you could invest in rental property, invest in neighborhoods you think are up-and-coming, or simply buy cheap houses with an attempt to flip them. In the crypto world, there are many different coins you could choose from, but your approach will be more or less the same no matter what.
- Uncertainty and lack of historical data. Crypto hasn’t been around for very long, relatively speaking. With the stock market, we have nearly 100 years of historical records, and plenty of experts who have made their careers by investing in it. If you’re new to it, you can quickly learn the fundamentals, and understand many of the ebbs and flows of the market. In the crypto world, things are much less certain.
- Volatility. Despite its promising potential, Bitcoin has historically been quite volatile. This isn’t necessarily a bad thing; in fact, experienced investors can try to take advantage of it by timing the market swings. But for a new investor, this is not a good idea. Timing the market is extraordinarily difficult, and volatility can stress investors out, dissuading them from honing their skills and committing to their investments.
The Promise of Cryptocurrency
Still, cryptocurrency promises to be a revolutionary economic breakthrough. Despite the slow rate of adoption by the general public, there are advantages of cryptocurrency that can’t be ignored. These include:
- Decentralization. One of the hallmarks of crypto is that it’s decentralized, meaning it isn’t regulated by a single authoritative body. The decisions and mistakes of a single individual or group can’t possibly affect the course of crypto development.
- Low transaction costs. Though currently transaction costs aren’t very competitive, in the near future, transaction costs will drop. In fact, the cost of doing business with cryptocurrency in all its forms will be dramatically lower than with traditional currency.
- Confidentiality. It’s possible to use crypto for anonymous transactions, which can improve privacy in an era where it’s increasingly scarce.
- Security. At the same time, the shared ledger of the blockchain behind cryptocurrencies means your transactions are much more secure; fraud is nearly impossible to pull off.
- Ease of acquisition. Though getting a crypto wallet is a bit more challenging than simply opening a brokerage account, buying and using cryptocurrency is still straightforward if you have any technological literacy.
So, is cryptocurrency a good investment for new investors?
This is a hard question to answer.
Crypto is relatively easy to purchase, in the sense that you don’t need any technical expertise to get involved. There are also fewer options with investing in cryptocurrency than there are in something like stocks or real estate. That said, “investing” is generally the wrong way to think about cryptocurrency, and it has a number of weaknesses compared to assets that are friendlier to entry-level investors.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant.Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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