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As cryptocurrencies such as Bitcoin and Ethereum become more and more popular in the mainstream, many investors are questioning whether cryptocurrencies are a sound investment. In fact, 50 million Americans say they’re “likely” to buy crypto in the next year, but they’re unsure whether the asset class is right for them.
Are you wondering if cryptocurrency is a good investment? If so, you’ve come to the right place. In this article, we’ll go over what makes cryptocurrencies appealing to investors, as well as their respective risks. Last, we’ll touch on how to invest in Bitcoin and other cryptocurrencies safely and responsibly if you do decide to invest in these digital assets.
Cryptocurrency Investing: A Crash Course
Bitcoin, the world’s first cryptocurrency, began as an open-source software project in 2009 by pseudonymous developer Satoshi Nakamoto. The technology underlying Bitcoin is known as a blockchain, which is a decentralized network (i.e., nobody owns or controls it) that produces tokens (such as Bitcoins) that can be traded like physical money.
Since Nakamoto’s release of Bitcoin, many similar blockchain products have been created that are known as “altcoins” (i.e., a cryptocurrency other than Bitcoin). The cryptocurrency industry has grown enormously since the early 2010s, and, as of August 2021, is now valued at over $2 trillion and counting.
What began as a modest underground movement is now a global phenomenon. Today, at least 13% of Americans own and trade cryptocurrencies as part of their investment strategy. Although most investors don’t utilize cryptocurrencies in order to make purchases, they instead treat them like speculative investments, believing that their value will appreciate with time.
You can think of Bitcoin as “digital gold”. Rather than buy and sell goods and services with cryptocurrencies, although this is possible, investors are more likely to use cryptocurrencies purely as investment assets and to hedge against risk in other areas of their portfolio.
Cryptocurrencies: What’s the Appeal?
Now that we now know the fundamentals of cryptocurrency, let’s take a look at the reasons why you should invest in cryptocurrency. Below, I’ve listed a handful of the value propositions associated with this nascent asset class.
- Frictionless Cross-Border Purchasing: Cryptocurrencies provide a remittance-free method of sending money between countries instantaneously.
- Inflation Insurance: As decentralized assets, cryptocurrencies cannot be printed by government decree; therefore, its value cannot be subject to inflation in the way that fiat currencies are.
- Anonymity: Those who don’t want their purchases publicly exposed might find value in cryptocurrency’s inherent anonymity since one’s real name is not recorded in a blockchain’s public ledger.
- Low-Fee Banking: Cryptocurrencies do not have to be banked or stored by third-parties; rather, they can be held in the security of one’s home and purchased on exchange platforms that charge low transaction fees.
- Huge Upside Potential: Bitcoin and other digital assets hold a unique potential for extremely high levels of growth. Between June 2020 and March 2021, for example, Bitcoin rose in value over 600% from $9,100 to $58,000 per token.
For the reasons listed above, Bitcoin has caught the attention of investors from all over the world. However, that doesn’t mean it’s a get-rich-quick scheme, nor does it imply that it’s without its share of risks.
Risks and Drawbacks of Cryptocurrencies
Many investors have made a fortune with cryptocurrency investing, but just as many have lost money in the market as well. Before you get involved in this asset class, it’s imperative that you understand the risks that these assets carry.
- Regulatory Risk: There’s still a lot of uncertainty regarding whether sovereign governments will crack down and suppress cryptocurrency transactions.
- Human Error: Unless you invest with a Bitcoin IRA company, there is a chance you could be locked out of your wallet forever if you lose or forget your passwords or keys.
- Volatility Risk: Bitcoin is still a highly volatile asset, and investing in any cryptocurrency could result in significant losses; as of August 2021, the Bitcoin Volatility Index is 3.51%, much higher than the relative volatility of other alternative assets.
- Irreversibility: A blockchain is immutable, meaning you cannot reverse a transaction if you accidentally initiate one with the wrong address. With cryptocurrency, you are ultimately responsible for your assets.
Despite the inherent risks listed above, many investors find that the upside potential for gains outweighs the downsides. Whether this asset is right for you depends on your individual risk tolerance, and whether you have savings you can afford to lose.
Many investors find that they can mitigate the risks of cryptocurrencies by investing with a secure third-party company. These firms reduce the risk of human error, highly vet every coin in their catalog to eliminate scam coins or frauds, provide numerous tax advantages, and are fully FDIC insured. If this sounds like the right path for you, check out our list of the top Bitcoin IRA companies that our readers have personally used and reviewed.
How to Invest in Cryptocurrency
There are many ways to invest in cryptocurrency, although some are riskier or more costly than others. Below, we’ll provide a brief overview of each.
App-Based Cryptocurrency Platforms
These days, there’s no shortage of mobile apps that can help investors easily purchase and trade cryptocurrencies. A cryptocurrency investment app, such as Coinbase or Gemini, can be set up and funded within hours. However, these services are entirely self-directed and they come at a much greater risk of making an investment error.
With the notable exception of Bitcoin IRA (you can read our full Bitcoin IRA review here), many of these apps do not offer investment services through a tax-advantaged retirement account. Therefore, any trade executed on a crypto investment app is subject to taxation on their gains.
Online Crypto Exchanges
Another option is to invest independently through one of several online cryptocurrency exchanges. Exchanges such as Binance or Kraken allow users, after a verification process, to convert their fiat currencies (e.g., U.S. dollars) into coins tethered to the U.S. dollars which can then be reliably and securely converted to any cryptocurrency of their choosing.
Like app-based crypto exchanges, this option does not offer tax-deferral or tax-exemption by default, and they carry higher risks. Often, predatory coins and fraudulent projects are listed on even reputable exchanges platforms, which can lure in unsuspecting investors with their low prices.
Cryptocurrency IRA Company
The best all-around solution is to invest through a cryptocurrency IRA company. This way, you can protect yourself from fraudulent coins while at the same time reaping the tax benefits of a Roth IRA or traditional IRA.
A Bitcoin IRA company can help you decide which crypto to invest in because they highly vet each listing on their platform. Therefore, you’re very unlikely to run into any scams when browsing the offerings of a legit cryptocurrency IRA company. They also have dedicated support agents who help streamline the investment process so that you’re never lost or overwhelmed.
Cryptocurrency Investing: Is It Right for You?
For most investors, cryptocurrencies are a classic example of asymmetric risk. That is, the risk of significant, irrecoverable losses is outweighed by the potential for success. However, this is only true under a couple of preconditions.
First, you have to be willing to invest only what you’re willing to lose. As a volatile asset, Bitcoin holds the potential to lose a lot of value in a short period of time. As such, you should never invest money that you need in the short-term, or that you cannot afford to part with.
Second, you need to treat cryptocurrency as a diversifier in your portfolio rather than a large, concentrated holding. Financial experts such as Vrishin Subramaniam, the founder of CapitalWe, recommend limiting cryptocurrency to 5% of your net worth. Other successful investors, with greater appetites for risk, go a little higher, such as Shark Tank’s Kevin O’Leary who dedicates 7% of his portfolio to Bitcoin and altcoins.
If you can stick to the two rules noted above, you can invest in cryptocurrencies safely and responsibly. Nonetheless, investors should note that even if they do everything right, they can still lose money in the market. Like any legitimate investment asset, there’s always a degree of risk when investing your money—otherwise, there would be no potential for gains.
Interested in Crypto? Get Started Today
We’re often asked, “Is cryptocurrency a good investment in 2021?” The answer, more often than not, is yes. However, as we discussed earlier, it’s imperative that you do so responsibly, and that you temper your expectations. Just as there’s a chance to make a fortune by cryptocurrency investing, there’s also a chance of losing money too.
If you’ve made it this far, you’ve probably decided that cryptocurrency is the right choice for you. If that’s the case, the good news is that you can get started investing in Bitcoin and other cryptos in a matter of hours. To take advantage of the important tax benefits of IRAs when investing in cryptocurrency, consult one of the top-rated Bitcoin IRA companies today.