If you were to ask 100 investors what the most important, impactful development of the past 10 years has been, certainly electric vehicles and solar power would rate among the more common responses. It’s arguable, however, that most of these people would cite the advent of cryptocurrencies as the biggest game changer. They’ve not just grabbed our attention. They’ve worked their way into mainstream discussions of what to buy, and they are regularly a hot topic for the investment media.
In short, crypto isn’t going to fade away like so many other long-forgotten fads have in the past.
And to be fair, they’ve earned their proverbial stripes; they have their upsides. In the same interest of fairness, though, cryptocurrencies also present downsides. No investor can afford to ignore their inherent, unique risks.
With that as the backdrop, here’s a rundown of the three top reasons to add crypto to your portfolio, and the big three reasons you might want to steer clear of them.
3 reasons to invest in crypto
1. This is the future
You may not like the shift away from paper money and toward digital dollars, but that doesn’t mean it’s not going to happen. Although we still don’t know exactly what a cashless future might look like, there’s no denying that taking the physical aspect of money out of the picture is making for faster and more efficient commerce.
Image source: Getty Images.
There is one noteworthy nuance about this paradigm shift. That is, there are more cryptocurrencies out there than we really need — or ever will — and they’re competing with one another not just for usage but for speculators’ attention. Only the best of the best will be able to attract and keep the crowd of owners needed to make them viable money.
2. A history of oversize gains
Most of them may be wildly volatile, but many of them have also produced the sort of returns that make their volatility worth the wild ride. Bitcoin (BTC -1.51%) is up nearly 3,000% over the past five years, while Ethereum (ETH -2.86%) has rallied nearly 5,000% during the same time frame. And that’s after the sizable setbacks suffered beginning in the latter half of last year.
Some cryptos haven’t fared quite as well, and the gains described here are going to be tough to reproduce going forward. There’s no denying these investments are certainly capable of catching a serious tailwind every now and then, though.
3. Another way to hedge against inflation
Finally, although gold has been the go-to way for most investors to protect themselves from inflation, cryptocurrencies are quickly becoming the preferred alternative means of doing so.
Makes sense. For U.S. investors, the war against inflation is ultimately a war against a weakening value of the U.S. dollar. Even though popular cryptos like Bitcoin or Dogecoin (DOGE -7.14%) are priced in American dollars for us, they’re often price-quoted overseas in terms of the local currency and can certainly be bought or sold in other currencies. They can also be readily traded for other cryptos, offering people yet another highly liquid way to avoid holding the wrong currency at the wrong time.
3 reasons not to invest in crypto
1. It’s difficult to evaluate, or even value
Stocks may or may not hold their value, depending on how well (or not) the underlying company is performing. But at least you have access to the right information to make a buy-sell decision. Publicly traded companies are legally required to disclose their profits and losses, which then lets investors make a collective decision as to the stock’s value.
Not so with cryptocurrencies, which don’t represent for-profit corporations. They don’t even really reflect supply and demand, since competing cryptos could be said to be part of the overall supply of decentralized currencies. Cryptocurrency prices are entirely arbitrary and only a reflection of the crowd’s best guess at any given time. This guess, of course, can change at the drop of a hat.
2. Expect brutal volatility
While big long-term gains from cryptos like the aforementioned Ethereum or Bitcoin have handsomely rewarded anyone that held onto them for the long haul, let’s be honest — most people were or would have been shaken out by one of the many steep sell-offs suffered during their storied run-ups. Drawdowns of as much as 40% from peak prices aren’t unusual in the crypto market, yet even pullbacks half that size can spook the average investor out of a position at the exact wrong time.
Simply put, the big swings the average cryptocurrency dishes out can really get in your head, causing you to make bad trading decisions.
3. There’s very little regulation
Finally, you may not like regulations or policies or the federal governments that create and apply them. By and large, though, this oversight does far more good than harm if for no other reason than curbing price volatility. In that decentralized currencies by definition aren’t subject to significant regulation by government entities, though — at least not yet — you don’t have any protection or recourse if you’re somehow wronged. Aside from the sheer risk of loss, trading crypto comes with the risk of fraud, a lack of transparency, and the potential for outright digital theft that (theoretically) isn’t supposed to happen.
A little common sense goes a long way
None of this is meant to encourage or discourage anyone from wading into cryptocurrency waters. It’s just meant to make you think, particularly if you’re just now considering getting into the crypto game but have yet to risk any actual money. Like everything else in the investment world, this sliver of it has its upsides and downsides.
That’s why you should apply the most important common sense rule here that you’d apply with any other investment vehicle. That is, never speculate with more money than you can afford to lose. While a total wipeout isn’t necessarily likely, it’s certainly possible.
