There’s currently a lot of buzz surrounding cryptocurrency, and much of it has to do with how viable it is as an investment. When assessing the virtues of a crypto investment, many people will judge it based on either of these two extremes: (1) that cryptocurrency is a flop that won’t earn its investors any money, and (2) that cryptocurrency is a magic-bullet, get-rich-quick kind of scheme.
However, the real answer is not so simple, and the wise crypto investor knows this. While it’s true that crypto has a high potential for reward, trading in such a speculative asset will definitely come with some risk. Whether it’s a good idea for you to trade in crypto depends on what you seek out of your investment. Evidence is starting to emerge that crypto is best suited for longer investment horizons. Before you start trading crypto, you may want to learn about Blockchain.
Why should cryptocurrency coins be viewed as a long-term, high-risk investment, and what consequence will this kind of investment have on your financial goals? To answer those questions, here’s everything you need to know about the risks and rewards of crypto. This advice should apply whether you’re interested in a popular coin and wallet combination, or whether you’re purchasing a privacy token like Monero (XMR) and storing it in an XMR wallet.
Important Notes On The Risks Of Cryptocurrency Investments
First off, there’s no denying that the crypto market can be very volatile. Prices for tokens can vary greatly from day to day. In addition, cryptocurrency is subject to two noteworthy phenomena called bull markets and bear markets. In bullish crypto markets, the overall market confidence is high and that results in an enduring positive trend on crypto prices. The opposite happens in a bearish market: negative market sentiments abound, traders sell more, and crypto prices can drop by hundreds or thousands of dollars. Sometimes these events are predictable, but sometimes they are not.
Another risk that comes with cryptocurrency trading is that most cryptos are unregulated. That means that they’re not tied down to a fiat or government-backed currency nor to the rules of a government or a central bank. This lack of regulation serves as a double-edged sword for cryptocurrencies. There are certain freedoms that traders will get out of crypto that they won’t get out of conventional currencies. But they can also expect fewer protections on their investments as a result.
With regard to protection, some crypto users are also vulnerable to becoming a victim of cyberattacks or breaches of their privacy. However, this may depend on the trader’s choice of coin and how traceable their trading activities are on the blockchain. Privacy tokens like Monero have upped their anonymity and security technologies to shield their traders from these problems.
There are also certain events that can increase the volatility of crypto coins even further. Some coins, like Bitcoin (BTC), have limited supply in circulation. Traders of BTC might expect additional volatility to rock the market when the last virtual token of this supply is mined. In addition, some cryptos may experience what are called blockchain forks, or splits in the blockchain network. This is usually associated with the creation of new tokens that are offshoots of older ones. Some traders may jump ship to what they perceive as a “new and improved” version of the previous coin, which will affect the latter’s prices. Lastly, there is a risk of a coin being discontinued altogether, for example if its developer base encounters major problems.
Why Cryptocurrencies Are Worth Pursuing as a Long-Term Investment
Despite these risks, if you think of cryptocurrency along the lines of the traditional risk pyramid, there’s potential to earn high rewards. There are several reasons why cryptocurrency may end up being a particularly rewarding long-term investment. For one, there’s been increased interest in cryptocurrency trading amongst the general public, which may also result in high trading activity. Crypto is no longer the realm of techies or financial elites. Nowadays, it’s easy for new traders to learn about crypto, develop a high level of literacy about the crypto market, and hone their investment strategies with crypto coins.
The financial and technological innovations that surround cryptocurrency won’t be going away anytime soon, either. In fact, the ecosystem that drives crypto has become richer and more varied. There are better technologies for keeping coins safe, like cold storage wallets. There’s also a wider variety of tools that can help traders manage their crypto assets, like real-time crypto trading apps. Some crypto enthusiasts have even bigger dreams for their virtual coins, such as the widespread adoption of decentralized finance. This may happen sooner than we think if more traders stake their interests in cryptocurrency.
But the personal rewards that you can expect out of crypto depend on several external and self-determining factors. These include the following:
- How much of your wealth you choose to invest into cryptocurrency.
- The nature of the coin you’ve invested in.
- The nature of the market for that particular coin.
- How skilled and experienced you are at trading with financial service companies.
Based on the insights detailed above, it’s most likely that investors will reap the rewards from crypto over longer investment horizons. Knowing that, treat any investment you make in cryptocurrency just like you would treat any other high-risk, high-reward, and long-term investment. Get the most value out of your crypto investment by making sure it aligns with your overall needs and financial goals.