Cryptocurrencies have quickly gained in popularity since their debut in 2008. Cryptocurrencies share many characteristics with precious metals like gold and silver.
Cryptocurrencies offer some investors a way to hedge against fiat currencies and survive economic storms, yet investing is still highly speculative and risky, so do your homework before investing.
1. It’s a speculative investment
Cryptocurrencies represent a new financial paradigm that makes value transfers possible online without needing an intermediary, like banks. This decentralized system has proven more cost-efficient, faster and efficient.
However, cryptocurrency can still be risky investment, according to a recent report from the U.S. Department of Labor. They cautioned 401(k) investors this year to exercise extreme caution when adding cryptocurrency assets such as bitcoin or Ethereum into their portfolios since these newer forms of investment often serve as sources of speculation and may pose additional risks.
Financial advisors generally recommend investing a significant portion of your retirement portfolio in traditional investments backed by government securities such as Treasury bills. Cryptocurrencies don’t offer such protection and therefore could experience price volatility and risk losing their value entirely.
There are various methods of investing in cryptocurrency, from using cryptocurrency exchanges like Coinbase to brokerages that specialize in investing. Some exchanges offer multiple cryptocurrencies while others may focus on just one or two.
Most cryptocurrencies feature a limited supply of coins available to mine, governed by an intricate protocol that ensures no central authority can mint more currency than is already in circulation, thus avoiding additional coin issuance which would reduce its value and ultimately decrease.
Bitcoin can offer considerable opportunities to make substantial returns by betting on price increases; indeed, the market often experiences major price surges like in December 2017 when Bitcoin hit an all-time high of $17,738. But its volatility also creates the risk of large losses when its value drops, making future predictions impossible.
If you’re new to cryptocurrency investment, be sure to read up on both its advantages and disadvantages so you can make an informed decision as to whether investing is suitable for you. While you might be amazed by what potential profits lie within its realms, keep in mind it’s an emerging field and that many have lost big bucks through such ventures.
2. It’s volatile
Cryptocurrency is an emerging asset class that’s only been around for about 10 years, yet some investors remain wary about investing in it due to its inherent volatility.
Volatility stems from numerous causes, including news developments and speculation which drive market swings. Also, as cryptocurrency markets lack an established ecosystem of institutional investors and large trading firms to provide the same degree of liquidity as traditional financial markets do.
Due to these fluctuations, cryptocurrency prices can wildly vary and have devastating repercussions for an investor’s portfolio value. Experts advise novice investors not to risk more money than they can afford to lose when investing cryptocurrencies.
Bitcoin has experienced dramatic price swings since its creation. Yet some still see them as promising investments despite these fluctuations.
As cryptos can be volatile investments, they should generally not be considered suitable for short-term traders. As an alternative, investors may wish to consider long-term assets like stocks or bonds which offer stable returns with proven track records of performance.
As more investors start investing in cryptocurrency, its price can fluctuate wildly over time – so wise investors have begun diversifying across multiple kinds of digital currency as well as stocks and shares to reduce risk.
Cryptocurrencies differ significantly from traditional investments like stocks or precious metals in that their price fluctuates frequently due to blockchain technology; each coin’s value depends on the performance of its network.
Day traders and speculators also find it increasingly challenging to predict the price of each cryptocurrency, which makes understanding its underlying causes of volatility important before entering this space.
Popular cryptocurrencies such as Bitcoin and Ethereum have seen dramatic price fluctuations since their inception; nonetheless, some investors view them as promising investments despite this volatility.
3. It’s illiquid
Cryptocurrency is a digital asset that can be traded on exchanges, though its liquidity lags far behind traditional assets like stocks. This can be due to factors like regulatory uncertainty and limited institutional investment. Furthermore, crypto markets are still evolving and present an elevated risk of market manipulation by speculators.
Liquidity refers to an asset’s ease of trading at any price without significantly altering its value, making it a crucial measure for investors looking to avoid losses and maximize returns on their investments.
Liquid markets can be defined as those where there are plenty of buyers and sellers trading at once, although the amount of volume may differ between markets; different exchanges have various levels of liquidity.
US stock markets are known to be highly liquid; Nasdaq alone sees daily trading volumes totalling hundreds of billions. By contrast, cryptocurrencies often see far smaller trading volumes even on large exchanges.
Liquidity can also be determined by looking at a crypto market’s bid-ask spread – the difference between its lowest ask price (sell order) and highest bid price (buy order). A smaller bid-ask spread indicates greater liquidity.
However, in less liquid markets the bid-ask spread may be wide and trading difficult, leading to slippage – in which a transaction executes at a different price than intended.
To assess the liquidity of any given cryptocurrency, examine its trading volume and price volatility on various exchanges. A high trading volume indicates a lot of people purchasing and selling at once while low volume indicates inefficiency in exchanges and the lack of liquid cryptocurrency assets on these platforms.
An estimator of liquidity can help cryptocurrency markets assess their own liquidity more accurately. Corwin and Schultz (2012) and Abdi and Ranaldo (2017) measures are effective ways to measure time series variation in liquidity as they correlate well with execution costs – key elements of the liquidity equation.
4. It’s risky
Cryptocurrencies are digital currencies that don’t rely on banks or third parties for regulation and tracking; instead, they use blockchain – an open and distributed ledger which records transactions – to keep track of them. Their value may fluctuate rapidly making cryptocurrencies high-risk investments.
Crypto currencies are versatile tools used for purchasing goods ranging from groceries to laptops; however, they should not be seen as an alternative form of payment as they are unbacked by governments or central banks – thus rendering them uninsured like bank deposits are.
Remember, however, that investing in cryptocurrency is more complex than simply buying stocks: you will need to spend some time understanding each coin’s technology and how they function before investing. Diversifying investments is also key for mitigating risk while increasing chances of long-term growth of any particular coin.
Last year’s price fluctuations showed just how unpredictable cryptocurrencies can be; hundreds of billions were lost as investments tanked overnight if you held bitcoin for just a few days before its value dropped from $20,000 to $65,000 before recovering again.
Due to this volatility, it’s essential that investors understand how a specific currency operates and assess its potential before investing in it. Furthermore, only invest in amounts you can afford to lose.
An effective strategy for mitigating risk in the crypto market is starting small and diversifying your investments by purchasing lesser-known coins that offer potential long-term growth potential.
Experts agree that cryptocurrency will gain in popularity over time despite its risks, with numerous major financial institutions and businesses now accepting cryptocurrency payments as forms of payment.
Main reason behind cryptocurrencies’ rising popularity is blockchain technology, which has proven reliable and secure money transfer. Furthermore, faster transactions with lower fees make cryptocurrencies even more desirable among investors as well as mainstream businesses.