Whether you are new to the world of investing or already an experienced investor, you may be wondering if cryptocurrency has a place in your portfolio. Given the mind-boggling rise in the value of Bitcoin and other cryptocurrencies, it is easy to see why there is so much interest in these alternative forms of investment.
Even so, it pays to proceed with caution. Cryptocurrency can have a place in your portfolio, but only after you have done your homework and evaluated the benefits and risks. Here are some of the pros and cons of adding cryptocurrency to your investment portfolio.
Financial advisors often recommend that their clients diversify their holdings. They may recommend, for instance, that a client invests in not only stocks and bonds, but in real estate and precious metals as well.
Adding cryptocurrency to an investment portfolio aids diversification in several ways. In the past, the value of Bitcoin, Ethereum, Litecoin, and other popular cryptocurrencies tended to rise when stocks were falling. If that trend continues, cryptocurrency could be a hedge in the next bear market.
The sheer number of cryptocurrencies also provides diversification, another important consideration for investors. Instead of investing a large chunk of money in a single cryptocurrency, investors can spread the risk around by taking small positions in a wide variety of virtual forms of payment.
Cryptocurrency investments are not like stocks, bonds, and mutual funds, and the security situation is one potential disadvantage. New investors are often surprised to learn that they could see their holdings disappear if hackers gain access to their accounts, and unlike other investments, there is typically no way to get the money back.
The lack of security is a major concern for cryptocurrency investors, and there are only so many ways to hedge those risks. Some cryptocurrency investors choose to hold their coins in so-called cold storage, isolating their investments from the internet and the associated risks. But if those investors lose the access keys, their virtual coins are probably gone forever. It is important for investors to be aware of, and be prepared for, the unique security risks of the cryptocurrency market.
Significant Potential for Appreciation
One of the biggest potential advantages of investing in cryptocurrency is the possibility of significant appreciation. While Bitcoin and other established cryptocurrencies have already come a long way, many experts feel they have much further to run.
Perhaps even more importantly, smaller and lesser-known cryptocurrencies could have an even bigger potential for future appreciation, especially if they become widely used down the line. Though there are no guarantees, this appreciation potential is one of the most attractive parts of the cryptocurrency world.
Flexibility of Use
Compared to stocks, bonds, mutual funds, and precious metals, cryptocurrency is much more flexible to use. After all, cryptocurrencies like Bitcoin and Ethereum are more than just investments; they are a form of virtual cash.
A large number of stores, restaurants and other businesses already accept cryptocurrency payments, and many others are expected to follow suit. This provides greater flexibility and freedom for investors, including the ability to turn their holdings into goods and services with the click of a mouse.
The Excitement Factor
Investing and excitement do not always go hand in hand, but they do when it comes to cryptocurrency. There is a certain excitement factor to investing in cryptocurrency, and investors could entertain themselves for hours as they watch the prices rise and fall.
If you love to gamble, a small investment in the cryptocurrency market could be better than a trip to the casino. When you put your money in a slot machine, the last pull of the handle means it is gone forever, but that is not true with major cryptocurrencies. Even if the price falls significantly, there is always the change it will recover and possibly earn you a healthy profit.
Taxes and Regulation
There is a real risk in the cryptocurrency market, including the dangers posed by future taxation and additional regulation. The IRS has already taken notice, and the tax agency is going after large holders of Bitcoin and other popular cryptocurrencies.
Investors who think they can fly under the radar and enjoy anonymity in their cryptocurrency holdings could be in for a rude awakening. If you plan to play in this arena, you should be prepared to pay up in the form of taxes.
The risk of additional regulation is another potential headwind in the cryptocurrency market and one that all investors should be prepared for. A number of countries have already introduced significant trading restrictions and other regulations, and those existing rules could be just the tip of the iceberg. If additional regulation comes to pass, the attractiveness of cryptocurrency investments could diminish greatly.
There is more to investing than just stocks and bonds, and adding other asset classes to your portfolio could have some significant advantages. Even so, cryptocurrency investments are not for the faint of heart, and newcomers may want to tread carefully before jumping in.