The latest news headlines haven’t been kind to Bitcoin. Once upon a time, the hardcore cryptocurrency crowd would tell anyone within hearing distance that buying Bitcoin would make them a millionaire. But today, it seems you can’t throw a bitcoin without it falling on a pundit warning you about the risks of investing in it or any other cryptocurrency.
So, who’s right?
Cryptocurrency (aka crypto) doesn’t have to be cryptic. We’ll explain the risks and rewards of investing in crypto so you can balance the pros and cons.
What Is Bitcoin and How Does It Work?
Cryptocurrency is digital money. You can’t hold cryptocurrency in your hand or shove it in your pocket – it only exists digitally.
Bitcoin – which is by far the most widely known and widely held of all cryptocurrencies – uses cryptography, a complex series of algorithms, to control coin creation (aka mining), verify transactions and make counterfeiting crypto virtually impossible.
Other popular digital currencies (often referred to as altcoins) include Ethereum, Cardano, Solana and Dogecoin. Right now, there are roughly 1,500 cryptocurrencies in existence.
Cryptocurrencies aren’t issued or backed by a government or central bank like traditional currencies (or fiat currencies), such as the U.S. dollar, Japanese yen or Mexican peso. As long as crypto is an accepted form of payment, you can spend it like you spend fiat currency.
Another thing about cryptocurrency is that it’s decentralized. There is no central authority regulating the digital currency. Whenever you buy or sell anything using crypto or invest in crypto, the transaction is publicly tracked on a network of computers called a blockchain.
Is Cryptocurrency Safe?
Crypto is a relatively secure currency. When we say this, we mean the technology that creates crypto and facilitates encrypted transactions is secure – but it doesn’t mean the system is invulnerable.
Cryptocurrencies are stored on centralized cryptocurrency exchanges and trading platforms, like Binance.US, Gemini or Coinbase. They are generally safe, but motivated, tech-savvy cybercriminals can and do target exchanges.
Storing cryptocurrency in an exchange-hosted wallet gives the exchange control of your crypto assets. If the exchange goes bankrupt or is ordered to freeze your assets by a federal government agency, you could lose the ability to spend or trade your crypto.
When an exchange-hosted wallet isn’t connected to the internet, it’s said to be in cold storage. You’ll need a private key to access your crypto. If you lose your key, you lose your crypto.
Why Has Bitcoin Dropped in 2022?
The price of Bitcoin hit an all-time high in November 2021. One bitcoin cost around $69,000 then. In 2022, Bitcoin’s trading price plummeted to under $20,000.
Why did Bitcoin drop so much in such a short time?
Whether it’s a stock, a commodity or a bitcoin, various factors contribute to the movement of financial trading instruments. Cryptocurrency is volatile because it is highly susceptible to world events and economic policies.
Some factors that likely contributed to Bitcoin’s downward slide include:
- Higher interest rates: With the increase in interest rates in the U.S., investors are less likely to take on the risks associated with crypto.
- Rising inflation: When the cost of living increases, people typically have less disposable income and usually invest less or sell assets to get cash.
- Ukraine invasion: Geopolitical instability can make people a little wary of the future, including the future performance of stock exchanges and cryptocurrency exchanges.
- International regulations: When China and other countries banned crypto trading and Bitcoin transactions, people lost confidence in the future of crypto as a viable investment. There is also speculation that Russia might ban or regulate crypto mining and trading.
Should I Buy Bitcoin Now?
To buy or not to buy Bitcoin. It’s a frequent topic of debate among potential crypto investors.
Investing in Bitcoin is risky, and it’s impossible to predict whether its value will soar or slump in the short term or long term. And the 2022 drop in Bitcoin’s price doesn’t mean it’s a good time to invest in the currency.
To help you land confidently on either side of the “to buy or not to buy” divide, we’ve listed several reasons – for and against – buying Bitcoin now.
Reasons to be optimistic about buying Bitcoin
The industry is maturing
Crypto technology is getting much better. And the adoption of Bitcoin is nearly universal. Big companies like Tesla accept and invest in Bitcoin, and there are rumors Amazon and Apple may follow Tesla’s lead.
Fixed bitcoin supply
There are around 21 million bitcoins in circulation. According to the law of supply and demand, we know that if demand exceeds supply, the value of bitcoins will go up. But, of course, that’s a big if.
You can use your crypto holdings as collateral
Some financial institutions allow you to take out loans by leveraging the value of your crypto portfolio – but crypto loans can be risky.
Reasons to be skeptical about buying Bitcoin
Government regulation could pin fees on Bitcoin transactions. Trading regulations would hinder the free trade that has traditionally attracted people to Bitcoin.
Bitcoin’s value is speculative, extremely volatile and based largely on supply and demand. The risk of losing money is sky-high.
No guarantee of success
Like most investments, there’s no guarantee you’ll turn a profit. Even after diligently researching, you can still lose what you invested.
Bitcoin’s value isn’t based on traditional metrics like price-to-earnings ratio, revenue or profit, so its future success is harder to gauge than traditional investments.
Even though crypto technology has matured, it is still a young and developing industry with an uncertain future.
Are There Other Ways To Invest in Bitcoin?
If you want to invest in crypto without buying crypto, there are alternative investment strategies that will expose you to the crypto market.
Companies that invest in crypto
You can purchase stock in a company that is heavily invested in crypto, such as PayPal, Coinbase, Riot Blockchain and Tesla.
Think of an exchange-traded fund (ETF) as a mutual fund that is traded on stock exchanges. ETF funds are made up of a collection of securities (aka assets) in a particular industry, which includes crypto.
Blockchain and crypto mining companies
You can purchase shares of companies invested in crypto mining or blockchain technology or invest in blockchain developers and fintech companies.
Should You Invest in Cryptocurrency?
We’ve got some tips to help you decide whether investing in crypto is right for you:
Assess your risk tolerance and risk capacity
Are you okay with the roller-coaster nature of financial markets? Or does every drop make your stomach sink? Your risk tolerance is how much volatility you can handle. Risk capacity, on the other hand, is how much money you can afford to lose.
A trusted financial advisor will help you gauge your risk tolerance and your risk capacity, taking into account your investment goals and your timeline to reach your goals.
If putting all your eggs in one investment basket is usually a risky thing to do, investing all your money in Bitcoin or other cryptocurrencies multiplies that risk.
Your financial advisor should put together a portfolio for you with an appropriate asset allocation, blending riskier investments (which might include cryptocurrency), medium-risk assets and lower-risk assets like bonds or cash.
Resist the fear of missing out
No one wants to be the last person to hop on the latest money-making trend. But don’t give in to FOMO. Maybe your friend group is doing okay with crypto, but if the headlines and pundits are to be believed, it’s more likely than not that you will lose money if you risk it all on crypto.
Seek advice from trusted resources and financial professionals
Ask a professional personal finance advisor whether Bitcoin (or an alternative crypto like Ethereum) is a good investment for you.
The Short Version
- Investing in Bitcoin is risky, and it’s impossible to predict whether its value will soar or slump in the short term or long term
- The 2022 drop in Bitcoin’s price doesn’t mean it’s a good time to invest in the currency
- Ask a professional personal finance advisor whether Bitcoin (or an alternative crypto like Ethereum) is a good investment for you
Experian™. “How to Start Investing in Cryptocurrency: Beginner’s Guide.” Retrieved August 2022 from https://www.experian.com/blogs/ask-experian/how-to-start-investing-in-cryptocurrency-beginners-guide/