Should I Invest in Cryptocurrency?
That’s the question most people ask themselves when they hear about the outrageous returns cryptocurrencies have given to its investors.
This guide outlines the pros and cons of investing in cryptocurrency, their value proposition, and also associated risks, to help you decide if you should invest in cryptocurrency.
Not reading this guide until the end is a decision you could regret for the rest of your life.
So, lean back and let’s dive right into it!
How are cryptocurrencies different from regular money?
A fiat currency is money that has its value enforced by the governments or jurisdictions that issue it.
Prior to the advent of fiat currencies, government-issued notes and coins had their value pegged to an underlying commodity such as gold or silver.
Fiat currencies have been around since 1694, which is when the British pound Sterling (GBP) was issued as the official currency of Great Britain and later the United Kingdom.
Up until 1971, the US Dollar (USD) was a commodity currency that had its value coupled to gold, after which it transitioned to being a fiat currency when the United States could no longer maintain sufficient gold reserves to back the US Dollar.
Unlike fiat money, cryptocurrencies are not backed by any state, and typically do not have a centralized organization (e.g. like a central bank) controlling the money supply.
Instead, most cryptocurrencies are designed to decentralize governance, giving individual cryptocurrency owners full control over their holdings while acting to resist censorship.
In fact, Bitcoin, arguably the best cryptocurrency to buy right now, was designed as a fiat alternative, with its primary purpose being to allow users to securely transmit value between one another without relying on banks or governments.
However, not all cryptocurrencies are designed to simply replace cash.
There are numerous different types of cryptocurrencies, including smart contract platforms like Ethereum (ETH), revenue sharing coins like Unus Sed LEO and Binance Coin (BNB), and utility tokens like Bounty0x (BNTY), all of which have unique specialized functions.
The enormous potential of cryptocurrencies
As of writing, the current market capitalization of all cryptocurrencies stands at $316.5 billion, while Bitcoin (BTC), the single largest cryptocurrency to date has a market cap of $207 billion.
Although these might seem like impressive figures, given that the entire industry is scarcely over a decade old, it is still massively lower than the market capitalization of most prominent fiat currencies.
The US Dollar, for example, has a circulating supply of around $1.7 trillion, while the Euro has more than €1.2 trillion in circulation.
However, that’s just the M0 money supply. The CIA estimates that there is approximately $80 Trillion of value in currencies if “broad money” is also included.
And this is without taking into account the $8 Trillion Gold market, $217 Trillion Real Estate market and $1.2 Quadrillion derivatives market.
With cryptocurrencies widely thought to be the successor to fiat currency and an improved store of value currency, it is not impossible to imagine how this new asset class eats into the market value of the above assets.
The impressive price explosion of many cryptocurrencies has seen the industry gain a huge amount of attention in recent years, and now, around 80% of Americans, and 93% of Brits have heard of Bitcoin.
However, despite most people now having heard of cryptocurrencies, less than 1% of Americans actually own any, indicating there is still huge room for further growth.
Superior store of value (“Digital Gold”)
If you have thought “should I buy cryptocurrency to safely store value” then you have likely already researched into the pitfalls commonly associated with other value stores such as gold and real estate.
While gold is an effective and relatively stable store of value, there are some major limitations associated with it that makes it inconvenient in comparison to Bitcoin and other cryptocurrencies.
Gold isn’t easily divisible and can’t be easily stored, while transportation costs and potential counterfeiting make trading gold a costly endeavor.
Cryptocurrencies, on the other hand, have virtually zero transportation costs (low transaction fees), cannot be counterfeited and are typically divisible by 8-12 decimal places.
Not only this, but they can be transferred between countries without incurring taxes and have excellent liquidity.
According to recent estimates, some $263 Trillion is locked up in stores of value, such as commodities, real estate, art, and government bonds.
Any cryptocurrency that is able to capture even a small fraction of this stands to experience incredible growth, since even capturing 1% would make it larger than any fiat currency in circulation, and almost 10x larger than Bitcoin currently is.
Extremely cheap micro-payments
Cryptocurrencies are also renowned for their ability to transmit value across borders for next to nothing.
Unlike remittance companies and money transmitters that charge often extortionate fees to move money between countries, cryptocurrency transactions are often negligibly cheap.
Recently, Binance was able to move $1.26 Billion in Bitcoin for just $124.60, which is equivalent to a fee of less than 0.01%. Comparing this to the world average remittance rate of 6.84%, it becomes clear just how cheap transacting with cryptocurrencies is.
Beyond this, several cryptocurrencies are specifically designed to make micro-payments much less costly.
Comparing this with PayPal’s 2.9% transaction fee, and Visa’s up to 1.5% interchange fee, it is clear that cryptocurrencies are the superior way to send both small and large payments in a cost effective way.
Beyond this, since most cryptocurrencies are decentralized entities, there are far fewer restrictions on who can use them.
Cryptocurrencies are widely predicted to disrupt the $1.9 trillion global payments industry, since there are no central parties that need to generate profit and adhere to regulations, cryptocurrencies should have few bottlenecks hindering their growth in this segment.
Making bank accounts obsolete
In 2018’s last quarter, nearly $13.8 trillion was held deposited at US Banks. Together with the national banks, the central banks around the world are widely considered to be in almost complete control of the modern economy.
Compared to these, bank accounts can often be considered cumbersome, offer very little in the way of privacy and often have a monthly fee associated with them.
In addition, there are many risks involved with maintaining a bank account, for instance, due to the practice of fractional reserve banking.
Most banks only maintain a fraction of all the money they manage, somewhere between 3% to 10% depending on the volume of transactions.
And when the banks suffer losses due to bad investments made with your money, they pressurize the government for bailout money or they risk closing their doors.
This is exactly what happened when Bank of Cyprus received an $11 billion bail-out in 2013.
So when you ask yourself, “should I invest in cryptocurrency?” the answer could be a resounding yes! Letting the banks risk your money is not wise at all. With cryptocurrencies, you can be your own bank, and bank accounts will become obsolete given enough time.
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What cryptocurrency should I invest in?
Since cryptocurrencies come in a variety of different types, many of which cannot be directly compared, it is impossible to select a single best cryptocurrency.
In general, cryptocurrencies can be divided into three main groups: Bitcoin, altcoins and utility tokens. Though there is only one Bitcoin, there are literally thousands of altcoins and utility tokens, most of which are extremely dissimilar and hence not directly comparable.
Similarly, because cryptocurrencies often experience their ups and downs, it is practically impossible to predict which will perform the absolute best.
For this reason, you will need to research into a variety of cryptocurrencies and identify the ones you personally believe will have the best potential over the time period of your investment.
With that said, there are several different conditions that can help make this choice easier. Let’s explore some of them.
Based on risk tolerance
You will need to ask yourself the question; “should I buy cryptocurrency with a low or high market cap?” This question is particularly important as the answer will mostly relate to your risk appetite.
For the most part, high market cap cryptocurrencies such as those in the top 10 by market capitalization are considered to be less risky investment choices.
They have proven their stability over the long term and tend to have huge trade volume behind them, making them less likely to experience sudden dumps.
Conversely, smaller cap coins, such as those with a market capitalization under $100 million tend to be much more volatile, often experiencing wild price swings that can make them attractive to scalpers.
They are also more liable to pump and dumps, which can result in significant losses if buying in at the wrong time.
Overall, those with a higher risk appetite may be best served by investing in lower market cap coins, since these have the highest potential for growth since there is still massive room for adoption and growth.
Whereas those with a low tolerance for risk should focus on larger, stabler cryptocurrencies that are likely to continue to grow, albeit more slowly and with less volatility than smaller cap coins.
Based on investment thesis
As briefly mentioned earlier, there are a huge variety of different cryptocurrencies available, each designed to tackle a different problem or address an unmet need in the market.
In brief, these can be separated into four different types: simple currencies (e.g. Bitcoin and Litecoin), smart contract tokens (e.g. Ethereum and EOS), security tokens (e.g. Aspen Digital Token) and utility tokens (e.g. Binance Coin and Unus Sed LEO).
The best cryptocurrency for you to invest in will generally relate to which of these four categories you believe has the most potential over the course of your investment.
Within each subtype, there will be more promising examples than others, and it will take time and research to identify those with the best prospects.
Right now, however, cryptocurrencies designed as stores of value and payment methods have achieved the most success, with 5 of the top 10 cryptocurrencies falling into this category.
However, there are also some popular smart contract tokens that are gaining prominence, such as Ethereum and EOS thanks to their utility as gas within their respective smart contract and Dapp ecosystems.
With that said, there are always new cryptocurrencies being unveiled, many of which have huge potential for growth if executed correctly.
Because of this, it is always wise to keep up to date with cryptocurrency news to identify new opportunities as soon as they arise.
Risks of investing in cryptocurrency
Cryptocurrencies are considered medium to high-risk investment options, while the potential for profits is in some cases astronomical, it is also similarly possible to lose your money.
Unlike other more stable asset classes, cryptocurrencies are known to be particularly volatile, and can often fluctuate wildly in price.
Because of this, it is quite a common occurrence for new investments to lose money in the short term—something risk-averse investors often cannot tolerate.
Unfortunately, the answer to “is cryptocurrency a good investment?” can often vary at the drop of a hat, since markets are notoriously volatile, and there are several significant risks that can make the choice to invest in cryptocurrencies a very difficult one.
A certain cryptocurrency could be a Ponzi scheme
Although very few cryptocurrencies are Ponzi schemes, there have been some extremely successful ones in the past that have scammed investors out of tens of millions of dollars.
Easily the most damaging of these was BitConnect, a Ponzi scheme that ran throughout 2016 and 2017 that managed to scam an estimated $2 billion from unwitting investors.
The resulting price crash of the BitConnect coin resulted in most investors losing all their invested capital.
Besides BitConnect, The Bitcoin Savings and Trust (BTCST) was another massively successful Ponzi scheme that reportedly managed to defraud investors out of approximately 700,000 BTC in 2011 and 2012.
To achieve this, the project offered investors as much as 7% interest per week or 364% simple interest per year.
Although Ponzi schemes are far less common nowadays, thanks to improved regulations and consumer awareness, there are the odd few unscrupulous projects still active.
Because of this, it is wise to remain vigilant when investing in cryptocurrencies, particularly if they make claims that sound too good to be true.
Some clear indicators of a Ponzi scheme include promises of a guaranteed return on your investment, with an interest rate far higher than what you might expect elsewhere.
Beyond this, lucrative multilevel marketing (MLM) schemes that offer you a fraction of your referrals earnings, and a smaller fraction of their referrals earnings, with potentially several more levels are common with Ponzis.
A cryptocurrency could be shut down by regulators
Cryptocurrencies that are most at risk are those currently being scrutinized by the U.S. securities and exchange commission (SEC).
The SEC is known for shutting down projects with security-like characteristics, meaning projects that guarantee a return on investment or offer dividends are potentially liable to be shuttered by the SEC.
In the last two years, the SEC has shut down numerous ICOs, including Paragon, CarrierEQ Inc. (Airfox) and Blockvest. Immediately after the news broke that these projects were shut down, their tokens plummeted in value and never recovered.
Usually, the SEC tends to go after coins that violate U.S. securities laws, but also targets companies known to be defrauding investors such as Ponzi schemes and outright scams.
Beyond this, although the great majority of countries have relatively relaxed cryptocurrency regulations, some are less liberal, and hence take a harsher stance against cryptocurrencies.
Because of this, it is entirely possible that government restrictions on how cryptocurrencies are used or traded can affect the value of the cryptocurrencies they apply to.
For example, if a major superpower country outright banned privacy coins like Monero (XMR) or Zcash (ZEC), then these coins, and likely all other privacy coins would lose significant value.
This same reasoning applies to bans to any single cryptocurrency, with a ban being a serious red flag to watch out for.
The cryptocurrency could have a fatal software bug
Bugs that can alter the supply dynamics of a cryptocurrency (inflation bugs), allow double-spends or reverse transactions are particularly damaging, and if discovered will likely cause an immediate price crash.
To rectify the issue, the bug was patched and an equivalent amount of XLM was burned to maintain the correct circulating supply, but user confidence was severely knocked.
These types of bugs can undermine the security and safety that cryptocurrencies promise, and if severe enough, can essentially render the cryptocurrency useless as a store of value or for its intended purpose.
Because of this, it is wise to only invest in cryptocurrencies that have been sufficiently battle-tested and have had their code audited by several securities researchers.
That said, even the largest of cryptocurrencies, including Bitcoin have had potentially fatal bugs discovered, but these are generally patched before they can be exploited.
It should be noted that when a bug is identified and exploited on a blockchain, forked chains are often vulnerable to the same bug, and so are likely to experience a significant price hit in tandem.
Despite this, you might ask yourself, “Should I invest in cryptocurrency X after the bug is patched?” The answer is probably not until it demonstrates it can recover from such a harsh set back (and few can).
The cryptocurrency could suffer a 51% attack
Arguably one of the most pressing concerns for many smaller cryptocurrencies is the threat of what is known as a 51% attack.
This occurs when an attacker is able to gain control of more than 51% of the network hash rate, allowing them to potentially reverse transactions, double-spend funds and block the confirmation of other transactions.
Since proof-of-work (PoW) cryptocurrencies are secured by a decentralized network of miners, they are designed to be tamper-resistant.
The security of PoW cryptocurrencies largely relates to the amount of hash rate allocated to it and the number and distribution of miners that contribute to this hash rate.
Naturally, cryptocurrencies with a relatively small number of miners are most vulnerable to a 51% attack.
However, even some larger cryptocurrencies, including Verge (XVG), Ethereum Classic (ETC) and Bitcoin Gold (BTG) have been successfully attacked, mostly thanks to mining power rented from the likes of NiceHash.
By reducing user faith in the security of the cryptocurrency, 51% attacks can drastically alter both its long term viability and its use as a store of value.
Looking at the recent Ethereum Classic 51% attack as an example, the price of ETC lost more than 25% of its value within a day after the news broke.
The core developers could abandon the cryptocurrency
Core developers abandoning a project is practically a death knell for the cryptocurrency, since most investors will begin to think “why should I invest in cryptocurrency that even the developers don’t believe in”, before selling their holdings.
This will often lead to a significant price crash, which may or may not be recovered from.
For example, when Haven Protocol’s one and only developer abandoned the project in January 2019, the coin lost almost 75% of its value before being taken up by a new team shortly after and recovering.
Unfortunately, it can often be difficult to determine the reasons behind developers leaving the project, since few will outwardly state that the project is doomed or has technical limitations that can never be resolved, but in general it is never a good sign.
Some warning signs to look out for include a weak development community, comprised of a single or small team of inexperienced developers, and no contributions from outside sources on the project GitHub page.
With that said, if a cryptocurrency lacks adoption, hasn’t had any major updates in an extended period of time, and doesn’t provide financial incentives for developers, then it is a prime target for being ditched and should be avoided.
The cryptocurrency could be delisted from major exchanges
For the most part, major cryptocurrency exchanges only seek to list cryptocurrencies that meet a variety of strict criteria, such as solid development progress, a strong community and sufficient trading volume and liquidity.
Arguably, the best cryptocurrency to invest in is that which is just about to be added to a prominent cryptocurrency exchange.
The converse is also true, as cryptocurrencies that get delisted from one or more popular exchange platforms are likely to crash in value.
Being delisted from a single major exchange is usually enough to cause a sudden, often transient downswing in price, while being delisted from several exchanges in quick succession usually indicates there is something seriously wrong with the cryptocurrency.
Identifying and avoiding coins at risk of being delisted in advance can help save you from a nasty price shock later on.
These can often be found by looking at the lowest volume cryptocurrencies on the exchange platform, as well as coins that have been the subject of significant controversy.
Looking at Bitcoin SV (BSV) as an example, the cryptocurrency was delisted by Binance, Coinbase, and Kraken in April 2019, resulting in around 25% of its value being cleaved in a single day and BSV falling to almost its lowest value since its inception.
Who should buy cryptocurrency?
If you have asked yourself, “should I buy cryptocurrency” or buy food for the week, then you are probably not in a position to invest in high risk assets. However, if you have you excess capital, then cryptocurrencies can be a potentially lucrative investment option.
After determining how much money you are looking to risk, the next questions you will need to ask yourself is “why should I buy cryptocurrency” as opposed to other investment options, and “should I invest in cryptocurrency of a specific type, or spread my risk over a range of assets?”
Some considerations to help you answer these questions are outlined below.
Investors looking for a hedge
We know what you are thinking, “why should I buy cryptocurrency over gold or stocks?” Well, there is no reason why you shouldn’t buy both.
As with any and all investment plans, diversity should play a critical role in your decision-making process, and you should always include a good mix of low, medium and high-risk investment options.
Technically, although Bitcoin and most other cryptocurrencies do fall into the high-risk investment category, many have outperformed traditional assets by a huge margin over the last several years and may continue to do so in the future.
However, what makes cryptocurrency investments stand out most is their tendency to defy the trends seen in traditional markets.
For example, while precious metals like gold and platinum remained stagnant, Bitcoin was experiencing incredible growth. Similarly, while the price of crude oil was crashing between 2015 and 2016, Bitcoin doubled its value over the same time period.
Cryptocurrencies also provide an effective hedge against modern monetary theory (MMT), which argues that governments use taxation to limit inflation, that they can essentially make money out of thin air, and that governments force citizens to use this currency.
Should the current economic model ever collapse, decentralized cryptocurrencies like Bitcoin could remain viable stores of value, hence placing holders in a strong position should things really go pear-shaped.
Investors wanting to park wealth outside of a Government’s reach
Since most cryptocurrencies are designed to be both decentralized and censorship-resistant, they naturally provide a good way to safely store funds beyond the reach of governments and regulators.
Although this might seem excessive, there are some compelling reasons to consider parking at least some of your wealth in cryptocurrencies.
Arguably one of the most prominent is known as a bank “bail-in”, a process which sees a bank legally take money from its unsecured creditors (i.e. possibly you and its other account holders) and use this money to save itself from bankruptcy.
In return for forcibly taking a loss and rescuing the bank, creditors are provided shares in the failing bank.
Thankfully bail-ins are rare, they are not unheard of. The most recent occurred in Cyprus in 2013, and saw unsecured account holders lose as much as 9.9% of their money as their funds were confiscated.
Unlike funds in a bank account, company shares, or precious metals, cryptocurrency cannot be easily seized, making them an effective way to safely store value.
Since they can also be transferred across borders cheaply, holding cryptocurrencies is also a viable alternative to opening an off-shore account.
If you are genuinely worried about the state of the economy and have asked yourself “should I buy cryptocurrency?” then the answer is an easy yes.
Speculators looking for an asymmetric risk opportunity
Investors define “asymmetric risk opportunities” as an investment where the potential gain is magnitudes larger than the potential loss.
For example, if an opportunity requires an investment of $1,000 with a risk of complete loss of capital, but also the opportunity that the investment value goes to $1,000,000, that would be an asymmetric risk opportunity.
Historically, the cryptocurrency market has proven to present many similar opportunities.
Hence, although it is quite possible to suffer almost complete losses when investing in cryptocurrencies, investors also have the potential to massively multiply their investment to a degree that is almost unheard of in other markets.
Looking at Ethereum (ETH) for example, had you invested during the 2014 ICO and held onto you investment until today, you would have earned an over 9,000% ROI, which is the equivalent of turning $10,000 into $900,000+.
At the time of investment, the maximum you could possibly lose is 100% of your investment, while standing to potentially gain 9,000%.
A huge number of cryptocurrencies have witnessed phenomenal returns for investors, including NXT (>1,000,000% ROI), IOTA (424,000% ROI) and NEO (378,000% ROI).
Because of this, it is not necessary to identify the best cryptocurrency to invest in, since simply spreading your investment over a basket of promising cryptocurrencies will often lead to significant gains that offset any losing choices.
Although there are fewer moonshot cryptocurrencies than there once were, substantial gains are still possible.
For example, Egretia has multiplied in value by over 250x since the start of 2019, while most major cryptocurrencies have more than tripled in value during this same time-frame.
How much cryptocurrency should you buy?
When asking yourself “how much should I invest in cryptocurrency?” there are two main things to consider: the first is your current financial circumstances while the second is your age.
Typically, younger people can risk gaining higher exposure to cryptocurrencies since they have time to gain any potential losses back, without damaging their long-term prospects.
However, those with serious responsibilities such as debts or a family to look after should typically take a more risk-averse approach to cryptocurrency investments, only investing a small fraction of any disposable income.
As with any investment, risk management is critical and care must be taken to ensure that you never risk more than you are willing to lose.
Since cryptocurrencies are particularly volatile and are considered a high-risk investment, it is usually not recommended to form the bulk of your investment portfolio with them.
The answer to the question of “how much should I invest in cryptocurrency?” really depends on your personal life circumstances and risk tolerance.
With that said, a good rule to follow is the 80/20 rule, which sees you place 80% of your disposable income in safer investment options like government bonds and 20% in high risk, high reward opportunities like cryptocurrencies.
How to invest in cryptocurrency? (3 Simple Steps)
If you are wondering how to buy cryptocurrency, then this simple tutorial is for you.
1. Create an account on Coinbase
Coinbase is by far the simplest way to buy cryptocurrency. It offers a simple, safe and easy to use platform that makes it easy for anyone to buy their first coins.
The first step to buy cryptocurrency is to create an account on Coinbase. This first step will just take a few minutes and the first step only requires you to submit your name, email, and a secure password.
After clicking “Create Account”, you will receive an automated verification email that you will need to click to activate your account.
After you clicked the verification link in the confirmation email to confirm your email address, the next step is to sign into Coinbase and pass basic identity verification.
This is a common practice among cryptocurrency exchanges and Coinbase must verify the identity of its clients to stay fully client.
To complete the identity verification process, all you have to do is to submit a picture of your ID or Passport, a selfie of yourself and your address of residence.
After you submit the required information, it may take up to 12 hours until Coinbase has reviewed it and your account is fully activated. You will receive an email as soon as that’s the case.
2. Deposit funds on Coinbase (USD, EUR or GBP)
After your identity was succesfully verified, the next step is to deposit the funds that you will use to invest in cryptocurrency. At the time of writing, Coinbase supports deposits in USD, EUR and GBP.
This, again, is also a very straightforward step and only requires you to input your bank name, your own name, and the amount that you want to deposit.
Once you filled out those fields, click “Continue”. You will now see the bank account details of Coinbase, which is where you need to send your funds to via wire transfer.
After you sent the transaction, it usually takes 2-3 days until they arrive at Coinbase and you can use them to invest in cryptocurrency.
3. Buy cryptocurrency instantly
As soon as your funds arrive, you can proceed with the final step (which is also the easiest of all).
All you have to do is click on the “Buy/Sell” tab. After you clicked the tab, you will see the following page:
On this page, all you have to do is select the cryptocurrency that you want to buy (in the image above we selected Bitcoin) and then type in the amount you want to purchase.
Then click “BUY” and that’s it!
You are now a proud cryptocurrency holder and among the first people in the world to own some.