Over the past several years, you’ve probably heard a lot about cryptocurrency. At times crypto’s presence is nearly inescapable, from buzzing social media posts to celebrity endorsements. But what exactly is cryptocurrency, and is it a good investment for beginners?
Cryptocurrency is a digital currency secured by cryptography, or advanced coding. This coding makes for ulta-secure, decentralized transactions that aren’t tied to any particular government or financial institution. All transactions are recorded on blockchain, a series of interconnected data blocks forming a chain of transaction history. Blockchain is highly secure, transparent, and impossible to alter.
The first cryptocurrency, Bitcoin (BTC), was invented in 2009. Although Bitcoin remains the most popular cryptocurrency, thousands of others have emerged, including Ethereum (ETH), Tether (USDT), USD Coin (USDC), BNB (BNB), and more.
The value of cryptocurrency has risen and fallen many times — sometimes quite dramatically. From the start of 2020 to its peak value in November 2021, the price of Bitcoin (measured per unit) skyrocketed from $6,966 to $64,995. Just one year later, in November 2022, Bitcoin was down to $17,601. With such a volatile market value, it’s important to consider the benefits and risks of cryptocurrency before investing.
The Benefits of Cryptocurrency Investment
Potential for High Returns
Crypto has shown the ability to generate a huge return on investment. If you catch the market at the right time, you can make a great profit. This is one of the biggest and most celebrated advantages of cryptocurrency.
Say you purchased two Bitcoins in January 2020 for a total of around $14,000. If you held onto them until November 2021, you could have sold them for around $130,000. That’s $116,000 of profit in less than two years — a huge return for an initial investment of $14,000.
Of course, there’s a chance these fluctuations in market value will work against you, as well. But relatively few investments offer the possibility of such a fast, lucrative return.
Diversifying Your Portfolio
If you have investments, you’ve probably been told the importance of diversifying your portfolio. Diversification, or the act of investing in a variety of different assets, reduces the risk of large losses. By holding interests across several diverse industries, any poorly performing assets may be balanced out by high-performing ones.
Investing in crypto could help diversify your portfolio, adding a digital asset to the mix, which is likely much different from your other investments.
Accessibility
Investing in crypto is convenient and relatively easy — all you need is a computer or smartphone with internet access. Cryptocurrency markets can be accessed anywhere, anytime. They’re open 24 hours a day, even during holidays and weekends. This means you can always buy and sell crypto at the drop of a hat, unlike traditional stock markets, which only operate during business hours.
The Risks of Cryptocurrency Investment
High Volatility
When it comes to investing, volatility is a double-edged sword. As easy as it might seem to make a lot of money, it’s just as easy to lose a lot of money. This is one of the most alarming cryptocurrency risks.
Suppose you noticed the market value of cryptocurrency skyrocketing, eventually buying two Bitcoins in September 2021. With the average price of Bitcoin at around $46,000 in September 2021, that’s an investment of $92,000.
By the end of October, the value of your investment has increased to nearly $123,000 — a profit of $31,000 in one month! By the end of November, your profits have ballooned to $38,000. At this point, you’re probably feeling pretty good about your investment.
In December, however, your profits suddenly evaporate as Bitcoin prices plummet. The value of your investment has gone from $92,000 to $130,000 back to $92,000 in just three-to-four months. If you chose to hold onto your Bitcoin for one full year — until October 2022 — your $92,000 investment would be worth around $40,000. That’s a loss of $52,000.
These kinds of scenarios aren’t just hypothetical, they happen to real investors around the world. While successful high-volatility investments are often celebrated on the internet or TV, they present a real danger. That’s why it’s important to fully understand what you’re getting into before investing.
Security Concerns
Cryptocurrencies come with both a public and private “key,” or code. The public key works to identify the blockchain, while the private key acts as a validation code — proving your ownership to authorize transactions. If your private key isn’t completely secure, your investment may get lost or stolen. So, how do you store cryptocurrencies safely?
To store your private keys, there are three types of “wallets'' you can use: software wallets, hardware wallets, and paper wallets. While some of these storage methods may be more secure than others, none are completely foolproof.
Software wallets are specially designed applications downloaded directly onto your desktop or smartphone. This makes software wallets especially convenient, but also susceptible to hacking and malware attacks.
Hardware wallets are physical devices that plug into your computer — similar to a USB drive, but with far more security features. Since hardware wallets are stored offline, they carry less risk of being exploited.
To protect against loss, damage or theft, hardware wallets are backed up by a “recovery seed,” or a series of specific words used to recover your private key. But, if you can’t come up with your recovery seed — or act before your cryptocurrency is sold or spent by a thief — you will lose your investment.
Paper wallets feature QR codes printed out on paper — one for the public key and one for the private key. They’re completely secure from cyber attacks, but run the risk of being damaged or lost. If stored incorrectly, the paper could degrade due to water, heat or even light exposure. With no backup options, these issues could cause you to lose access to your cryptocurrency.
Lack of Regulation
Unlike most banks and credit unions, which are regulated by the FDIC and NCUA, respectively, cryptocurrencies are not federally insured. If you’re invested in a cryptocurrency that goes bankrupt, you’re likely to lose all of those assets — whether you have thousands of dollars invested or a million.
The most famous instance of this happened in November 2022, when the cryptocurrency exchange firm FTX filed for bankruptcy. In the process, FTX lost roughly $8 billion of investors’ money, including large investments from Tom Brady, Kevin O'Leary, and other celebrities.
Cryptocurrency regulations are still being developed worldwide, and it’s a slow process. The U.S. government has begun to regulate crypto based on how and where it's used, but transactions between private users is still largely unregulated.
Different Ways to Invest in Cryptocurrency
Buying and Holding
The buy-and-hold strategy is a long-term investment centered around keeping a stable portfolio. This approach involves ignoring short-term price fluctuations, instead focusing on a much larger picture. The hope is that, over time, these investments will grow steadily, giving you a healthy long-term return.
Trading
Trading involves trying to forecast what the market will do next — in this case, predicting how the value of cryptocurrency will shift in coming months. By buying when prices drop and selling when prices spike, it’s possible to make healthy profits on short-term investments.
Staking and Yield Farming
Staking involves validating third-party cryptocurrency transactions and reviewing blockchain in an effort to maintain the network’s integrity. To start staking, you’ll have to put up your own crypto funds as collateral, but you’ll be entitled to certain fees for providing the service.
It’s important to note that not all cryptocurrencies support staking.
Yield farming involves depositing your cryptocurrency into a decentralized application, lending out your money in promise of returns or rewards. Think of it as earning interest on digital assets, measured in annual percentage yield (APY). Yield farming can generate very high APYs, but can also come with considerable risks.
The Future of Cryptocurrency Investment
Should You Invest Now?
When considering investing in cryptocurrency — or anything else — it’s important to consider what your investment goals are. Are you looking for short-term profitability, or a long-term investment to strengthen your portfolio?
There’s no right or wrong answer, only what makes sense for you and your situation. For short-term trading, the volatility of cryptocurrency makes it particularly hit-or-miss. For long-term investment, there’s also a great deal of uncertainty surrounding crypto’s future — a lot of it depends on how the world continues to adapt to decentralized, digital currencies.
So, what’s the potential for long-term growth in the cryptocurrency market? The experts are torn. Critics of crypto view it as not only inherently worthless, but also an avenue for money laundering and other criminal activity. Proponents of crypto think it could transform the financial environment, especially as institutions begin to adopt it.
Cryptocurrency has provided high returns in the past. Will its market value skyrocket once again? The best advice may be to keep researching and adapting to new information. But if you feel strongly about the successful future of cryptocurrency, then proceed with caution.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
