Cryptocurrencies may seem mysterious, but they do have a pretty simple definition:
An encrypted data string that denotes a unit of currency. It is monitored and organized by a peer-to-peer network called a blockchain which also serves as a secure ledger of transactions.
Cryptocurrencies have only existed since 2009 when Bitcoin was founded. Since that time, many other cryptocurrencies have popped up. While considered to be silly at best and a scam at worst by many, cryptocurrencies are gaining mainstream acceptance.
Some 16% of Americans have invested in cryptocurrencies, not close to stock ownership numbers (which is 56%) but pretty impressive for an alternative asset that didn’t exist just two decades ago. While they have been some of crypto’s most prominent detractors, even institutional investors are onboard with $17 billion of institutional money flooding into crypto products and services in 2021.
Cryptocurrency can be an alternative asset to review when building your portfolio. Here are some items to consider when evaluating whether cryptocurrency might be an opportunity for you to consider.
Potential Pros of Cryptocurrencies
Cryptocurrency investing can be highly lucrative. Bitcoin, the best-known crypto, had a year-to-date gain of 60% in 2021. Binance Coin, a relative newcomer, rose 1,275% year to date in 2021, trading for just $35.17 at one point and reaching $514 at another.¹
Mineable cryptocurrencies with a capped supply may be able to help against inflation. Inflation can occur when central banks and governments print more money, increasing the supply. Scarce things tend to appreciate in value.
Additionally, crypto markets operate 24/7, meaning you don’t have to miss out on making a time-sensitive move because the market is closed overnight for a weekend or holiday.
Potential Cons of Cryptocurrencies
Crypto is highly volatile. Bitcoin hit a record high of $69,000 in November 2021 and about two months later was trading just above $35,000. The world of crypto is so new that governments aren’t sure how to regulate it. Regulation is coming, but we don’t know what it will look like, adding to the uncertain nature of crypto.
Crypto transactions are not reversible. If you send funds to the wrong wallet, the only way to get it back is if the owner of that wallet agrees to return it.
Platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, like the platforms themselves, digital wallets can be hacked. As a result, consumers can—and have—lost money.
The world of cryptocurrency is not easy to understand and it has its own vocabulary, for instance, mining, hashing, blockchain, etc. The learning curve is a bit steep for those new to the world. Do you have to understand it to invest? Certainly not, but you should have at least a basic understanding of any investment you make.
How to Invest in Cryptocurrencies
You can invest in crypto through a cryptocurrency exchange like Coinbase. Brokers like Robinhood and SoFi also support crypto investing, but not all exchanges or brokers offer all forms, so be sure the outlet you choose supports the coin you want to buy. There are Bitcoin and crypto ETFs too.
If you aren’t quite ready to jump feet-first into crypto by buying coins, there is the option to invest in companies that invest in technologies and companies that develop products and services that use blockchain technology. They aren’t crypto, but crypto-adjacent. Blockchains can have many real-world applications, including:
- Supply chain monitoring
- Digital identification
- Voting
- Transfer of real estate, land, and auto titles
- Data backup
Blockchains can provide an additional way to invest in this new field. Before making any investment decision, it’s important to do your research and consult with professionals on whether an investment has a place in your portfolio.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency. Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. ¹Past performance is not indicative of or a guarantee of future results. Purchasing cryptocurrencies could result in the loss of original investment.
