Cryptocurrency has gained immense popularity amongst new-age ambitious investors for a wide array of reasons, including decentralized technology and the potential for high returns. As a result, Bitcoin, Ethereum, Litecoin, and hundreds of other digital currencies have taken the investing world by storm.
However, the market is not without flaws. High risks and huge losses often follow the high-reward factor of the crypto market.
So, in this article, we will be assessing the risks and rewards of investing in cryptocurrency, and finally, answering the big question: Is the high-risk and high-reward crypto market worth your investment.
What are the Risks of Investing in Cryptocurrency?
Here are three major drawbacks of the high-risk, high-reward crypto market that investors must be warry about:
Cryptocurrency is as high-tempered as a two-year-old. With extreme highs and lows, the crypto market is a lot more volatile than stocks, bonds, or any office investors are typically used to investing in.
Therefore, you must bear in mind that where your crypto investment can hike up to 25% in minutes or hours, it can also crash, which is extremely common in the highly-volatile cryptocurrency market.
Even though cryptocurrencies are much different than the typical assets investors are used to investing in, like stocks, you still need to pay your taxes on them.
The IRS is now going after some investors who have secured huge profits investing in cryptos but haven’t paid their taxes. In fact, in 2021, only 800 people reported their gain in Bitcoins last year to the IRS.
Some billionaire investors have put about 5%-10% of their network into cryptocurrency because they believe it to be the next big thing. Potentially even more significant than the internet boom.
Risks Associated with Private Key
The cryptography of cryptocurrency relies on the use of pairs of keys to authenticate transactions. The first is a public key available to the public, while the second is a private key that is kept confidential and used for identification and verification. A private key is generated automatically when you create a crypto wallet, giving the user authority over the assets in that wallet.
When a private wallet key is compromised, all the cryptocurrencies in that wallet is gone. In actuality, private key loss or destruction accounts for about twenty percent of all Bitcoin losses.
As a result, it’s vital that you regularly back up your private keys, preferably on a secure and isolated computer. Also, if your private key isn’t encrypted, never post it on the internet.
Understanding the High-Rewards
Despite numerous risks surrounding the crypto market, its boom as an industry is stronger than ever.
Investors can obtain institutional-grade custody services as much-needed financial infrastructure is being constructed. In addition, professional and amateur investors are progressively gaining access to the tools to manage and protect their cryptocurrency holdings.
So, here are the three primary reasons behind the boom of the crypto market:
It’s no mystery that Bitcoin has outperformed all other assets over the previous 12 years. For example, Bitcoin had almost no value when it started in 2009. However, it would climb to a fraction of a cent, then tens of thousands of dollars over the next few years.
Moreover, specific cryptocurrencies have surpassed Bitcoin by a considerable margin at times, albeit many of them have since seen their prices plummet. These are maybe the most well-known bitcoin advantages. (On the other hand, the losses may be one of the most well-known disadvantages.)
Mineable cryptocurrencies with a finite supply cap, such as Bitcoin, Monero, and Litecoin, to name a few, are deemed to be extremely good inflation hedges. Due to monetary inflation, which happens when the government and central bank print more money, the value of scarcer things rises.
Furthermore, since more fresh dollars are chasing relatively fewer coins, the value of these fixed-supply digital currencies is more likely to grow in dollar terms. Furthermore, the Bitcoin network, for example, is designed to make such currencies scarce regardless of the outcome of monetary policy.
Decentralized cryptocurrencies are secure means of payment since they are built on blockchain and cryptography security. One of the most definite advantages of cryptocurrencies might be this.
The hash rate is an important aspect of crypto security—the higher the hash rate, the more computer power is necessary to penetrate the network. Bitcoin is by far the most secure coin, with the highest hash rate of any network.
On the other hand, using a crypto exchange is only as safe as the exchange itself. As a result, most crypto hacking cases involve exchanges or individuals making errors.
Is Crypto a Safe Long-Term Investment?
Many cryptocurrencies, including Ethereum and Bitcoins, were introduced with ambitious goals that may be accomplished over an extended period of time. While the success of any crypto venture cannot be guaranteed, early investors in a cryptocurrency project that achieves its objectives might be rewarded handsomely in the long run.
Therefore, to be regarded as long-term success, every cryptocurrency initiative must first achieve widespread adoption, like Bitcoin in recent years.
Should You Invest in Crypto?
Owning bitcoin can help diversify your portfolio because cryptocurrencies like Bitcoin have traditionally had low price correlations with the stock market in the United States. Therefore, if you believe that cryptocurrency use will increase in popularity in the future, investing in some crypto would make sense as part of a balanced portfolio.
However, make sure you have an investment thesis for each cryptocurrency you buy. This will help you understand why the currency will last. You should be able to manage investment risk as part of your whole portfolio if you do your study and acquire knowledge about how to invest in cryptocurrencies.
If purchasing cryptocurrency appears to be too perilous, there are alternative methods to profit from the boom of cryptocurrencies. For example, you may buy equities in firms like Coinbase, Block, and PayPal or investment in an exchange like CME Group (NASDAQ: CME), which allows you to trade crypto futures.
While investing in these firms can be beneficial, it does not have the same promising prospects as investing directly in cryptocurrencies.
Cryptocurrency Investment: Checklist for Aspiring Investors
- Conduct proper research before investing in any cryptocurrency in the same way you would do for any other investment.
- Invest only in coins that have the greatest potential to change the world.
- Attempt not to be swayed by criminals who declare that one currency or another is “going to the moon.”
Despite what the market trends indicate, crypto is not a get-rich-quick-scheme. Furthermore, Nothing pulls an investor back to reality faster than losing a month’s income in a single day.
Therefore SayWHA Radio Network advises you to consult a financial advisor before investing your hard-earned money into the fragile crypto market.