Cryptocurrency investing is a hot new trend. In addition to Bitcoin, there are numerous ways to buy a variety of other cryptocurrencies that have been making headlines recently.
However, before you get too deep into the crypto world, it’s critical that you step back and assess your current financial situation. A good idea doesn’t necessarily have to be exciting.
Consider the following before making a Bicoin investment.
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Advantages of investing in Bitcoin
Bitcoin is completely free of fraud and scams
The cryptocurrency investment is completely safe from scams and frauds. In contrast to other payment methods, such as online banking, credit cards, or gift cards, cryptocurrency payments can never go down in value. Payment is always received within a few seconds by the recipient. Because cryptocurrencies are safe and digital, they cannot be manipulated.
Complete privacy
When making a purchase from a merchant shop, you’d rather use your credit card to complete the transaction. To complete the transaction, the merchant will require your pin code. What do you consider to be a secure method? Of course, a pin code is a highly private and confidential piece of information that you are under no obligation to divulge. Cryptocurrency isn’t the issue here. You don’t have to give anyone your private key. Payment information, including your credit card number, is protected by 256-bit AES encryption, which means no one will be able to see what you paid for. The best method for making payments while remaining anonymous.
Transferring ownership in a safe and timely manner
Cryptocurrency is a very valuable asset if it’s in your digital wallet. It’s easy to give it to anyone, even if they don’t have your permission. You need the other person’s private key to complete the transfer. There is no fee, no hassle, and no paperwork involved in transferring ownership. If you compare it to other situations, such as a bank account closing or a property transfer, you’ll need to deal with a lot of paperwork and pay a commission fee.
There are more opportunities
These new cryptocurrencies, which are only a few years old, are beginning to gain traction in the financial community. Some businesses use Bitcoin to expand their operations in the international markets.
Liquidity
Cryptocurrency exchanges, online brokerages, and trading platforms have sprung up in response to the rise in bitcoin popularity. One of the best things about trading Bitcoin is that there are no transaction fees.
Like gold, it’s an excellent investment because of its high liquidity. Because of its high demand in the market, short-term and long-term investments are made in bitcoin.
Intensely pared-down trading
Trading stocks necessitates either a licence or a certificate, and a broker is generally used to buy and sell shares of a specific company. With bitcoin, this is not the case because it only requires minimal trading.
To buy or sell bitcoin and other cryptocurrencies, traders or investors can use crypto exchanges and bitcoin wallets. Instantaneous transactions can be carried out at any time and from any location using bitcoin wallets.
Low threat of inflation
Bitcoin is a decentralised currency, unlike fiat currencies, which are regulated and controlled by governments. Inflation has no effect on Bitcoin because it is impervious to it. Because the supply of bitcoins is finite, they are mined rather than printed.
In order for the bitcoin network to function, it must rely on the blockchain technology. Bitcoin’s value is not controlled by the government or financial institutions, but rather by a variety of other factors. Inflation is less of a concern with cryptocurrencies than with fiat money.
Possibilities for expansion into new markets
In a portfolio context, cryptocurrencies have been cited as an alternative to gold for hedging purposes. As an example, the S&P 500 has fallen in 17 of the 60 months leading up to December 2020, while the price of bitcoin has risen in seven of those months. Compound annual returns of 26.8% would have been generated in the five years leading up to the end of 2020 if 10% of your portfolio was invested in bitcoin and 90% in the S&P 500.
It’s a tight market
Only 21 million coins can be mined or “created” at a time. Around 18.5 million bitcoins have been mined so far, leaving less than three million more to be mined. It’s also important to note that the production of bitcoins is halved as time goes on. Bitcoin’s value has decreased from 50 bitcoins per block in 2009 to 6.25 bitcoins per block today.
Acceptance and use are increasing
Coinbase had seen a rise of 600% in 2019 from the $135 billion in cryptocurrency merchant transactions in 2018. Payment processors processed bitcoin transactions worth $4 billion in 2019. As a side note, the number of bitcoin electronic wallets has increased significantly in the last few years and institutional investors, such as Blackrock and Bridgewater, are increasingly interested in investing in cryptocurrencies.
Disadvantages of investing in Bitcoin
It has a long history of volatility
In the past, the price of a cryptocurrency has fluctuated greatly, rising and falling quickly. Taking a look at any cryptocurrency’s price chart is all you need to do. Even for well-known currencies like Bitcoin, wide fluctuations from day to day are common.
Cryptocurrencies such as Bitcoin and Ethereum are no exception to this rule. In May of 2021, the price of Ethereum surpassed the $4,000 mark. The price had fallen below $1,800 by July 2021. It’s now down to $4,000, down from a peak of $4,858.52 in November 2021. That was on December 10th, 2021. There may be even more dramatic swings in smaller currencies, such as Dogecoin.
It can be difficult to value cryptocurrencies
You can examine a company’s management, balance sheet, and revenue in order to determine its value. A long-term historical value chart of various stocks and stock indices can help you form an opinion on whether the company’s products and services will be successful.
Commodities and real estate can also be valued more easily. Some of these assets are tangible and can be held in your hands.
In contrast, it is more difficult to value cryptocurrencies. Unlike other asset classes, you can’t physically touch cryptocurrencies. Making an accurate comparison with other asset classes can be difficult when trying to arrive at a reasonable estimate.
Negative impact on the environment
Many people have turned to computer mining because of the burgeoning interest in cryptocurrencies. While bitcoin is good for the environment because it uses a lot of electricity, many of the power plants that supply that electricity are powered by fossil fuels.
Be aware that some cryptos are less efficient than others if you’re interested in making environmentally friendly investments. Make a conscious effort to support only currencies that do not heavily rely on fossil fuels when making your purchases. Renewable energy investments may be a better option if you’re concerned about this issue.
Taxes can be a real pain in the neck
When it comes to filing your taxes, it’s likely that you’re already dealing with a lot of paperwork.
Your tax burden is partially determined by the method by which you received your cryptocurrency. Coins purchased with fiat currency and held as an investment may be subject to long-term or short-term capital gains taxes, depending on how long you’ve held them.
It’s important to note that if you receive cryptocurrency as payment for services — like when I was paid 1 Bitcoin in 2011 to write an article — then it’s considered income and may be subject to taxation as ordinary income, depending on the coin’s value on the day it was received. This could lead to problems in the future. Make sure to consult a tax professional if you invest in crypto.
Bubble that is about to burst
Cryptocurrency prices have risen rapidly in recent months, raising the possibility that the market is in a bubble. Cryptocurrency prices have seen ups and downs over the years, but the recent surge for many cryptos may indicate this is the case.
Some investors may want to take profits when the price is this high. A high price is paid when this happens. However, as a result of the increased volume of sales, the price has begun to fall. Unless the price of cryptos drops significantly enough, there will be no buyers, and the crash could leave investors who got in later with large losses.
The blockchain may be able to work with fiat currencies
There is nothing stopping fiat currencies from working on the blockchain too, despite the claims of blockchain enthusiasts that it is a public ledger and a safe way to send payments. When a government or central bank issues a currency, it is referred to as a “fiat” currency.
The idea of a digital dollar has been floated by some officials at the Federal Reserve Bank of the United States. Making it possible to conduct transactions using a dollar token means putting the US currency on the blockchain. China is currently working on digitising its currency, and other countries may follow suit.
When it comes to paying for goods, cryptocurrencies aren’t anything special. There is a possibility that fiat currencies will follow suit.
Bitcoin is still a niche concept
Despite the hype surrounding cryptocurrencies, they aren’t yet widely accepted. It’s still necessary to find a buyer or seller willing to accept a cryptocurrency in order to complete an exchange or transaction. According to many reports, a small number of people control the vast majority of Bitcoin wealth.
It’s difficult to predict whether cryptocurrencies will become a viable mainstream asset class in the future because they haven’t been widely adopted for payment and aren’t yet seen as mainstream investments.
Risks of fraud and theft exist
Even though some cryptocurrencies are legitimate, there is a risk of fraud and theft. In addition, a number of investment schemes have sprung up in response to the growing popularity of cryptos. It’s bad enough that the SEC regularly issues investor alerts about cryptocurrency fraud. The Bitconnect craze, which ended with over $2 billion in fraud at the start of 2018, is a well-known example of a crypto Ponzi scheme.
It doesn’t matter how they get into your crypto wallet; you have no recourse if someone manages to get into your online or offline wallet.
No regulation
The crypto market has had little regulation to date. In many ways, it’s reminiscent of the Wild West. It is possible for anyone to create a coin offering without going through the vetting process that a publicly traded company would go through, because there are numerous cryptocurrencies and crypto exchanges.
Although the regulatory environment may change in the future, SIPC insurance does not cover cryptos at this time. Because of this, you may be unable to recover your funds if the company responsible for the management of your crypto holdings goes out of business.
Investing too much of your assets in crypto is a bad idea
Before making a new crypto investment, take a step back and assess how much of your overall portfolio is already comprised of cryptocurrencies. Overexposure to cryptocurrency puts you at risk of suffering significant losses if the bubble pops or price volatility rises.
Banking system does not support it
Cryptocurrencies are still not widely accepted by the banking sector. As a result, you’ll need to conduct cryptocurrency transactions outside of the regulated channels. Despite the fact that some exchanges are offering credit cards with cryptocurrency rewards or debit cards with which you can access your coins, the banking system as a whole is still not ready for this.
The underlying blockchain technology is being used by some banks to make payments, but these payments are not always made with well-known cryptocurrencies. As a result, they are using the underlying technology to improve their own banking systems instead.
There are a lot of fake currencies on the market
While Bitcoin and Ethereum have become household names, there are still a plethora of other fabricated currencies. As of December 2021, there are more than 8,000 cryptocurrencies listed on CoinMarketCap, a cryptocurrency price tracking website.
This makes it difficult to predict which currency will become the most popular. To some, the idea of a cryptocurrency like Dogecoin is amusing; however, the price of Dogecoin skyrocketed before plummeting again. Determining which cryptos will take off and last is difficult and you may lose money before it’s over, so be careful!