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What Are Advantages & Disadvantages of Investing in Cryptocurrencies?

This week, we’ll cover the advantages and drawbacks of investing in cryptoassets. Why would anyone choose cryptocurrency when their local currency works just fine? Why would someone invest in a cryptocurrency?

To recap, Bitcoin was the first cryptocurrency and created by a pseudonymous computer programmer working under the alias Satoshi Nakamoto. There are now over 20,000 cryptocurrencies in circulation.

Investing in cryptocurrency has several advantages:

  • Since the value of cryptocurrency doesn't appear to be correlated with the price of stocks, bonds, or other asset classes, investing in cryptocurrencies is a way to diversify your portfolio. This is also a drawback since the prices for cryptocurrency can swing wildly on a day-to-day basis.
  • Cryptocurrency has produced extremely strong returns as adoption increases. Most people agree the expected return for a sound cryptocurrency investment is greater than that for stocks. Playing the devil’s advocate, owning a cryptocurrency represents ownership in a digital asset with zero intrinsic value. Investing in a quality stock grants you ownership in a company that has the potential to create profits for its shareholders.
  • Cryptocurrency transactions can be completed in a matter of minutes. Most transactions at U.S. financial institutions settle in three to five days. A wire transfer usually takes at least 24 hours with an average cost $25 or $30 for domestic wire transfers.
  • The Consumer Price Index (CPI), a key measure of inflation, has risen at a rate it hasn't in decades. Many see Bitcoin and other cryptocurrencies as offering protection against inflation like gold. Bitcoin has a hard cap of 21 million that will ever be minted. So, as the growth of the money supply outpaces the growth in the Bitcoin supply, the price of Bitcoin should increase. This hasn't been the case at all, its price has fallen 55% since hitting a peak November 2021.

But there are disadvantages and risks as well:

  • There's limited regulation in the cryptocurrency industry. Cryptocurrency exchanges are not backed the Federal Deposit Insurance Corp (FDIC), which means you don't have the same protections as you do when investing in the stock market. If your account gets hacked, you could find your investment lost without recourse. If the coin you invest in turns out to be a scam, there's little you can do. Additionally, increased regulation may decrease the demand for some cryptocurrencies.
  • Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen.


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