Written by Vic Patel
Many early adopters who invested in cryptocurrencies have become wildly successful and turned their modest stakes into huge fortunes. They were able to see the vision early and more importantly act upon their beliefs by investing their hard earned money.
Since then, cryptocurrencies have started to become more widely accepted as an investment medium. We will take a look at some pros and cons of investing in cryptocurrencies for those that are interested in getting their feet wet.
Huge Upside Potential
One of the major advantages of investing in crypto is the enormous upside potential that it offers. Bitcoin, for example, had peaked to almost 20,000 before the recent decline. That is an astonishing level given the fact that Bitcoin started trading in 2013, and really only started to pick up steam in 2016. To understand the magnitude of the up move in Bitcoin let’s take a practical example that will help demonstrate the point. If you had invested $5000 USD in Bitcoin in 2013, that would have risen to in value to $ 2,500,000 in 2018.
Some analysts believe that the recent decline is short lived and the current correction will be followed by another move up which will take out the previous high and could reach as high as 100k over the next 4-5 years. And Bitcoin is just one example; there are a number of other cryptocurrencies such as Ethereum, Dash, Ripple and others that have launched and witnessed incredible gains. So, the potential to make enormous gains in Crypto is still available. You have to find the opportunities out there, and a little bit of luck wouldn’t hurt either.
Bitcoin runs on blockchain technology which posts all transactions made with Bitcoin. As such, it is totally transparent. The ledger can be verified at any time and the transactions are open to public scrutiny. Many investors view this level of transparency as a positive step in the right direction. However, not all cryptos run on this type of public ledger system. As an investor, you will have to decide how important this feature is for you, and how comfortable you are with the particular coin you are interested in.
Additionally, many new ICOs put out a detailed prospectus about the currency, its management team, issue amount, and other relevant details. This makes it easier for the would-be investor to compare and constant various offering to find one or several that align with their own preferences and vision. Though many ICOs are reputable in nature, there are certainly some bad apples so you need to be careful. It is up to each investor to perform their own due diligence before committing their hard earned money.
Liquidity is King
When evaluating any type of investment, one of the first things that you should look for is Liquidity. Liquidity measures the ease with which you can buy or sell an instrument or asset with minimal slippage. For example, in you invested in a stock such as Walmart, and wanted to sell it the next week, day or even the next minute, you would be able to do so with minimal loss, due to the highly liquid nature of the Equities market, in particular, a blue-chip stock like Walmart. So essentially the stock is very liquid.
Most of the major cryptocurrencies have a marketplace as well which facilitates trade. Some of these exchanges include Bitstamp, Binfinex, Kraken, Coinbase and others. There is also a Bitcoin futures market. So, if you are investing or trading in the more established cryptocurrencies, you will enjoy a liquid market for those instruments. And as a result, you will be able to quickly buy and sell as your heart desires with minimal cost or slippage. Remember, liquidity is king, and it is no different whether you are trading stocks, bonds, stamps, cryptos or anything else for that matter.
When investing in new ICOs (Initial Coin Offerings), investors need to make sure to check out the people behind the offering, as all ICOs are not created equal. Some of these startups are backed by a highly competent team with a clear vision and goal. Others are nothing more than fly by night companies that may be running a shady operation to say the least.
Even very highly touted firms can make missteps which can lead to a decline or even collapse in the value of the altcoin. Though you can never be fully confident of your results when investing in ICOs, the stronger the team, the better the chance you will have at actually making a return on your investment.
Volatility and Uncertainty
Cryptocurrencies have risen and fallen quite violently over the last few years. This volatility is a double-edged sword. Investors love the upside volatility, but when prices begin to fall like a knife, then the heightened volatility becomes a drawback.
Cryptos tend to be 10x or more volatile and erratic than other instruments such as gold, stocks, and other commodities. One of the main reasons for this is the uncertainty that surrounds most cryptos. Are cryptocurrencies just a bubble waiting to burst, like the crazed tulip bulb mania that occurred in the 1600s? Will it be around in 6 months, a year, 5 years? No one really knows for sure, and this type of heightened uncertainty causes huge shifts up and down in the price value of these instruments. Investors most fear that which they do not know.
Security breaches should be a concern that is at the top of the list for any potential crypto investor. We are in a completely new era where virtual currencies are challenging traditional monetary norms, and that brings with it the risk of being hacked or comprised by cybercriminals. In fact, even top crypto trading exchanges will not ensure virtual tokens if your account were surreptitiously hacked or taken over.
Keep in mind that Bitcoins, for example, are not stored as a physical asset. Instead, they are accessed via private keys as part of a digital wallet. So, protecting your key and wallet from cyber predators will be your primary goal. One way that investors can prevent potential breaches from happening is by utilizing a cold storage wallet. Essentially, it involves storing and taking your Bitcoins offline. Even this, however, is not foolproof but is certainly a solid preventative measure.
As we have highlighted in this article, there are several advantages and some disadvantages for getting involved in the crypto market. The primary advantage is that the potential upside is huge, even after taking the downside risks into consideration.
This is the digital Gold Rush where fortunes can be made and lost with the blink of an eye. But for those willing to put in the time, do the research, and are bold enough to stomach the roller coaster ride, they may just find a new form of gold at the end of the rainbow.
Vic Patel is a private trader and founder of Forex Training Group. Vic has in-depth knowledge of the financial markets including Foreign Exchange, Futures, and Cryptocurrencies.