Weighing the Pros and Cons of Cryptocurrency
Posted May 31, 2022
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I believe that the key to superior lifetime investment returns comes from just four areas. We can create a great investment experience by minimizing costs, diversifying your portfolio, minimizing taxes, and having good investment discipline.
For example, when you invest with Thayer Financial, you receive investment portfolios built around highly diversified, low-cost investments using a fiduciary investment process designed to achieve your goals and produce superior performance over the lifetime of your portfolio.
As I have worked with clients on their investment strategies, questions often arise about cryptocurrency. What are the pros of investing in cryptocurrency? What are the cons of investing in cryptocurrency?
So, if you’ve ever wondered about cryptocurrency and if it would be right to add to your investment portfolio, look as we weigh the pros and cons of investing in cryptocurrency.
Defining Cryptocurrency
First, you may be shyly raising your hand, saying you don’t actually know what cryptocurrency is and don’t worry; you’re not alone. Cryptocurrency is defined as a digital or virtual currency secured by cryptography. They are not issued by any central authority, making them typically immune to government influence or manipulation. Additionally, because cryptocurrency is secured by cryptography, it makes it resistant to counterfeiting or double-spend (Source: Investopedia).
Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Though not widely accepted for e-commerce or retail purchases, cryptocurrency is primarily used as a trading instrument, a store of value, and sometimes for cross-border transfers.
One of the most popular features of cryptocurrency and central to its functionality is blockchain technology. Blockchain technology is “essentially a set of connected blocks or an online ledger.” Each block records the verified transactions, and each node must verify each new block before being confirmed. This is one of the greatest assets in preventing forgery or double-spending.
What Are The Types of Cryptocurrency
Bitcoin is the most popular type of cryptocurrency; as of April 2022, nineteen million Bitcoins had been mined. It was founded in 2008 by a mysterious individual named Satoshi Nakamoto (Source: Business Insider), but this inventor (or inventors) has not revealed themselves. Although Bitcoin is the most popular type of cryptocurrency, it is not the only one on the market. There are thousands of cryptocurrencies; others include Ethereum, Binance Coin, Solana, and Cardano. Despite the other cryptocurrencies on the market, Bitcoin remains the most popular and well-known.
“By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of that total value (Source: Investopedia).”
What Are The Key Advantages of Cryptocurrency?
One of the key advantages of cryptocurrency is the decentralized system. There is no central authority controlling transactions. There is no need for a bank or government institution to get involved. This is attractive to many people because it eliminates a single point of failure, such as a failing central bank.
The second advantage of cryptocurrency is the speed and ease of making a transaction. You can purchase cryptocurrency from apps like Cash App, brokers, or crypto exchange sites like Coinbase.
A third advantage to cryptocurrency is the profit that awaits. As more people dip their toes into the cryptocurrency world, we see quick valuation spikes. Over the past decade, the value of cryptocurrency markets has reached heights as high as $2 trillion. Bitcoin alone was valued at $862 billion in December of 2021.
Finally, one of the most popular features of cryptocurrency is security. Because of blockchain technology, many people view cryptocurrency as highly secure. However, keep in mind that other crypto repositories such as exchanges and wallets are still susceptible to hackers.
What Are The Key Disadvantages of Cryptocurrency?
There is almost always a significant risk when there is a chance for a great reward, like anything in life. There are many reasons why cryptocurrencies are enticing and might be worth including in your investment strategy, but there are also disadvantages that you should be aware of.
The first disadvantage of cryptocurrency is the digital paper trail it leaves behind. Although cryptocurrencies claim to have anonymous transactions, they are pseudonymous. This allows government organizations, like the FBI, to track the financial decisions of ordinary citizens like you and me.
One of the main disadvantages of cryptocurrency is the extreme volatility. In one day, Bitcoin’s value dropped 30%. It’s important to remember that cryptocurrency has no intrinsic value, and they do not produce income or products. It’s not tangible like gold or cash, and its value comes from the amount of value others place on it and is willing to trade for it; This is known as the greater fool theory.
Another disadvantage of cryptocurrency is the enormous energy it takes to run the blockchain and mine new coins. In theory, anyone with a computer and internet connection can do so. However, it can take up more energy than entire countries consume to perform. Many see cryptocurrency as unsustainable from an environmental perspective.
It’s also important to note that there are no refunds or cancellations for cryptocurrency. If you accidentally transfer to the wrong account or accidentally purchase more than you intended… tough luck. (Source: Geeks For Geeks)
Cryptocurrency has also been linked to a surplus of illegal transactions. Because of the high security and level of privacy, it is difficult to trace every transaction, making it attractive to criminals.
So What Does This All Mean?
Cryptocurrency is a unique digital asset that can be highly lucrative, but it should be viewed as a speculative asset and treated like a lottery ticket. If you consider investing in cryptocurrency, it’s best to first talk with a CERTIFIED FINANCIAL PLANNER™ that can help you make the right decisions.
As a fiduciary, the team at Thayer Financial will always work with your best interest in mind. We will review your goals and the risk you need to take to create an investment strategy that is right for you. You can make your appointment with our team today by clicking here.
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