In 2021, after years of staggering growth, the total value of the cryptocurrency market was estimated at approximately 3 trillion USD – a figure that would have seemed almost impossible to reach in the early days of the industry, when digital currencies were regarded as nothing more than a feeble attempt at bringing innovation to the traditional financial system.
But here we are today, witnessing the rise of crypto culture in real-time and watching how this new class of assets is paving its way toward mainstream adoption. Whether you like it or not, cryptocurrencies have already written a new chapter in the world of finance, one that is filled with promise and possibilities but also with all sorts of challenges, risks and uncertainties.
As a virtual form of money secured by cryptography and underpinned by blockchain technology, digital currencies have been designed to ensure decentralized, safe, fast and easy transactions, serving mainly as an alternative method of payment that can enable the democratization of finance. However, given that most companies don’t yet have an infrastructure that could facilitate crypto payments, digital currencies mostly function as a store of value, becoming an extremely popular investment option for millions of users around the world.
Looking solely at the benefits and the rapid growth rate, cryptocurrencies do appear to be an unmissable investment opportunity. However, figures can be deceiving when taken out of context, and the buzz created around this new asset class might prove to be just smoke and mirrors. So, the best way to figure out whether crypto investments live up to the hype or not is to analyze both the pros and the cons.
The advantages of investing in crypto
The prospect of investing in digital currencies is appealing for a variety of reasons, as listed below.
The market never sleeps
While traditional asset markets follow regular trading hours, being open Monday through Friday and closed during the weekend and on certain holidays, the crypto market never closes. This means crypto investors don’t have to wait for the market to open to make a transaction since major exchanges like Binance allow for around-the-clock trading. Whether you want to check Bitcoin price in real-time or place an order to buy Bitcoin, you can do that at all hours of the day or night. This gives investors more time and, thus, more opportunities to increase their profits.
High earning potential
There are numerous crypto projects you can invest in at the moment, and while their characteristics may differ, volatility is the one thing they all have in common. Prices can rise or drop suddenly, given that crypto value is influenced by a wide range of factors such as economic and political events, competition, utility, market sentiment, supply and demand, or media hype. Given these rapid and unexpected price moves, those who invest in a crypto asset at the right time can earn massive returns.
No third-party involvement
While traditional assets like fiat money, stocks or bonds are generally controlled by a central authority, digital currencies have completely eliminated the need for a third party to supervise and verify transactions. They have introduced the idea of a trustless system in finance, meaning users don’t have to place their trust in a third-party intermediary like central banks to manage their assets, as that might not act in their best interest. Instead, they rely on a decentralized network of computers where consensus is reached through the use of complex algorithms, so no one holds supreme authority.
Inherently secure technology
Although decentralized by nature, cryptocurrencies provide a high level of safety due to the blockchain technology that supports them. The blockchain is basically a virtual decentralized ledger that records transactions across a distributed network. Once a block of data enters the blockchain, it cannot be erased or altered, so there’s no way anyone could steal or tamper with the information.
Protection against inflation
All traditional assets are subjected to inflation, although some may perform better than others in inflationary environments. However, digital currencies don’t play by the same rules as other asset classes since they’re not linked to a specific currency or controlled by a financial entity. As for the inflation of the cryptocurrency market, most developers have addressed this issue by establishing a supply cap that limits the number of new coins that enter circulation.
The risks associated with crypto investing
Observing all the benefits listed above, it’s obvious why so many people are tempted to dip their toes into crypto investing. However, underneath all this glitter and shine, there are also risks to be aware of.
While the swift and frequent price swings that characterize the crypto market create opportunities for profit, they can also expose you to greater loss risks. Crypto volatility can go both ways – it can make you rich in an instant and leave you penniless just as quickly. Finding a balance between risks and returns is a tricky thing to achieve when investing in digital currencies, and not everyone is cut out to withstand the stress and pressure that come with it.
Cryptocurrencies represent a new generation of assets – one that’s extremely complex and 100% digital. So, for those who have only ever invested in conventional assets and don’t have a good understanding of what digital currencies entail, investing in crypto can be extremely confusing and might require a steep learning curve. Taking the leap without doing proper research is going to increase exposure to risks.
Last but not least, one can’t ignore the fact that cryptocurrencies haven’t been around for a very long time. The market is still in its infancy, and it’s very difficult to tell how things are going to evolve from here. Therefore, investing in crypto often feels a bit like diving into the unknown. Given that cryptocurrencies provide both benefits and risks, it’s up to each investor to decide what weighs more in the balance and figure out if investing in these assets is worth the effort or not.