At this point, we’ve all heard about the craze surrounding cryptocurrencies. In fact, most of us have probably participated in it or know a close friend or family member who has. And why shouldn’t they? I mean, it is all the buzz these days, and there are all these stories about successful crypto investors. Well, unfortunately there are also a lot of failures surrounding the crypto craze.
It’s important to take note of that and make sure you educate yourself accordingly. Jumping in head-first with no context is an easy way to make bad investments or fall for scams. Without further ado, let’s dive into how you can come to understand the crypto craze.
What Does Blockchain Even Mean?
This term is inseparably linked with cryptocurrency, so it’s important to understand it. I’m not going into the nitty gritty technical details – as they don’t really matter. Just think of it as a ledger of transactions that is duplicated on every computer within a large peer-to-peer network. It has a good purpose too, since it helps to prevent hacking and theft – of a specific variety at least. This is what helps cryptocurrencies actually have some security behind them, so it isn’t completely like the wild west out there.
So What’s Cryptocurrency?
Again, I’m going to try to keep this simple for people who don’t already have a lot of background or technical knowledge on the topic. Cryptocurrency is a digital asset used to perform transactions electronically. It is decentralized, meaning it isn’t backed by a bank or government (like the US dollar is). There are a lot of interesting uses for crypto, some of which are bad and some of which can be incredibly beneficial. However, this doesn’t fully explain the craze or the drawbacks that come with cryptocurrencies.
Crypto Is Volatile
Crypto being decentralized is one of its greatest drawbacks – as well as one of the things that brings people to it. Not being backed by a government or bank can lead to cryptos being outrageously volatile. Their value can up or down an astounding amount in the short-term, even daily.
Many of you are bound to remember the events of early 2021. Wallstreetbets was going viral and calling shots, and stocks like GME and AMC were shooting through the roof. Some cryptocurrencies were also getting the treatment, like Dogecoin. During this period, quite a few people made a significant amount of money. It seemed like everyone was investing in at least one meme stock or crypto. Unfortunately, a lot of people got burned in the process.
When everyone is buying into a crypto, there will be some who make money. However, most people will end up losing in that situation – if they’re trying to day trade crypto. Be cautious so that you don’t put any money into a cryptocurrency that you aren’t willing to lose.
The Safest Way To Buy Crypto
This one is always hotly debated. The average joe will probably be fine by going through exchanges to get crypto. However, many crypto fans don’t like that, as they prefer having access and complete ownership over their own private wallet. That private wallet is a nice perk, but it makes illegal transactions more feasible, and it’s a potential risk for losing your money. If you lose the key to your wallet, you’ll lose all the crypto (and consequently all the money you put into it)!
The Pros Of Cryptocurrency
- It offers the potential to protect from inflation (against standard currencies).
- Cryptocurrency transactions are secure and private, as far as any electronic transactions can be.
- Your transactions can be done with incredible speed.
- Transaction fees are usually lower than fees you’d encounter through wire transfers.
- There is a modicum of privacy, usually.
- It’s another asset besides stocks, bonds, and real estate (the common go-to choices).
- It’s arguably more transparent than traditional banks.
- Cryptocurrencies are usually decentralized.
The Cons Of Cryptocurrency
- A lot of illegal activity is done using cryptocurrencies as payment.
- They are highly volatile – you could lose a lot of money if you aren’t careful.
- If you lose your private key, you’re out of luck. That money will be lost forever!
- Crypto has a high energy cost. If you thought it was reducing your carbon footprint, you’re sorely mistaken.
- It is in fact still possible for hackers to steal your data, and you’ll have no recourse for getting it back.
- Understanding cryptocurrencies can be less than easy for the average joe.
- There is no proof for long-term results – yet. This is still a brand new area in the world of finance, so nobody knows how it will turn out.
- It comes with a lot of risk, but does have the potential for rewards.
- Even though cryptocurrencies are usually decentralized, some organization or individual is still running the show.
- Good luck getting a refund or cancellation! People can use that to scam you out of money, with no way for you to retrieve it.
Reward Comes With Risk – Find A Balance
I’m not saying you shouldn’t take risks or use cryptocurrency. There will always be a level of risk with your investments, and it’s up to you if you’re willing to take it. My main concern is that the crypto craze seems to encourage a lot of bad financial behaviors. FOMO and panic selling are great ways to lose your money, and they seem to be the normal strategy with cryptocurrency.
In my opinion, a portfolio is served well by reserving 5% of it for the much riskier investments. These can be things you don’t necessarily understand, or assets with a high degree of volatility, like crypto. Setting aside 5% for that means that you’ll be able to take advantage of any potential successes, but you won’t get crippled if its value plummets either.
Conclusion
Hopefully this article gave you some food for thought when it comes to cryptocurrency. It’s an asset, like many others, and whether it’s for you is ultimately up to you. I do think that the average investor will be better served with index funds and ETFs. If you do decide to invest in crypto, just make sure you do your research and don’t fall into bad habits like panic selling. If you have any thoughts of your own to share, let us know in the comments.
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