There is a general consensus that cryptocurrency is here to stay. This applies to the field overall; most people believe that digital currency is going to be with us, more so and more so, for the foreseeable future. Still, there are risks to cryptocurrency.
When taking an overall view of cryptocurrency, its assured place in our future is not an unreasonable assumption; it brings significant benefits. On an individual basis, however, there is no such assurance for any individual coin.
Current Crypto Usage
A recent Pew Research study found that 16 percent of Americans have or have used a cryptocurrency. There’s a lot of interest in crypto, and it gets a lot of media attention.
The barriers to entry can also be quite low. In some cases, investors can start with a little as a couple of dollars. There are virtually no meaningful barriers to entry.
Volatility is often cited as either a major risk of cryptocurrency investing or the major risk of crypto investing. This bears some scrutiny.
Not all cryptocurrencies are volatile. There are stable coins, often tracking a major currency such as the U.S. dollar. These are designed to be stable, which facilitates their use as a medium of exchange.
Many cryptocurrencies, however, are very volatile.
They can easily lose half their value over a short period of time, or, conversely, gain as much during a short period of time.
Extremely volatile assets are speculative investments. There is no reasonable assurance that they will be worth more when you want to sell them than they are worth currently. They could be worth considerably more; they could be worth considerably less.
Cryptocurrencies, to a greater extent than other assets, are subject to undue influence by celebrities and other voices. This is exacerbated by their unregulated nature. Stocks are less influenced by noise because regulations prohibit insiders from creating that noise. Crypto has no such controls — at least for now.
The Broader Cryptocurrency Risk Spectrum
There are many people who say you can’t use traditional metrics to evaluate cryptocurrencies, as crypto is “new” and “a game changer.” These words were likewise used when discussing the internet in its early years. Following that noise cost many investors dearly.
Today, internet investments are just regular investments; they hold no special cachet. It may serve investors well to remember that in the long run value creates wealth. There are thousands of cryptocurrencies; many may not survive the coming years. It behooves investors to give each potential investment its due diligence to make a determination on the worth of the project.
The consensus is that cryptocurrency will be a part of the future; there is no reasonable assurance that any particular cryptocurrency will be the mainstay — or even exist.
It is likely that few of the thousands of cryptocurrencies will survive. That makes many others an unwise long-term investment.
The ones that do survive, if they are in existence today, may be a good, potentially even great, investment.
In addition to their inherent risk, cryptocurrencies face structural risks.
In the United States, cryptocurrencies are unregulated. This is subject to change, and likely to change. Regulation may adversely affect the value of specific holdings or of cryptocurrency more broadly.
Exchanges may be subject to cyberattacks. Many millions of dollars’ worth of cryptocurrency has been stolen by hackers.
Investors can reduce their exposure to hacking by keeping their cryptocurrency in a digital wallet. Many millions of dollars of cryptocurrency has been lost due to investors losing their wallet’s digital key.
Investors who have their crypto assets stolen may lack legal remedy. In a sense, it’s still the Wild West out there; there are no crypto cops. There may be no one to sue or to pursue. Cryptocurrency investors can protect themselves to a degree, but only if they understand the environment and how to mitigate their risks.
The Bottom Line on Cryptocurrency Risks
Some investors may want to allocate a portion of their investment dollars into cryptocurrency. There is some business case for this, remembering that this is a highly speculative endeavor, and investors shouldn’t invest funds they can’t afford to lose. Generally, investments that potentially have a spectacular upside also potentially have a spectacular downside.
Some investors may want to invest in crypto-related companies, such as those that facilitate crypto or crypto trading. These cryptocurrency investments won’t have the same potential for gains, but will likewise have less risks.
There is also the option of investing into crypto EFTs, again primarily as a way to mitigate risk.
It’s easy to envision a world where digital currency is mainstream. It is far less easy to do the due diligence necessary to select appropriate cryptocurrency investments. Smart money always does its homework.