Cryptocurrency’s popularity has reached mainstream investors, but a recent swoon in these coins’ value has many questioning whether crypto is more of a risk or an opportunity for them.
While there are differing opinions about the future prospects for Bitcoin (BTC) and other cryptocurrencies, crypto assets have catapulted in popularity and are gaining widespread demand from investors globally.
But there is a crack in crypto’s bullish streak. Bitcoin’s price dropped nearly 50% between late December 2021 and a mid-May low, and as of June 2 was still hovering around $30,000, a far cry from the all-time high near $70,000. Other crypto assets are also struggling. Ether (ETH) is down roughly 50%, Cardano (ADA) is off by 54% and Polkadot (DOT) has dropped 63% year to date.
Bitcoin’s share of the total crypto market is roughly 46%, making it the leader of all cryptocurrencies, but the crypto market is vast. There are thousands of cryptocurrencies available to trade, and the global crypto market cap stood at $1.24 trillion on June 2.
With demand and utility of crypto sectors like smart contracts, decentralized finance applications and NFTs on a steady rise, cryptocurrency is no longer on the fringes of finance. As more businesses accept cryptocurrency and the blockchain technology that facilitates its operation, you may inevitably have to learn the dynamics of the crypto world and even consider investing in it.
Here’s what you need to know about investing in cryptocurrency:
— What is cryptocurrency?
— Basics of investing in cryptocurrency.
— What to consider before investing in cryptocurrency.
— How to make money with cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is digital currency secured by cryptography, or secure communications, that can be used as a peer-to-peer medium of exchange, store of value or investment vehicle.
Bitcoin, the first blockchain cryptocurrency, is a form of digital currency invented by an anonymous founder using the pseudonym Satoshi Nakamoto. Cryptocurrencies aren’t managed by a bank or public agency. Instead, crypto transactions are typically recorded on a public blockchain, comprising digital information stored on a database.
Blockchain technology is used to keep an online ledger of all the transactions, and it provides a data structure for the ledger that is considered secure.
Unlike fiat money, or government-issued currency, which is controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority. Each of the thousands of cryptocurrencies has its own security standards and value propositions.
Although cryptocurrency is a newer phenomenon, it has the potential to revolutionize the financial system and how we think about money.
“Cryptocurrency is a new asset class that is at the foundation of the cryptoeconomy, an entirely new set of financial services, commerce and global payments that will be built on top of this new technology,” says Max Branzburg, vice president of product at Coinbase Global Inc. (COIN), one of the leading crypto exchanges.
With their unique profile as currencies and investable assets, cryptocurrencies are opening retail investors to “a world of global capital, as opposed to what they can access through the U.S. market,” says James Putra, senior director of product strategy at TradeStation Crypto.
Basics of Investing in Cryptocurrency
There are thousands of cryptocurrencies on the market that have different fundamental values. Investors should recognize that a cryptocurrency can be here one day and gone the next, which could leave your investment worthless. That’s why it’s important to have a strategy for investing in cryptocurrencies and to know how to manage your risk.
Beginner crypto investors may want to consider elements such as transaction fees, types of cryptocurrencies available on a platform, available education resources, and other features that may align with their interests and goals.
There are many crypto exchanges from which to choose. TradeStation, Coinbase, eToro and Gemini, among others, offer easy, accessible and secure platforms for owning and conducting transactions with cryptocurrencies.
Investors are attracted to crypto’s superior return potential. But take into consideration these assets’ volatile nature and the role cryptocurrency will play in your portfolio. In May, Bitcoin fell to a 16-month low, around $26,000, before recouping some of those losses. Putra says it’s best to take a balanced approach toward investing in crypto, allocating only about 2% to 5% to the sector in your investment portfolio because its volatility can cause drastic swings in value.
Bitcoin is considered a “risk on” asset similar to high-growth speculative tech stocks, both of which have performed similarly in a rising-interest-rate environment. While correlation between Bitcoin and the stock market, especially the tech sector, has increased in recent months, some experts say a decoupling will eventually follow.
“Bitcoin has blended into the risky asset class,” says William Cai, partner and co-founder of Wilshire Phoenix. Investors will see a de-correlation in the longer time horizon, but right now, the high correlation is a sign of the asset class maturing, he says.
Investors may also choose cryptocurrency as an inflation hedge. Putra says that since bond yields are not keeping up with inflation, cryptocurrencies can serve as a bond alternative.
“Because of the low interest rates across bonds, there is a reshuffling of capital on a macro level out of bonds and into other assets that are more inflation-protected,” Putra explains. Some cryptocurrencies, such as Bitcoin and Ether, can even give your crypto portfolio a measure of stability because the inflation protection they provide balances with their volatility, he says.
What to Consider Before Investing in Cryptocurrency
Investing in cryptocurrencies is highly speculative. Despite stories of investors making millions, entering the market at an inopportune time can result in rapid and extreme losses.
Another risk: Unlike in other large asset markets, the future of cryptocurrency regulation is uncertain. Some countries that so far allow the more-or-less free use of Bitcoin include the U.S., Canada and Australia. El Salvador even adopted Bitcoin as a legal tender. But other countries, such as South Korea, are pushing restrictive regulation of cryptocurrency, with China essentially banning it. In the U.S., new legislation targets crypto investments for taxation.
Although cryptocurrencies were conceived of as a unit of exchange, there are only a handful of businesses today that accept crypto as a form of payment. Crypto advocates support its broad economic use, but this adoption could take time because regulators around the world are still skeptical of the digital asset.
How to Make Money With Cryptocurrency
There are several ways investors can increase the value of their assets and secure a profit when investing in cryptocurrency. Just like in the stock market, the way to make money when investing in the crypto market is to buy the cryptocurrency when its value is low and then sell it when its value has increased.
“You can get more out of your money with cryptocurrency than with other traditional assets,” Branzburg says, because of the price swings and opportunities that conventional investments don’t offer.
The first method he points to is staking. Staking lets you earn income with your crypto by participating in the network of the asset. When you stake your crypto, you make the underlying blockchain of that asset more secure and more efficient. In exchange, you get rewarded with more assets from the network, like a yield you would get from a savings account.
Some cryptocurrencies that offer staking rewards include Cardano, Ether, Tezos and Algorand.
“You can lend the assets that you have in your portfolio into decentralized finance, or DeFi, protocols to generate yield, as well,” Branzburg says. Accessing DeFi allows users to “tap into a global liquidity pool,” he says. From the decentralized money market, other users are able to borrow your crypto assets, and you garner a yield.
Cryptocurrency is a new and exciting way to think about money. But experts say the first and most important step is to educate yourself about these emerging digital currencies and the technologies they use so that you can understand the risks and rewards.
Calculating the intrinsic value of a publicly traded company might be a bit simpler, but learning about cryptos and how they perform can help you avoid investing at a peak.
More from U.S. News
Update 06/03/22: This story was published at an earlier date and has been updated with new information.