Crypto Investing

Is Cryptocurrency a Safe Investment?

Cryptocurrencies have attracted a reputation as unstable investments due to high investor losses from scams, hacks, bugs, and volatility. Although the underlying cryptography and blockchain are generally secure, the technical complexity of using and storing crypto assets can be a significant hazard to new users.

In addition to the market risks associated with speculative assets, cryptocurrency investors should be aware of the following risks:

• User risk: Unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent. By some estimates, about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.18

• Regulatory risks: The regulatory status of some cryptocurrencies is still unclear in many areas, with some governments seeking to regulate them as securities, currencies, or both. A sudden regulatory crackdown could make it challenging to sell cryptocurrencies or cause a market-wide price drop.

• Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency. Theft or loss by one of these third parties could result in losing one's entire investment.

• Management risks: Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices. Many investors have lost large sums to management teams that failed to deliver a product.

• Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could cause them to lose their investment.

• Market Manipulation: Market manipulation remains a substantial problem in cryptocurrency, with influential people, organizations, and exchanges acting unethically.

Despite these risks, cryptocurrencies have seen a significant price leap, with the total market capitalization rising to about $2.4 trillion. Despite the asset's speculative nature, some have created substantial fortunes by taking on the risk of investing in early-stage cryptocurrencies.

Advantages and Disadvantages of Cryptocurrency

Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.

Advantages

• Removes single points of failure

• Easier to transfer funds between parties

• Removes third parties

• Can be used to generate returns

• Remittances are streamlined

Disadvantages

• Transactions are pseudonymous

• Pseudonymity allows for criminal uses

• Have become highly centralized

• Expensive to participate in a network and earn

• Off-chain security issues

• Prices are very volatile

Advantages Explained

Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure—such as a large financial institution setting off a cascade of global crises, such as the one triggered in 2008 by the failure of large investment banks in the U.S.

Cryptocurrencies promise to make transferring funds directly between two parties easier without needing a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.

Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties can be faster than standard money transfers. Flash loans in decentralized finance are an excellent example of such decentralized transfers. These loans, which are processed without requiring collateral, can be executed within seconds and are mostly used in trading.

The remittance economy is testing one of cryptocurrency's most prominent use cases. Cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and subsequently converted to the destination fiat currency without third-party involvement.

Disadvantages Explained

Though they claim to be an anonymous form of transaction, cryptocurrencies are pseudonymous. They leave a digital trail that agencies like the Federal Bureau of Investigation (FBI) can follow. This opens up the possibility for governments, authorities, and others to track financial transactions.

Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.

In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. Ownership is becoming more concentrated, as witnessed by companies purchasing and holding them for price appreciation and investment fund managers buying them to hold in their funds.

One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs and the unpredictability of mining have concentrated mining among large firms whose revenues run into billions of dollars.

Though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in the theft of millions of dollars in coins.

Cryptocurrencies traded in public markets suffer from price volatility, so investments require accurate price monitoring. For example, Bitcoin has experienced rapid surges and crashes in its value, climbing to nearly $65,000 in November 2021 before dropping to just over $20,000 a year and a half later. Bitcoin prices had roared back by mid-2024. As a result of this vast range of volatility, many people consider cryptocurrencies a speculative bubble.

Is Crypto Actually a Good Investment?

Crypto can be a good investment for someone who enjoys speculating and can financially tolerate losing everything invested. However, it is not a wise investment for someone seeking to grow their retirement portfolio or for placing savings into it for growth.

Is Crypto Real Money?

One definition of money is something that is generally accepted as a medium of exchange, a measure or store of value, and a unit of account. By this definition, cryptocurrency is real money.

How Does Crypto Make You Money?

There are several ways cryptocurrency can make money for you. Decentralized finance applications let you loan your crypto with interest; you can stake a compatible one on a blockchain or at certain exchanges for rewards, or you can hold on to it and hope its market value increases. None of these methods are guaranteed to make money, but many people have benefitted from them.

The Bottom Line

Cryptocurrencies are digital assets that are secured by cryptography. As a relatively new technology, they are highly speculative, and it is important to understand the risks involved before investing.