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In 2010, a man from Jacksonville, Florida, made the first real-world purchase with Bitcoin. He bought 2 pizzas for 10,000 bitcoin. At the time, that was a fair price for 2 fast food pizzas. If this man skipped his dinner and kept his bitcoin, he’d be sitting on close to half a billion dollars worth of cryptocurrency today. Oops.
Today, Bitcoin fans around the world celebrate this day (22nd of May) as Bitcoin Pizza Day. The occasion commemorates the first time anyone was reported to have used bitcoin to buy physical goods (that we know of).
By historical standards, Bitcoin is a great investment. Bitcoin is the best performing asset of the past decade, appreciating over 31,000%. If you were to invest just $1,000 in Bitcoin ten years ago, you’d have hundreds of millions of dollars today. But can Bitcoin maintain this exponential growth? Potentially. Trading volatile cryptocurrencies has much more risk than traditional investments, but the payout could be life changing.
- Is Cryptocurrency Safe?
- Is Cryptocurrency Insured?
- Investing In Crypto
- Where to Invest in Cryptocurrency
- Advantages of Cryptocurrency Investments
- Disadvantages of Cryptocurrency Investments
- Crypto Price Movements
- So, is Cryptocurrency a Good Investment?
Is Cryptocurrency Safe?
Bitcoin and other cryptocurrencies run on blockchain technology. A blockchain is a distributed ledger technology powered by miners. Bitcoin’s network has an estimated 10 to 20 times the processing power of Google’s servers, making it among the most secure networks in the world.
Fascinatingly, blockchain technology achieves its high level of security by creating incentives to make tampering unprofitable. This means that blockchain relies on probabilistic thinking rather than certainty to ensure safety and functionality.
To hack a blockchain, you’d have to simultaneously control 51% of the miners on the network, making security breaches virtually impossible. Yet, crypto exchanges are still at risk of being hacked, and unless you store your crypto in a hardware wallet, you aren’t completely safe from bad actors.
Although blockchains are virtually impenetrable, Bitcoin and other cryptocurrencies are risky investments. It’s not uncommon for Bitcoin to dip 80% to 90% in a bear market –– in 2015, Bitcoin lost 84% of its value and in the 2018 bear market Bitcoin lost about 85% of its value. That being said, as more institutions and long term players enter the market, the volatility is likely to decrease greatly.
Bitcoin’s blockchain is the most secure, followed by Ethereum. After that, it gets complicated. Because security is directly correlated with the ability to take over 51% of the network, smaller networks are smaller targets, but inherently less secure. Crypto “security” is not one-size-fits all.
Is Cryptocurrency Insured?
Like other investments, investing in crypto is not insured. However, there are insurance options for some crypto-related investments.
For example, coincover offers insurance options to cryptocurrency wallets and exchanges. If these companies use coincover, their users’ cryptocurrency is insured for theft, and in some cases, if they lose their private keys too. Your private key is what grants you access to your crypto wallet. There are also decentralized insurance options that operate on the blockchain.
Nexus Mutual is a leading decentralized insurance protocol that allows investors to purchase a share of the insurance fund. When investors buy into the fund, they are issued Nexus tokens proportional to their share of the fund. The token’s price is calculated mathematically based on the total tokens in the fund, the minimum reserve requirement and the amount of open insurance contracts. Companies can use Nexus Mutual to insure their exchanges in case of a security breach.
Investing In Crypto
Many cryptocurrency investors see crypto as a long-term investment. Some investors claim they will never sell their cryptocurrency because they believe that crypto will replace both gold and fiat currency. However, cryptocurrencies have suffered through multi-year bear markets, causing thousands of investors to lose 60% or more from their portfolio. Regardless, Bitcoin has broken all-time high prices time and time again. However, the implication here is that cryptocurrency returns are inflated by survivor bias. Namely, investors tends to view the performance of existing cryptocurrencies such as BTC or Ether as a representative and comprehensive sample without regarding the thousands of cryptocurrencies that have gone bust.
On the other hand, some crypto traders see cryptocurrencies as a short-term investment. Some traders will even buy cryptocurrency tokens that don’t have any real value because they think the price will rise regardless.
Cryptocurrency as a Short Term Investment
Traders who invest in cryptocurrencies for the short term care less about the utility of the cryptocurrency and more about the price history of the coin. For example, many short-term crypto investors invest in Dogecoin, which has no competitive advantage over other larger cryptocurrencies like Bitcoin. Looking to make quick profits, these traders buy Dogecoin for its high volatility.
Other short-term traders buy Bitcoin during price surges, hoping to get in early enough to ride out the enthusiasm. Some traders can make money this way, but most people are better off just buying and holding their cryptocurrency for the long term. In fact, even from a mathematical standpoint, long term investment is generally more favourable than short term investment. According to the Wharton School of Business, the median return for most altcoins are less than the mean return. This means that most days you lose money or make very little money, however, such days are heavily compensated by a few big outliers. Hence, the fundamental strategy of an altcoin portfolio is to hold long enough to experience a ‘outlier move’ in the market.
Cryptocurrency as a Long Term Investment
If you believe in blockchain technology, cryptocurrency is a great long-term investment. Bitcoin is seen as a store of value, and some people think Bitcoin can replace gold in the future. Interestingly, Bitcoin is the only leading crypto project that has an anonymous creator and relied purely on organic growth, which has resulted in it being the most meritocratic cryptocurrency on the market.
Ethereum, the 2nd largest cryptocurrency by market cap, also has huge growth potential as a long-term investment. That said, it is important to note that investments into Bitcoin or Ethereum are not direct investments into the underlying blockchain technology. In the future, new manifestations of blockchain technology could dominate the industry, rendering Bitcoin and Ethereum obsolete.
If Bitcoin is to cryptocurrency what the PC was to computing, then Ethereum would be the internet. Ethereum hosts decentralized apps (dapps) that let people use Ethereum for more complex financial transactions, such as loans, insurance and derivatives. Dapps can also be video games –– operating the game on Ethereum lets users buy and sell in-game items to each other using the blockchain.
Before investing in a cryptocurrency for the long-term, be sure to understand what you’re investing in. Find out what problem the cryptocurrency is trying to solve and then assess whether there really is an advantage of utilizing blockchain technology as part of the solution. Some cryptocurrency companies create a token to easily raise money from unaccredited investors, and there is no competitive advantage for their company to operate on a blockchain.
Lastly, it is important to understand that cryptocurrency gains are heavily inflated by survivor bias. What does this mean?
Simply, survivor bias refers to the tendency to view the performance of existing cryptocurrencies as a representative and comprehensive sample of the asset class, without acknowledging the thousands of cryptocurrencies that have died out or gone bust along the way.
Where to Invest in Cryptocurrency
There are lots of options for where to invest in cryptocurrency. eToro and Gemini are great options for beginners. You can deposit funds on these exchanges through their websites or on their mobile apps. Both Gemini and eToro let you buy crypto with a debit card, bank transfer or other cryptocurrencies.
Robinhood is among the easiest way to purchase crypto, especially if you already have a Robinhood account for trading stocks. While the platform has less cryptocurrencies than dedicated crypto exchanges, Robinhood lets investors purchase major cryptocurrencies like Bitcoin and Ethereum, as well as a few select altcoins. It’s important to note that you can’t transfer crypto off Robinhood just yet, so if you’re looking to transfer your digital assets to a hardware wallet or use with DeFi, then you should opt for a dedicated cryptocurrency exchange.
Decentralized Ways to Invest in Crypto
Uniswap is a great option for investors looking to use DeFi to exchange cryptocurrency. This DeFi protocol creates liquidity among tokens through smart contracts –– code on the blockchain. This liquidity is used to let investors exchange their cryptos without the need of a 3rd party. You can also let Uniswap use your tokens for liquidity, and they will pay you a generous interest rate for doing so.
Another great option is Argent. Argent is a mobile crypto wallet for iOS and Android that lets its users invest in different DeFi protocols. Some DeFi programs on Argent offer as high as 9% annual interest rates on savings accounts funded by stablecoins. Stablecoins are tokens nearly always equal to $1, so these investments are extremely low risk.
A major downside to investing in crypto through DeFi is transaction costs. Because you need to interact directly with the blockchain (usually Ethereum) to use DeFi apps, you will incur a transaction cost that goes to the Ethereum miners. This cost is calculated based on how busy the network is, but can cost anywhere from $3 to $25 or more.
However, this will change soon. Ethereum’s blockchain is getting an upgrade this year: Eth2. Eth2 will operate under a proof of stake (PoS) instead of proof of work (PoW). This allows Ethereum to cut its transactions to a fraction of what they cost now.
Advantages of Cryptocurrency Investments
The biggest advantage of investing in cryptocurrency of investing in cryptocurrency is its upside potential. If Bitcoin replaces gold as a store of value, each coin would be worth over $500,000 (market cap of gold / total Bitcoins issued). Some investors are calling for Bitcoin to reach $1 million, as it will be a better and more accessible store of value than gold.
Ethereum has similar upside potential. Anyone who wants to perform a financial transaction with DeFi is required to pay Ether tokens to do so. For example, if you want to exchange tokens on Uniswap, buy an NFT, or get a loan on the blockchain you must pay an Ethereum transaction fee. Also, investors are locking up their Ether to earn interest through DeFi (and soon Eth2), so Ethereum tokens will become more scarce as more use cases are developed.
Disadvantages of Cryptocurrency Investments
You pay for reward with risk. Cryptocurrencies are risky investments that can easily swing double-digit percentage points in a day. Some cryptocurrencies will fail and their tokens will be worthless. Investing in larger market cap coins like Ethereum and Bitcoin are generally safer investments than lesser-known coins.
Since the blockchain industry is relatively new, many cryptocurrencies go unregulated. Be sure that the coin you’re investing in has an accredited team and a solid foundation before investing.
Crypto Price Movements
Cryptocurrency investing isn’t for the faint of heart, although many prominent investors suggest that everyone has some exposure to digital assets. As cryptocurrencies are more risky and less regulated than traditional investments, it’s a good idea to limit your exposure dependent on your risk tolerance as an investor. For the most up-to-date cryptocurrency prices, check out our table below.
So, is Cryptocurrency a Good Investment?
By historical standards, cryptocurrency has been a great investment. However, investing in cryptocurrencies in inherently more risky than other asset classes like stocks, traditional commodities, and real estate. Bitcoin aims to replace gold as a store of value, and Ethereum has the potential to disrupt the entire financial services industry. Although ambitious, the growth potential for cryptocurrencies is unlike any other investment.