You may have a friend who cannot stop talking about cryptocurrency. They encourage you to invest in it now because you may not get another opportunity later on. They may make it out to be the best possible investment and vow that there’s nothing like it.
On top of that, you may have come across many influencers recently who are rigorously promoting cryptocurrencies of their choosing. They make endless social media posts to tout benefits of investing in one particular currency or the other. They also flaunt their gains and go through the whole shebang of fancy cars and bling that comes with new-found wealth.
While many people have made good money by investing in cryptocurrency, it isn’t a smooth ride. What these people don’t tell you is the risks that come with investing in a highly-volatile market of digital currencies. The market is marked by either/ifs kind of scenarios where you win everything or lose everything.
An investment is only worthwhile if the risks and gains are clearly understood. When it comes to cryptocurrency, the volatility of the market makes this a difficult process. But it’s not impossible to assess the situation, and that’s what we’re here to educate you about.
Therefore, we’ve compiled this guide to help you understand the risks and benefits of cryptocurrency trading. The pros and cons listed below are meant to give you a comprehensive understanding of cryptocurrency.
While a graduate of Master’s in Accountancy can be your ultimate go-to guy for everything related to financial investments and advice, this guide is meant to be nothing more than an educational primer on the crypto market investments.
Risks
1. It’s highly volatile
One of the biggest drawbacks of cryptocurrency is the volatility of its markets. You may invest large amounts in hope of a larger payout. However, things may not work according to plan, and you may lose out on a lot. So, the risk factor is at an all-time high when it comes to volatile markets.
2. Lack of regulation
One of the biggest critiques laid against cryptocurrency is the lack of regulation in its market. The innovative and cryptocurrency-enabling feature called the blockchain makes it possible for online communities to keep a ledger of every cryptocurrency transaction ever made. Despite that, the risks are always there, and things may head in unexpected directions. Moreover, there’s always a risk of a data breach with third-party platforms.
3. Hacking is a possibility
You may lose all of your investments if a data breach on your part allows hackers to get control of your account. Despite many stringent security features, things can still go wrong. This would render you without access to your own account. Moreover, given that there is no central regulation, there’s nowhere and no one you can plead your case to.
4. Innovation as a threat
As more cryptocurrencies continue to emerge, there’s always a risk that some old types might go obsolete. If you don’t have a diverse enough portfolio in crypto coins and depend on one or two types of coin for your gains, you might be in for trouble if you don’t wise up quick enough and diversify your portfolio mix. This also means that there might be an endless supply of cryptocurrencies. Due to this, the market may never reach a point of stability.
5. Wrong transactions
Imagine sending money to the wrong person. It’s gone, for good. You can’t get it reversed. Considering how expensive a single coin can be, sending it to someone by mistake means having incurred a huge loss with no realistic possibility of it being ever returned.
6. Limited use
While cryptocurrency sounds promising as an investment, there’s limited use for it. Many places, including some high-end brands, don’t accept cryptocurrencies for now. So, if your money is in your crypto wallet, you can’t use it without exchanging it for fiat currency.
Benefits
1. It’s transparent
One of cryptocurrencies’ biggest drawbacks, i.e., the lack of regulation, is also its greatest benefit—the transparency that comes with a deregulated market. Every transaction is recorded on a public ledger (the blockchain), shared within the community of cryptocurrency owners.
If you’re a skeptic when it comes to monetary transactions, you can keep a track of these records. This makes cryptocurrency, in theory at least for now, less prone to fraud. Following certain precautionary rules, you can rest assured that you’re receiving genuine cryptocurrency against the investments you put in.
2. Easy liquidity
Cryptocurrencies can be easily liquidated. With acceptance growing gradually among the people, you can exchange it for fiat currency. This also means that if the value of a coin goes up, you can get more dollars for the price of that coin.
3. Cross-border transactions
One of the most liberating features of cryptocurrency is the way it allows you to conduct cross-border transactions with ease, and without the need for third-party oversight, i.e., the banks.
Its international acceptability allows you to evade massive exchange rate differences when you’re abroad. You may also be able to get more money for your crypto coin than your standard dollar.
4. Lack of central control
Cryptocurrency is not controlled by a central authority or a central bank. This means that they cannot intervene to control exchange rates and transactions. Your cryptocurrency account is not likely to be frozen by the authorities.
Also, since cryptocurrency is international, domestic economic policies or government prescribed fiscal policy measures aren’t likely to have a massive impact on its value.
5. Good returns
While market volatility makes investing in crypto a feat of great daring, it also signals various opportunities of making money, i.e., cryptocurrency trading.
During a dip, for example, if you buy a cryptocurrency at a lower price, and anticipate growth in the coming months, you can make a fortune easily. All you need to do is stay up to date and predict the patterns accurately.
6. Portfolio diversification
You can have a diverse portfolio within the same field. You don’t have to put all your eggs in one basket. With new types of cryptocurrencies emerging constantly, there is a lot you can invest in. Some of these are promising and can bring you good results on your investment. All you need to do is keep an eye out for those reliable potential investment opportunities, and, who knows, you might get lucky enough to ride a coin’s rise to the top, enabling you to cash out rich before the boom busts.
Final thoughts
These pros and cons illustrate the risks and benefits of cryptocurrency trading. It’s not exactly black and white, and things may differ from person to person. But with a good understanding of markets and patterns, you can secure and enhance your investments. While it is possible to make money in the cryptocurrency market, the risks are exacerbated by cryptocurrency’s high market volatility. Therefore, it’s advisable to make a calculated and prudent decision when investing, keeping these pros and cons in your mind.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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