Have you ever sat back and just thought to yourself, should I invest in cryptocurrency? If so, you will love our list of 5 reasons why you should never definitely consider it.
Before we get into the good stuff, let’s cover off the basics. Let’s face it, crypto is complicated. We all sort of know what it is and how it works, but then again do we? Or do we just like to convince ourselves we do.
Sometimes it just makes us feel a little bit better to tell ourselves we know whats going on, when really all we know is what we have heard others repeat in the past.
It’s a digital currency. It has genuine real world uses. Bitcoin. Ethereum. XRP. Blah Blah Blah.
Now I don’t claim to be an expert myself, but after a fair bit of research, I think I can give you a digestible, jargon free definition of what cryptocurrency is and how it works.
It is important to understand that I am not a financial advisor and this is not intended to be taken as financial advice – it is your money so please make sure you do your own research before making any investment decisions.
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What is Cryptocurrency?
Cryptocurrency is a digital currency. What this means is that unlike a dollar coin, cryptocurrency is not a physical object. Like other currencies however, it can be traded or exchanged for something else, like a product or a service.
Cryptocurrencies utilise blockchain technology to operate. A blockchain is essentially a database or ledger that records all cryptocurrency transactions.
The blockchain removes the need for any third party to be involved in transactions such as a bank or person.
Most cryptocurrencies are decentralised which mean that they are not controlled by the government.
Lastly, the phrase crypto refers to the high level encryption that is used to ensure the blockchain networks remain secure.
At the time of writing, there are over 12,000 different types of cryptocurrencies with the very first being Bitcoin which was created in 2009.
Now if you are wanting to buy any cryptocurrencies, you will need to do so via a crypto exchange. Our recommendation is Swyftx. They are a broker that currently has outstanding reviews and great security features which makes them a top choice. They are currently the crypto broker that I personally use myself to buy and sell crypto.
Now that you have a brief understanding of crypto and how it works let’s talk about 5 reasons why you should consider adding some to your investment portfolio.
1. Cryptocurrency Returns
Now before we get carried away, past returns absolutely do not guarantee future returns. However, at the same time it would be silly to completely ignore them, so let’s take a look at how the 8 biggest cryptocurrencies (based on market cap) have performed since their inception.
Please note all figures are taken from the time each coin was first listed on Coin Market Cap, which is one of the worlds biggest cryptocurrency price tracking websites.
Bitcoin | In 2013 the price of Bitcoin was approximately $100. In 2021, Bitcoin is valued at approximately $83,000. This is an increase of 82,900%
Ethereum | In 2015 the price of Ethereum was approximately $1.50. In 2021, Ethereum is valued at approximately $5,600. This is an increase of 373,333%
Cardano | In 2017 the price of Cardano was approximately $0.03. In 2021, Cardano is valued at approximately $2.90. This is an increase of 9,566%
Tether | In 2016 the price of Tether was approximately $1.20. In 2021, Tether is valued at approximately $1.30. This is an increase of 8.3%
Solana | In 2020 the price of Solana was approximately $1. In 2021, Solana is valued at approximately $278. This is an increase of 27,700%
XRP | In 2013 the price of XRP was approximately $0.003. In 2021, XRP is valued at approximately $1.50. This is an increase of 49,900%
Polkadot | In 2020 the price of Polkadot was approximately $6.90. In 2021, Polkadot is valued at approximately $59. This is an increase of 755%
Dogecoin | In 2013 the price of Dogecoin was approximately $0.0005. In 2021, Dogecoin is valued at approximately $0.3619. This is an increase of 73,720%
Shiba Inu | In 2020 the price of Shiba Inu was approximately $0.0000000002. In 2021, Shiba Inu is valued at approximately $0.000056. This is an increase of 27,999,900%
Now there are a few important things that need to be understood. Firstly, many of these coins experienced sharp increases in value which may distort their overall increase %.
In addition many of these coins experienced such sharp increases before they were well known. Finally, it is questionable how sustainable these drastic increases are over the long term.
However, with this being said, when you take a look at just how big the returns of some cryptocurrencies has been, it becomes pretty clear why people are drawn to investing in this asset class and why it could be worth while investing a few dollars into.
2. Cryptocurrency is Volatile
By definition, to be volatile means to be likely to change rapidly and unpredictably. Now let me tell you, crypto is definitely volatile.
This becomes particularly apparent when you compare crypto to other common types of investments such as stocks and property. For example, each day it would be considered a reasonably significant event if any major stock market index increased or decreased by more than 3%.
However, with crypto, prices can be extremely volatile, meaning they bounce up and down by significant amounts.
Now it is important to understand that with volatility comes risk. If you invest your money into something that is highly volatile, you can expose yourself to sudden and sharp losses.
BUT, the opposite also remains true. With volatility also comes the opportunity for sudden growth in the value of your investments.
Volatility is a key reason why many like crypto as a type of investment in comparison to other types of investments, which, in comparison with cryptocurrency, look rather conservative.
As i’m sure you are probably aware, when it comes to investing, diversification is like not putting all of your eggs in one basket, but instead spreading them across multiple baskets.
In investing, diversification is achieved through investing in different asset classes and sub-sections within those asset classes.
The primary reason most people do this, is to spread risk and minimise over exposure to any one asset class or asset. For example, if you invested $100,000 (all of your money) into Telstra shares, your investments are not diversified and your returns will be dictated by the performance of that singular company.
Hence, if Telstra’s price decreased significantly your entire portfolio would take a major hit. Whereas, had you spread your money evenly through five different stocks, one being Telstra, its major decrease would have less of an overall impact on your portfolio returns.
Diversification is a way of minimising irreversible losses. Let’s take a look at a case study example. If your $100,000 portfolio takes a 50% downturn, it is now worth $50,000. However, it must now increase by 100% to get back to its original position.
Investing in cryptocurrency is often seen as a mechanism to achieve diversification within a portfolio. Interestingly enough, those who have used crypto as a means to diversify, have been rewarded quite nicely.
4. Hedge on Inflation
Firstly let’s start with a little bit of background info on what inflation actually is. Well, for instance, a can of coke costed 9 cents in 1950. Now one costs roughly $2. This is the work of inflation.
Simply put, inflation is the term used to describe the reduction purchasing power of a currency. What you can buy for $100 this year, you will be unlikely top be able to buy the same product or service for the same amount in 10 years.
In Australia over the last decade, the rate of inflation has been approximitely 2.5%.
Many people more or less understand how inflation works but probably don’t give it to much though because you never see that 2.5%. Imagine if every year you had to hand over 2.5% of your net worth, all of a sudden you might start paying more attention to inflation.
The moral of the story – inflation is real and you need to protect yourself from it.
Many believe that certain cryptocurrencies can be a good hedge against inflation.
The primary reason behind this is due to the fact that the supply is finite. This means that the amount of that currency that is circulating cannot be increased which can result in devaluing of the currency.
Now I completely acknowledge that you probably don’t want to be picking your investments purely based on which one excites you the most.
But this is a real reason why some do chose to invest into cryptocurrency. It can be exciting.
It is no different to gold prospectors hunting for gold or for someone playing poker in the casino, the prospect of maybe, just maybe being able to turn a little amount of money into something much more significant is exciting.
Now this really has been done in the crypto world – i’m sure you have all heard the story of the man who purchased $5,000 of Shiba Inu which is now worth $5.7 BILLION dollars.
However it would be completely misleading for me to suggest that this is likely to happen to you, as the chances are slim to none.
Nevertheless, this excitement is absolutely a factor that drives many to invest into crypto.
Some Final Thoughts On Crypto
Overall, cryptocurrency is a very interesting asset class. With barely ten years of historical data it is incredibly hard to predict what is going to happen in the future.
Are we going to see the widespread adoption of crypto around the world? Will we even be talking about crypto in 10 years? No one can answer these questions with absolute confidence.
One thing is for certain it would foolish to not consider investing in crypto before weighing up the pros and cons.
If you were wondering if you should invest in crypto – we hope these 5 reasons shed some light on why others do.
Please ensure you do your own research before making investment decisions. I am not a financial advisor and this article is not intended to be taken as financial or investing advice.
As mentioned previously, if you do want to invest in crypto, we recommend using Swyftx to do so. They have incredible reviews and top security features which makes them a great choice.
If you are thinking about investing, check out our guide on how to make an investment plan.