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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.
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?
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.
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 50% or more from their portfolio. Regardless, Bitcoin has broken all-time high prices time and time again.
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.
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. Ethereum, the 2nd largest cryptocurrency by market cap, also has huge growth potential as a long-term investment.
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.
Where To Invest in Cryptocurrency
There are lots of options for where to invest in cryptocurrency. Coinbase 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 Coinbase let you buy crypto with a debit card, bank transfer or other cryptocurrencies.
All of the options presented so far are centralized cryptocurrency exchanges. This means that you need to trust the exchange to hold your funds securely, stay in operation and continue to support the cryptocurrency you invest in. Albeit low, these are still risks you should consider.
Alternatively, you can invest in crypto using decentralized finance (DeFi). DeFi is a term for applications built on Ethereum’s blockchain that perform decentralized financial transactions. The beauty of DeFi is that it eliminates the trust you would otherwise need when using a centralized exchange.
Advantages of Cryptocurrency Investments
The biggest advantage to 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
Since cryptocurrencies are more speculative and harder to value than traditional assets, digital assets are typically much more volatile than the stock market. What’s more, cryptocurrencies trade 24 hours a day, 7 days a week. This can be beneficial if you’re looking for liquidity during off-hours, but this also means that you may miss price fluctuations when you’re away from your computer. For the most up-to-date cryptocurrency prices, check out our table of real-time crypto prices