Cryptocurrency : Is it Risky to Invest in Cryptocurrency ?
- 10 December 2020 | 1382 Views | By Abhinav Mishra
Cryptocurrencies are a new addition to the list of investment options for investors looking for good returns. When we say new, we are talking relative to traditional investment options like real estate, gold, stocks, etc. Cryptocurrencies have been in the news every now and then in the last decade.
In this article, we are going to talk about the risk involved when investing in cryptocurrency. Before we get into the risk part, let us try and understand it in very simple language. A cryptocurrency is a virtual currency that is designed to work as a medium of exchange. It does not rely on banks to verify transactions, instead uses cryptography to secure and verify transactions.
It has become a popular form of investment because you don’t need a significant amount of money to enter the market. Also, you don’t need to visit banks and sign a ton of papers. You can just create an account, get a wallet, and easily track your assets.
Can we Rely on Cryptocurrency?
When we talk about investments, you need to be clear with one thing – no investment comes without risk. Every investment has an underlying risk attached to it. Investing in gold is considered to be a very safe option, large-cap mutual funds come with little risk and stocks are very risky. Cryptocurrency takes the risk level to another level. Since they are a very new form of investment, it is very unstable as well as risky. This is when you compare it with other options.
When it comes to cryptocurrency as an investment (not comparing it to anything else) you can rely on it. Over the last 12 years, cryptocurrencies have delivered very high returns to investors. Given it is technology-based, it is a lot secure and the transactions are easy even when you are making cross border payments. The other side of the story says it is not that kind of investment where you can put your money and sleep peacefully. The value of cryptocurrency fluctuates a lot.
In short, you can rely on the cryptocurrency given its past record but you cannot completely rely on it.
Is Cryptocurrency the Future of Money?
At present, there are very few platforms that allow you to complete transactions using cryptocurrency. Cryptocurrencies are in the very initial stage, it has been facing a lot of reaction from the government of various countries over its use. For example, it was banned in India sometime back and recently the Supreme Court of India has declared it legitimate. Trading/using cryptocurrencies has been declared legal in India.
There is no doubt as a form of money, it is a great way of currency distribution since it is both easy to use and safe. Once the cryptocurrency crosses the regulatory hurdles from the various governments, it may become a legitimate substitute for existing currency. However, that is not happening anytime in the near future.
What is Bitcoin and is it Safe to Invest in?
When we say cryptocurrency, the first word that comes to mind is Bitcoin. Bitcoin is the most popular cryptocurrency. It is a decentralized cryptocurrency that uses a peer to peer technology which you can use to make instant payments. It is created and held electronically in a computer, though it a currency it is not available in paper form like other currencies.
When we talk about investment, there are two things we consider – returns and risk. Let us first talk about the returns. Bitcoin first came in the year 2009 when the value of 1 Bitcoin was nothing. Today, a single Bitcoin is trading for over $14,900. In December 2017, Bitcoin was trading over $19,000. So if you invested in early phases, you must have made a fortune out of your investment. While, if you have investment towards the end of 2017 and early 2018, your returns are negative. During the March market crash, Bitcoin crashed and went to the $6000 level. That answers the question – are Bitcoin safe?
If you want to make a safe investment, Bitcoins are probably not for you. In terms of risk, they are the riskiest form of investment. Also, the lack of uniform regulations about Bitcoins raises questions over their liquidity, longevity, and universality.
Can you Lose Money on Bitcoin?
Just like stocks, you can lose your money investing in Bitcoin. As mentioned above, the value of Bitcoin in December 2019 was over $19000 and today it is trading around $14900. You must have lost 20% of your capital if you have invested during the peak.
Is it Smart to Invest in Bitcoin?
If you can take a significant risk and enter the market when the prices are significantly low (like at present, however, the best time was March 2020) then it can be a smart investment. An important thing to take note of is that you should not invest a large percentage of your portfolio in Bitcoin. Their lack of guaranteed value and digital nature means the purchase and use of Bitcoins carries several inherent risks.
Is Crypto a Good Investment?
The same holds for other cryptocurrencies. It is a good investment only if you are investing a small percentage of your portfolio and not buying at peaks. What is the peak is a separate question!!
What will Bitcoin be Worth in the year 2030?
Who could have predicted the worth of Bitcoin when it came into existence in 2009? No one expected that your $1 will turn to $18000 in less than 10 years. So predicting the worth over the next 10 years is quite a challenge not just for Bitcoin but other asset classes as well.
However, given so much hype around Bitcoin, a lot of research has been going around to predict the future price of Bitcoin. As per the Crypto Research Report, the price of Bitcoin will be around $341,000 in 2025 and $397,727 by the end of 2030. However, there are many other reports available that have predicted different growth numbers.
This is one side of the story, the technology is changing very fast and there could also be a scenario where a new cryptocurrency comes and completely overtakes Bitcoin. In that scenario, Bitcoin won’t see such exceptional growth.
Will Cryptocurrency Replace the Dollar?
Well, it is a good question to ask, but perhaps it is too early to ask this question. You should know the dollar is not only used in the US for transactions but it is also a global reserve currency. It facilitates cross-border trade which includes investment and international debt obligations. Also, most of the central banks of the world hold reserve currencies in the form of a dollar. Some analysts believe the dollar will lose its value in the next few years as the market is losing confidence in it. Whatever the situation of the dollar, Bitcoin is far from replacing the dollar any time soon since it is deeply rooted in the system.
What are the Risks of Trading?
You can invest in cryptocurrency for the long term and also trade in cryptocurrencies. However, trading in cryptocurrencies is risky. Trading itself is risky, the nature of cryptocurrencies makes it riskier. Below are some risks involved with cryptocurrencies trading:
Unregulated – There are no central banks or government bodies that govern the cryptocurrencies.
Volatile in nature – In the case of negative sentiments in the market, there is a sudden and sharp movement in the prices of cryptocurrencies. It can quickly drop by hundreds of dollars.
Error and hacking – These are susceptible to technical glitches and human error. If you face one such scenario, making a complaint does not guarantee resolution since there is no regulating body.
Which Cryptocurrency will Explode in 2020?
There are around 6955 different cryptocurrencies available in the market. If you are looking to invest in cryptocurrencies, you better choose a good one. Here are the top 3 cryptocurrencies which can explode by the end of 2020 and the start of 2021.
Ripple – Ripple in the last year or so has shown an increased rate of adoption. It has made international transactions quicker as well as cost-effective. Banks form a popular consumer base of Ripple since they enjoy cheaper cross-border transactions.
Ethereum – It is soaring in popularity since it is the favorite crypto network for developers. Ethereum supports the creation and promotion of decentralized applications popularly known as dApps. These are referred to as the next generation of digital applications.
Bitcoin – No list can be complete without Bitcoin, if cryptocurrencies are popular it is only because of Bitcoin. Bitcoin has seen a lot of ups and down in 2020 but the future seems bright.
To sum up, cryptocurrency is a risky investment. It has made some people millionaires in the last decade while some have lost a fortune investing and trading in cryptocurrencies. As per experts, you should only put that much in cryptocurrencies that you can afford to lose.