You’ve probably heard quite a bit about cryptocurrencies over the past year, and you may be wondering if you’re missing out on an investment opportunity. While that’s a valid question, there’s a lot to consider before investing in these very risky assets.
A cryptocurrency is a digital currency: a form of payment that can be exchanged online for many goods and services. The cryptocurrency “lives” in something called a “digital wallet,” which is basically a series of complicated passwords. Transactions are verified using a decentralized technology called blockchain.
Cryptocurrencies have proliferated in recent years. According to CoinMarketCap.com, thousands of different cryptocurrencies are publicly traded, and the total value of all cryptocurrencies was more than $2.2 trillion as of April 2021. But Bitcoin is the most popular, with a $1.2 trillion market cap as of April.
So why do people buy cryptocurrencies? Some like the fact that central banks can’t manage the money supply, since central banks tend to reduce the value of money via inflation over time. Others like the fact that because the blockchain is a decentralized processing and recording system, it can be more secure than traditional payment systems.
But cryptocurrencies have plenty of risks. First, if you lose your “digital wallet,” there is no way to recover your Bitcoin. Second, cryptocurrencies are considered speculative: like other currencies, they generate no cash flow, so in order for you to make money, another investor must pay more for your cryptocurrency than you did. Third, cryptocurrencies can be volatile: it’s not unusual to see them fluctuate by as much as 40% in a single day.
If cryptocurrencies intrigue you, we can provide additional input, helping you choose the right investments to balance growth potential and risk. Please call or email us today. We’re always here to help.