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Cryptocurrency has conquered the world. Since 2009, when the first cryptocurrency appeared:Bitcoin—was launched, the cryptosphere has experienced tremendous ups and downs and terrifying lows.
The truth is that cryptocurrency is an extremely volatile asset. Investors need to understand that owning cryptocurrencies means taking a lot of risk on their portfolios. But for investors who understand how to manage risk, cryptocurrencies could present great opportunities.
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Is it safe to invest in cryptocurrencies?
Crypto has generated huge profits for some investors, while others have lost significant sums.
William Procasky, CFA, an assistant professor of finance at Texas A&M University-Kingsville, says new investors should steer clear of cryptocurrencies. But he also points out that more experienced investors, who understand how to deal with risk, could find a place for it in their portfolios.
“If you are building a broad-based portfolio and you want to add crypto to the 5% or 10% of your portfolio that you are setting aside for alternative assetsthen you could be fine,” says Procasky.
bitcoin and Ethereal They are the two largest cryptocurrencies by market capitalization and are more established than many other cryptocurrency options. This makes them a safer bet for most investors.
“If you go with options like Bitcoin and Ethereum, which are more mainstream, there’s a bit more security around you,” says Lauren Niestradt, CFP/CFA, a senior portfolio manager at Truepoint Wealth Counsel.
What the SEC says about cryptocurrencies
The SEC has been skeptical of cryptocurrencies. In an interview with Yahoo Finance, SEC Chairman Gary Gensler said that cryptocurrency companies must “comply” with existing laws.
These comments came immediately after the FTX debacle at the end of 2022.
Gensler’s hope is that, among other things, the SEC can offer protection to consumers should crypto firms decide to become lending firms.
“There is no reason to treat the crypto market differently just because different technology is used. We should be technology neutral, Gensler said in an April 2022 speech.
This means not only new laws and regulations, which Congress is discussing, but existing regulations could affect the way cryptocurrency exchanges and other companies do business.
Risks of investing in cryptocurrencies
There are several risks associated with investing in cryptocurrencies: loss of principal, government regulations, fraud, and hacking.
- Loss of principal. Mark Hastings, a partner at Quillon Law, cautions that investors must tread carefully in the unique financial environment of cryptocurrencies or risk significant losses. This is a risk with any investment, but the high volatility of cryptocurrencies makes it an even greater risk factor. With Bitcoin falling more than 60% in the last 12 months, these losses could easily add up to a significant portion of the original investment.
- Government regulations. According to Michael Collins, CFA, a professor of financial planning at Endicott College, many governments have yet to fully regulate the use and trading of cryptocurrencies, which can make it difficult to know what to expect in terms of legal and financial risks. There are even some calling for cryptocurrencies to be made illegal in the United States. This is probably an unlikely scenario, but given that it’s already happened in China, it’s certainly a possibility.
- Fraud. As with any unregulated industry, fraud is rife in the cryptosphere. Hastings says: “Cryptocurrency fraud has skyrocketed in 2022, and the industry’s lack of regulatory oversight has left many thousands of investors penniless.”
- tricks Hacks are quite common with cryptocurrencies. According to Chainalysis, more than $3.2 billion worth of cryptocurrency was stolen in 2021. Although many exchanges offer private insurance, if you lose your cryptocurrency in a hack, you may not have any recourse to recover your investment.
Bitcoin price is around $17,000 as of this writing. This is significantly down from its high of over $65,000 in November 2021.
However, rather than a long-term investment, Bitcoin was initially lauded as a form of electronic cash. For this to work as promised, cryptocurrencies like Bitcoin should be able to be used to buy goods and services.
But with over 22,000 cryptocurrencies in circulation, very few of them are widely accepted for the purchase of goods or services.
As of the end of 2020, it was estimated that approximately 2,300 US businesses accepted cryptocurrency for payments. In 2019, there were more than 35 million businesses in the United States, which means that those who accept cryptocurrency are a drop in the bucket.
Could Crypto become the new global currency?
With all the excitement around cryptocurrency, many backers have touted the possibility of it becoming a global currency.
“I don’t think governments would allow a competing currency like that on that scale,” says Procasky. “A global currency has to be very liquid and very deep, and there is nothing that can compete with the US dollar.”
Money is a strictly regulated and controlled asset. As was evident from the scandals of 2022, as earth moon, Celsius and FTX: crypto can cause significant damage to people’s finances in its current incarnation. Most of the world’s governments would not allow their financial systems to carry that kind of risk.
“I think it’s years away,” says Niestradt, “and this is where some of the speculation lies. It is not a certainty.
Is Crypto a hedge against inflation?
Those who still believe that Bitcoin and other cryptocurrencies could be an inflation hedge are simply not paying attention.
According to the US Bureau of Labor Statistics, in November 2022, core inflation rose more than 7% year-over-year. Bitcoin is down more than 65% during the same period.
“Crypto failed the test as an inflation hedge. If it’s possible to give it an F-, that’s how it performed,” says Procasky.
Cryptocurrencies and Taxes
Investors must pay capital gains tax on any income they have earned from cryptocurrency. This means that virtually every time cryptocurrencies change hands, it becomes a taxable event, which includes mining either to bet.
Capital gains taxes are around 15%, but can be as high as 20% or more.
In order to make a purchase with cryptocurrency, investors often have to convert it into fiat currency. This makes the use of cryptocurrency for most purchases taxable, making it more expensive than buying goods with cash.
Is Crypto a good long-term investment?
Widespread adoption would be necessary for cryptocurrencies to gain value in the long term, and cryptocurrencies face tremendous hurdles.
Andrew Rosen, CFP, President of Diversified LLC, says, “While I believe the underlying technology of block chain it has innovation and practicality, until you disassociate yourself from the game of unregulated currency, it is too risky.”
However, more speculative investors may want to take a risk.
These investors may or may not see a reward in the short term, but that is not to say that the right cryptocurrency cannot earn them huge profits in the long term. Of course, the total value of an investor’s cryptocurrency holdings could easily reach zero.
Should you invest in cryptocurrencies?
The final determination of whether you should invest in cryptocurrency can only be answered by one person: you.
However, whatever decision you make on the matter, it pays to do your due diligence, understand the investment thesis of each particular coin, and even talk to a financial advisor.
“There are other assets that you can speculate on. It doesn’t have to be crypto, but if you think long-term you have a role and you believe in blockchain technology, then there is a thesis,” Procasky says. .