Cryptocurrencies have garnered global recognition and interest for their sudden increase and just as sudden decrease – in value. From experienced investors to individuals just beginning their investment journey, many are wondering, Are cryptocurrencies a good investment?
What’s a cryptocurrency?
A cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren’t backed by major governments or developed economies. This decentralisation means that blockchain technology validates these digital transactions without oversight or intermediaries. While cryptocurrencies are generally meant to serve as a medium of exchange, much of the attention they receive is as a financial investment.
Is there value in owning cryptocurrency?
It’s hard to talk about cryptocurrencies without acknowledging the savvy technology behind it. Some investors have had success trading various cryptocurrencies in the short term. However, there are a few issues that can make crypto a problematic investment for long-term portfolios.
- They’re highly speculative. While you may gain a quick win with these investments, there’s no evidence that they’re built for the long term.
- They have significant price volatility. Market swings happen, but the price fluctuations of many cryptocurrencies make them relatively unstable.
- They have high commissions. Many crypto exchanges charge high fees to trade, with some as high as 2.5% per trade
What are the risks?
The surging value of various cryptocurrencies—such as Bitcoin, Dogecoin, and the like — can make it tempting to invest, but consider these risks before purchasing a digital currency:
- In recent years, cryptocurrency prices have experienced wider fluctuations than traditional assets (such as stocks and bonds) and some have had dramatic short-term drops. This volatility makes cryptocurrencies impractical as a medium of exchange, and the sudden price movements can encourage impulsive buying and selling.
- Additionally, the extreme can make it difficult to liquidate a position in a timely manner, making liquidity risk a real concern.
- Unlike stocks and bonds, cryptocurrencies don’t pay dividends or cash payments, and therefore don’t offer any intrinsic value for the sizable amount of risk the investor takes on.
- Cryptocurrencies are largely unregulated, without the backing of major governments or economies. This lack of regulation makes it unlikely that cryptocurrencies will be able to achieve the value and quality of other currencies. Additionally, the anonymity of the digital transactions lends them to possible illegal activity.
- Cryptocurrency exchanges are subject to breaches, disruptions, and failures that can jeopardise investors and their personal information. The collapse of the crypto exchange FTX in November 2022 is evidence of this lack of regulatory oversight. Since cryptocurrencies aren’t currently backed by any major governments, investors are unlikely to recover lost funds.
The bottom line:
Cryptocurrencies are highly speculative in their current state and as such their long-term investment case is weak. A better approach is to have an investing philosophy that encourages discipline and tuning out the noise. Investing for the long-term in a cost-conscious portfolio of shares and bonds has served investors well, while reacting to short-term trends can derail to your long-term goals.
Dr Steve Garth
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