Should You Invest in Crypto?

What is crypto?

Simply put, crypto or cryptocurrency is a digital or virtual currency that can be used as an alternative method of payment or investment. The whole idea behind crypto is to eliminate the need for traditional third party financial systems, such as banks, since crypto is a peer to peer lending system. In other words, crypto does not have a regulating authority. Instead, crypto uses blockchain technology to verify transactions.

When was crypto created?

Although the idea behind crypto was created back in 1983 by American cryptographer David Chaum, the actual creation was in January of 2009 when Bitcoin was created by a programmer or group of programmers under the pseudonym Satoshi Nakamoto. Bitcoin has remained the most popular cryptocurrency and has paved the way for thousands of others to be created.

How does crypto get its value?

Crypto primarily gets its value through supply and demand. If there is more demand then there is supply for a crypto, the value tends to go up. Certain cryptos also have a maximum supply. For example, there will only ever be 21 million Bitcoins available. Essentially: if enough people agree a crypto has value, then it becomes valuable.

Potential for large returns

The first pro of investing in crypto is the potential for large returns. For example, Bitcoins return over the last decade has averaged out to be over 200% per year. No other asset class comes even close in that same amount of time. Many investors got into crypto over the past decade to try to capture some of these returns.

Accessibility

Many crypto supporters stress the importance of accessibility. Anyone with a smartphone or computer that has an internet connection can use crypto after setting up a crypto wallet. Crypto purists also stress how crypto could be used for people in developing countries that don't have access to traditional financial institutions.

Highly volatile and risky

Although major cryptos have provided very strong returns over the last decade, prices tend to fluctuate rapidly. Crypto prices can move suddenly and without warning, and can be influenced by outside sources such as government news and influencers. Trying to pinpoint what the value of a crypto will be tomorrow, next week, or next year can be extremely challenging. This makes crypto an inherently risky investment.

Lack of regulation

In many countries crypto is broadly unregulated. This can make it difficult to predict what the legal and financial risks are. Some countries are working on regulating crypto, some have fully embraced it, and some have banned it altogether.

Theft and fraud

Since crypto is still largely unregulated, it leaves the door open for theft and fraud. For example, hackers stole almost $4 billion worth of crypto in 2022. And it is not only hackers that you have to look out for. In the same year, Sam Bankman-Fried, who founded the FTX crypto platform, was charged with fraud for stealing customers money.

The bottom line is this: Crypto is still a very volatile and speculative investment. However, this does not mean that you can't invest in it as crypto can potentially provide larger returns and can be a store a value. With that being said, you should not place any many in crypto that you can't afford to lose. Most financial experts suggest that you should not allocate more than 5% of your portolio to crypto, and maybe even less than that.

Building significant wealth from investing takes years and more commonly decades. If you want to learn how to take a traditional approach to investing, you can check out our guide on how to start investing as a beginner. If you do want crypto to be part of your portolfio, you can buy it through a crypto exchange. You can check out our review for the top crypto exchanges to learn more.