Investing in Cryptocurrency: Is It Worth the Risk?

By Myles Leva

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Last Updated: January 18, 2022

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Cryptocurrencies are a young asset class that has only gained widespread popularity during the last decade.

They have made the news constantly for the best and worst reasons.

You’ve probably heard of “Bitcoin millionaires,” and the stories of people whose returns were hundreds of times higher than their investments.

But you’ve likely also heard of the extreme volatility and the unethical practices that also exist in the space.

In this article, we will simply seek to answer the most pressing questions prospective cryptocurrency investors have in a straightforward manner.

 

Is Cryptocurrency Safe?

No.

Relative to other assets, cryptocurrencies may present the potential for extraordinarily high returns. But by the same token, they present extraordinarily high volatility and risk.

Changes to cryptocurrency prices are hard to predict, even for technological experts in the field. If you’re entering the crypto market without comprehensive knowledge, the potential for loss is higher.

This relationship between extreme risk and extreme rewards can be a draw to the crypto markets for many people.

However, if safety and low risk are your primary concerns for investing, cryptocurrencies aren’t the right asset class for you.

 

Is Investing in Crypto High-Risk?

Yes.

Cryptocurrencies are an asset class that has only recently gone under the microscope of traditional regulatory bodies. However, as an asset, they are not issued or backed by any government or regulatory body. They are treated as property in terms of taxing gains in most countries.

 

Crypto Risk Management

Cryptocurrency price fluctuations are extreme when compared to other asset classes.

This is a large part of what draws more and more people to the crypto space. They present a unique value proposition of potentially multiplying your initial investment in a shockingly short time frame. However, this unpredictability also means the potential for extraordinary losses.

Similar to asset classes like large-cap stocks, crypto investments (for the most traded assets) tend to do better over the long term.

Short-term fluctuations make short-term strategies like day trading even riskier than they already are with traditional securities. Long-term gains are easier to realize and present a safer strategy, especially for investors new to crypto.

But even so, all investment strategies are riskier when applied to crypto as compared to other asset classes.

 

Can You Lose More Than You Invest in Cryptocurrency?

No. You stand to lose your entire investment, but you won’t lose more than you first invest.

For example, if you started investing in Bitcoin with $50 in 2011, became fabulously wealthy, then invested your Bitcoin in a sinking ship, you could lose your new fortune, but you won’t have lost more than you started with in 2011.

You can potentially lose your entire investment if you invest in cryptocurrency. However, it’s rare to lose your entire investment.

When people lose their entire crypto investments, it’s normally the result of investing in an ICO or a project that either fails or that turns out to be a scam.

When you invest in a widely circulating, mainstream cryptocurrency such as Bitcoin or Ethereum, the risk is smaller. You could theoretically lose all of your investment, but there is no reason to believe that these cryptos are going to hit rock bottom or simply cease to exist anytime soon.

 

Is Crypto Worth the Investment?

If you ask one of the 100,000 plus people who became millionaires from Bitcoin alone, they would probably say “yes!”.

If you ask someone who got scammed off a dodgy ICO or who made rash, poorly-informed decisions and lost everything, they would likely give you a different answer.

All these factors circle back to the high-risk high-reward reality of the crypto markets. Cryptocurrencies simply tend to make or break individuals’ finances.

For cryptocurrency investments to be worth it for you, you will need to start by educating yourself on the intricacies of this young market.

In totality, the space presents high risks. However, not all crypto investment decisions are equally risky or equally wise. To make the most out of cryptocurrency investment, traditional investing guidelines must be applied. These include common-sense rules such as:

  • Not investing more than you’re willing to lose
  • Not engaging in risky short-term practices without extensive education and the right professional tools
  • Understanding how asset prices are determined
  • Diversifying your portfolio to avoid being decimated when one asset drops      

 

Next Steps

If you’re considering investing in cryptocurrencies, take the time to become acquainted with how they work.

Their underlying technology (blockchain) and unique value proposition make them, unlike any other investment asset. This is why it’s also important to appreciate the unique risks crypto investment presents as well.

Photo by Kanchanara on Unsplash

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