Cryptocurrency, or crypto, has been making headlines for years. Now, it has even entered the 2024 presidential election.
Surprisingly, “almost half of all corporate money contributed to this year’s federal election campaigns — yes, nearly half — has come from crypto backers, according to a recent report from the consumer advocacy group Public Citizen,” said Bankrate.
But beyond being part of a buzzy industry with apparently deep pockets, is crypto actually a good investment? Here is what to know about its potential risks and rewards.
What exactly is cryptocurrency?
Before we get into whether to invest in crypto, let’s review what crypto actually is. Effectively, said NerdWallet, cryptocurrency “is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment,” meaning an investor hopes to profit from a change in value when they go to sell.
Typically, “cryptocurrencies exist on decentralized networks using blockchain technology — a distributed ledger enforced by a disparate network of computers” and “are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation,” said Investopedia.
What are the upsides of investing in crypto?
Depending on the type of investor you are and your tolerance for risk, crypto can offer upsides as an investment, including:
It is a decentralized currency. For many, a major upside of crypto is that it is a “decentralized currency, meaning it’s not regulated by a single government or central bank,” said Credit Karma. In other words, “governments can’t control [crypto] like they can with centralized fiat currency such as the U.S. dollar.”
It offers diversification. One potential benefit of crypto for your portfolio is that owning some “can increase your portfolio’s diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market,” said The Motley Fool. Diversification is key when investing, as it spreads your portfolio across a number of different types of assets, buffering against market volatility.
It may provide sizable returns. Though it is far from guaranteed this will happen, “several cryptocurrencies have seen their prices skyrocket since first being introduced,” said Bankrate. This translates to “the potential for large gains on your investment.”
Are there risks or drawbacks to crypto?
While past tales of people making bank on crypto may seem tempting, it is important to heavily weigh the downsides of this investment as well:
It is extremely volatile. While risk of loss is possible with any type of investment,” crypto’s elevated volatility makes it an even bigger risk factor,” said Forbes. As just one example, “Bitcoin has experienced rapid surges and crashes in its value, climbing to nearly $65,000 in November 2021 before dropping to just over $20,000 a year and a half later,” said Investopedia. Further, said Bankrate, since cryptocurrencies “aren’t backed by anything,” that means “the price they trade at is determined by the whims of traders.”
It is susceptible to hacks and scams. Fraud and hacks are both common with crypto. That is because “though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked,” said Investopedia. In the past, many exchanges and wallets have been hacked, “sometimes resulting in the theft of millions of dollars in coins.” Plus, said Bankrate, “it is often difficult to recover stolen funds.”
It lacks government regulation. While some may see it as an upside that crypto is largely unregulated, that can bring some downsides as well. “Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways,” said NerdWallet.
It has a major environmental impact. Crypto is often made through mining, which “involves solving complex mathematical problems to verify transactions and create new blocks in the blockchain,” said Credit Karma. This “requires lots of computational power, which in turn requires a large amount of energy.” In fact, according to “a comparison by the University of Cambridge,” said NerdWallet, “worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting.”