“Cryptocurrency” refers to digital money. These are currencies that exist entirely online, and independent of any country, bank, or governing body. They are not based on any physical asset, which means their value is determined entirely by public sentiment. In other words, they’re worth only what people are willing to pay for them. Which, if you’ve been watching the news lately, is quite a bit.
There are thousands of different cryptocurrencies, but for the sake of keeping things simple in this article, when I refer to crypto, cryptocurrency, or cryptocoins, I’m talking primarily about Bitcoin, Litecoin, and Ethereum. The more obscure a cryptocurrency, the fewer advantages and the more risks! If you’re eager to get on the crypto investing bandwagon, below are what you need to consider before buying in.
Does cryptocurrency have a place in your portfolio?
Whether or not cryptocurrency is a good investment for you depends entirely on what you think the future will look like — not what the past growth of cryptocurrency has been.
It’s tempting to look at the hockey-stick growth curve of these coins and think they’re must-haves for your retirement plan. However, because of the nature, longevity, and future application of cryptocurrencies — and which ones — is largely unknown, it’s hard to say of what and how much you should have in order to meet your financial goals.
Will cryptocurrency replace traditional money? It’s possible, but it’s also possible money will change in other ways, such as the introduction of a universal basic income to cope with the elimination of jobs due to automation. It’s also possible the stock market will implode, there will be a nuclear war, and a whole bunch of other unpredictable events will drastically change the nature of money and how we use it forever. You can’t know the future, but that doesn’t mean you can’t plan for it.
The most important thing is not to bet all your money on one outcome, while still putting forward enough not to get left in the dust. In other words, don’t take out a second mortgage on your house to buy Bitcoin, but also don’t feel bad about putting a few hundred or thousand dollars into crypto to “see what happens”. Cryptocurrency is trendy, it’s fun, and it might mean something in the long run.
If you’re looking for how much to invest, treat it as you would investing in any individual stock. My personal rule of thumb is:
never put more than 3% of your investment portfolio into a single investment
— and that applies to cryptocurrency, too. 3% is enough to give you some skin in the game, while still being an amount you can afford to lose without wildly sabotaging your financial security. Now, you can bend this rule to suit your own needs, whether you take it to mean 3% of your total wealth in cryptocurrency or 3% of your total wealth in each Bitcoin, Ethereum, and Litecoin. Whatever you choose, don’t invest more than you can afford to lose.
The advantages of investing in cryptocurrency
The reason cryptocurrencies have become so popular lately is that there are major advantages to using this technology in place of traditional currency and assets.
A way to protect against political instability. Cryptocurrency is a great way to tuck away wealth outside of the risk of regular currency volatility. This concept probably doesn’t make a lot of sense for North Americans who enjoy fairly stable currency, but in countries with less political — and therefore monetary — stability, cryptocurrency offers an attractive way to protect your assets that is removed from this risks of government, bank and currency collapse. If you live in a region where your money is becoming worth less and less in the global economy by the day, cryptocurrency can protect your personal and family wealth while giving you an asset your government cannot seize.
No taxes on capital gains. Because cryptocurrency doesn’t belong to any country and isn’t quite recognized as a “real” investment yet, no one can tax you if your investment in crypto goes up in value. That means everyone who scored a 1,000%+ return on Bitcoin’s meteoric rise was able to cash out without giving a penny over to Uncle Sam. With the exception of a Tax-Free Savings Account and the Roth IRA, there are few in the way of tax-free investment vehicles available. But cryptocurrency is definitely one of them.
Anonyminity. The very nature of cryptocurrency, and what made it so attractive initially, is that it’s an anonymous currency. Within each coin is a record of every transaction, but it’s encrypted, so you can never know who bought or sold what. This is the complete opposite of our more traditional payment methods, like credit cards, that keep a record of as much data as possible about the buyer (and seller). Since most people enjoy keeping their private information private, especially depending on the purchase/sale of certain goods or service, the anonymity of cryptocurrency is a huge draw.
Protection against fraud. Hand in hand with its anonymous nature, cryptocurrency also cannot be counterfeited. In a world rampant with identity theft and counterfeit cheques, money, and credit cards, this is a huge advantage for both shoppers and merchants to ensure high-quality transactions.
Universal access. Because cryptocurrency is not bound by one country or government, it can be used globally. Or at least it will be able to once more places accept it. But in the meantime, anyone from any country with an internet connection can buy cryptocurrency. From a collaborative global-citizen perspective, that is pretty cool.
The downsides and risks of investing in cryptocurrency
The list of potential downsides and risks with cryptocurrency is unfortunately long, but it’s important to be aware of them before you buy any digital coins.
Volatility. While the overall trend of cryptocurrency values has been an upward trajectory, there’s plenty of large valleys and dips in that journey. It’s not uncommon for the price of a crypto coin to fall 10% or 20% or more in a single day. Everyone likes to see their investments go up, but few can handle even minor dips in value. Most people think they’re actually way more risk tolerant than they are, and it only takes one bad day (or in the case of crypto, one bad minute) to let them know how much volatility they can actually stomach.
Theft. Because cryptocurrency is digital, it’s at risk of the same things that wipe out other digital assets: hackers and user error. Hacking is a big risk to cryptocurrency loss, particularly for the retail investor who doesn’t know how to take the necessary precautions to protect their coins. The average computer user has weak passwords a lack of understanding of web vulnerabilities, and this is leaving their cryptocurrency assets up for grabs. One of the most vulnerable places you can keep your cryptocurrency is on the exchange where you buy and sell them. In a recent hack, $60 million of worth of Bitcoin was stolen from NiceHash. Remember, because cryptocurrency is unregulated, it’s also uninusured, which means the users that had tens of thousands or even hundreds of thousands of cash in their NiceHash accounts lost it, and will never get it back.
Accidental loss or misplacement. You might be your own worst enemy when it comes to keeping your cryptocurrency safe. If your passwords are so good that it keeps both hackers and yourself out of your digital wallet, your cryptocoins are as good as nonexistent. Over the past eight years, plenty of people have locked themselves out of their digital wallets, wiped hard drives, and otherwise eliminated cryptocurrencies from their ownership. Both I and Elon Musk are part of the many that have contributed to the approximately 3 million Bitcoins (about $20 billion worth) that are lost. Misplacing a Bitcoin isn’t the same as forgetting a $20 bill in the pocket of your winter jacket. If it’s gone, it’s gone for good.
Utility. One of the biggest hurdles to overcome with cryptocurrency is you can’t spend it in very many places. Aside from select online retailers that take Bitcoin, very, very few places accept any cryptocurrency as a form of payment. You cannot pay your cellphone bill or buy groceries with cryptocurrency, which fundamentally defeats its identity as a “currency” in the first place: if you can’t exchange crypto for goods and services, then it’s not really serving as a currency. It is possible to get debit and prepaid credit cards that will let you spend your cryptocurrency as cash. However, these convert your Bitcoin or other digital money to conventional cash first and then let you spend that. This brings up the original problem of cryptocurrency’s volatility — how eager are you to spend something that can go up or down in value by as much as 20% in mere minutes? It also comes with currency exchange and transfer fees that you wouldn’t otherwise have to deal with if you use traditional money.
Contributing to illegal and illicit activities. Because of the anonymous nature of cryptocurrencies, they’re a favorite for the global drug, sex, and illegal weapons trade. Maybe Americans wouldn’t have rallied the price of Bitcoin so high if they knew they were bankrolling terrorists. To put it simply: the increased value of cryptocurrency made many very bad people very rich. Whether or not you’re personally morally opposed to participating in the cryptofest when plenty is tied up in the black market is entirely up to you, but do be aware: plenty of it is dirty money.
Environmental destruction. Believe it or not, for all the high-tech talk of blockchain, cryptocurrency is energy intensive to mine. Bitcoin actually consumes enough energy to power 3 million homes. Maybe you’re a zero-footprint, tree-hugging vegan trying to make the world a better place, in which case buying Bitcoin makes you a hypocrite. Other more modern cryptocurrencies show promise in less pollution and better scalability, but for now, the fuss is still all about the worst environmental offender, Bitcoin.
Hoarding. The “currency” in cryptocurrency is rapidly becoming a misnomer if no one spends their digital assets. With few retailers accepting cryptocurrencies and the ongoing wild volatility in coin prices, people are not buying cryptocurrency with the intention to spend it. Instead, it’s becoming an asset to store value. There’s nothing wrong with this, but how something is used affects how it is valued, and we will see that play out when it comes to these coins.
Final thoughts on cryptocurrency
Blockchain technology is cool, digital money is fun, and everyone loves a good rollercoaster (even if they get on at the top).
If you’re ready to get started investing in cryptocurrency, check out Coinsquare (Canada) or Coinbase (USA) to set up an account and start investing. These are digital coin exchanges that you can fund with cash from your bank account, and then use it to buy Bitcoin, Litecoin, Ethereum, and more.
No one really knows what’s going to happen in the future, but it looks like cryptocurrency might be here to stay and that warrants doing your research and seeing how it fits into your own financial plan. At the very least, you can always buy a fraction of a coin if only to be part of the mania.