One in 10 people have invested in cryptocurrency in the past year! There are now over 300 million crypto users worldwide! And it’s not just the Gen Z crypto kids who are putting their money in, Gen Xers and Baby Boomers seem to be getting their hands in the game these days too.
One thing’s for certain: crypto has definitely been making some waves in the financial news with some people calling it the future of currency and the scourge of the big banks and others saying that it’s a passing fad that’s going to leave a lot of people with big losses.
So, what’s the deal? Why are people so split on crypto? And is it really a good way to invest your money? Well, I’m not going to tell you whether or not you should throw all your money at Dogecoin, but I will give you some pros and cons of crypto and let you make up your mind for yourself.
Pro: Potential For High Returns – The Bitcoin Boom
In the interest of keeping things even-keeled, I’m going to give you a pro and then a con, and flip-flop back and forth like that. So, let’s start out with one of the top reasons people are putting money into crypto: the potential for unthinkable returns.
In the five years before the end of 2020, the average annual growth rate of the S&P 500 was 14.5%. Over that same five-year period, the price of Bitcoin had an annualized growth rate of 131.5%. If we go back even further to the massive Bitcoin boom that created the phenomenon of the Bitcoin millionaire, it’s pretty easy to see that cryptocurrency has the potential for some seriously high returns.
With the price of Bitcoin sitting at over $62,000 as I’m writing this article, it seems like Bitcoin is probably out of its infantile stage. However, there are new cryptocurrencies coming out all the time and who knows which one might absolutely explode in the next few years. Plus, a lot of experts have speculated that Bitcoin might have some more growing to do as well.
So, if you’re thinking about investing in crypto, you might just make a ton of money. But, what’s the flip-side of high reward? Super high risk.
Con: High Volatility and Loss Potential – High Rewards, High Risk
In that same 5-year period that led up to the end of 2020, the volatility of monthly percent changes for Bitcoin was 90%. For the S&P 500, it was just 15.3%. And, for gold, it was 13.4%. If you’re not up to speed on your financial jargon, that means that the price of Bitcoin moves around a whole hell of a lot more than the other two. And that means that whether you choose to invest in Bitcoin at a high point or a low point is going to have a major effect on your investment return when it’s time to sell.
Many, many cryptocurrencies are extremely volatile, not just Bitcoin, which makes them far riskier than, for instance, a blue-chip stock, an ETF, an index fund, or a commodity like gold or silver, all of which tend to be way less volatile than cryptos. There’s also, of course, a pretty decent chance of failure for a lot of cryptos, being that cryptos are a pretty new phenomenon in general.
Take Ethereum’s DAO cryptocurrency, which was supposed to be the next big thing according to a lot of people. After a hacker infiltrated the system, the price of the coin basically hit the floor, losing investors a whole ton of money.
Right now, with cryptos being so new, it’s difficult to say which ones will fail and which ones are here to stay. While the criteria for a good versus a bad cryptocurrency have been difficult to determine, they do offer one advantage over traditional stocks, and that’s how transparent the transactions are.
Pro: Very Transparent – Equal Footing
A lot of questions and controversies have arisen lately about the transparency of the stock market, particularly around short sellers and market makers, investors whose trades can have a profound effect on stock price, because of the whole GameStop fiasco that happened recently.
And, by the way, if you don’t fully understand that whole situation, we have a video about it! Anyway, one advantage of cryptos is that they all work on an open-source blockchain ledger. And, without going too deep into what exactly that is and how it works, it basically means that anyone anywhere can view any transaction at any time.
No, real names are not used on these ledgers, so you won’t know if Bill Gates purchases a Bitcoin or two. But, you can see the size of the trades, which can let you know if there’s any market-making going on with a particular crypto.
Having this kind of transparency helps put average people and institutional investors on the same playing field, which is why a lot of people think of it as a way to free ourselves from the big financial institutions.
While a lot of people think of cryptos as a way of sticking it to the big banks and Wall Street, many of the world’s largest banks are actually thinking about launching their own digital currencies. And who’s to stop them? Right there is another con to crypto.
Con: Potentially Unlimited Supply – Crypto Inflation
Yes, yes, only 21 million Bitcoins can ever be mined and plenty of other cryptos have caps on their supply as well, but there are new cryptocurrencies being issued every day. And that means that the total supply of cryptocurrency is potentially unlimited.
There’s a reason that the New York Stock Exchange has regulations for who can list their stocks with them. It’s because it’s extremely difficult to have an efficiently functioning exchange when any regular person can just make their own stock.
The fact that anyone can go out and make their own crypto means that a lot of money is going to be put into cryptos that are soon going to be worthless, which makes valuations for every crypto out there more difficult.
While the fact that anyone can make a cryptocurrency can be seen as a potential drawback, the fact that anyone can access them at pretty much any time has contributed a whole lot to the adoption of cryptos in recent years.
Pro: Easy Accessibility – From Your Smartphone
Robinhood has made trading stocks way more accessible to the average person. But, even so, it doesn’t rival how accessible crypto trading platforms are. With crypto, there’s no market close and market open, no waiting for 9:30 to come around so you can buy or sell a stock, no looking at the price of your stocks and seeing that they’ve changed drastically during the after-hours sessions when normal people can’t trade.
Crypto trading goes on 24/7, allowing you to do your trading whenever you want and see every single price change in real-time. Also, pretty much all crypto trading can be done from a mobile device, which has made them a viable investment vehicle for people all over the world, even in places where they don’t have computers, only a cellphone.
For both of these reasons, crypto trading is a way more accessible way to invest for average people. And the rate at which crypto trading volume has increased only proves that fact.
But, while cryptos are easier for your average person to invest in, they may also be easier for hackers to access in some cases. And, if you lose your investment, you’re probably never going to see that money again.
Con: No Investor Protection – The Wild West
Being that cryptocurrency exchange and cryptos themselves are traded completely within the private sector, there’s no government protection to reimburse you if your cryptocurrency gets stolen by a hacker. As I said before, Ethereum’s DAO got hacked to the tune of $50 million from the entire system and another hacker stole over a million dollars worth of Bitcoin. If you were a holder of any of that crypto, it’s sayonara to your money, my friend.
Stocks, on the other hand, are backed by the Securities Investor Protection Corporation (or the “SIPC”), a federally mandated non-profit created under the Securities Act of 1970 that covers all of its members. And every stockbroker you’re ever going to buy a security through is a member, even Robinhood.
So, in a way, the world of crypto is kind of like the Wild West. Yes, their systems are extremely difficult to hack, but it has been done before. And, if it happens to you, no one’s going to reimburse you.