3 Pros and Cons of Adding Crypto to Your Portfolio
Over the last few years, people’s interest in owning and trading virtual currency has reached unprecedented heights. At present, it’s estimated that around 420 million people own and use cryptocurrency worldwide. Crypto has also commanded an increasingly strong presence in the commercial sphere, and some of the largest and most established brands in the world now accept it as a form of payment.
Given cryptocurrency’s promising beginnings and equally auspicious-looking future, enterprising individuals may be highly tempted to jump aboard the investing train. However, as with any asset, it’s important to investigate the pros and cons of adding cryptocurrency to an investing portfolio before putting any money down.
This article explores three of the major advantages and three potential drawbacks that investors should consider before entering the crypto sphere.
The Pros of Investing in Cryptocurrency
It’s Decentralized
One of crypto’s most compelling selling points is that it exists outside the control of regulatory institutions like government organizations and central banks. Instead, most cryptocurrencies are built on a global, decentralized network of computers called a blockchain. These networks, such as the well-known Bitcoin SV Blockchain, are vast and entirely public, and they’re controlled completely by their users.
Due to this state of affairs, a cryptocurrency’s value is also mostly determined by these users. What a particular coin is worth, how much of it is produced, and other similar variables will change as supply and demand rise and fall. This means that as more businesses accept specific cryptocurrency payments and more individual users trade them, the overall value of those coins can be expected to rise over time.
There are many reasons crypto’s decentralized nature proves attractive to investors. For one, because cryptocurrency transactions aren’t coursed through banks or other institutions, enthusiasts argue that they offer users a higher degree of control over their assets—and by extension, more financial autonomy. Crypto users can perform peer-to-peer (P2P) exchanges without having to depend on any central authority. This presents an appealing opportunity to those who find traditional financial systems excessively restrictive.
Crypto is also seen as more resilient by virtue of decentralization. Traditional finance is susceptible to all manner of external disruptions, such as technical failures, government provisions, and economic or sociopolitical crises. Cryptocurrencies, by contrast, are not bound by geopolitical borders. The computers that make up crypto networks are distributed all over the globe, making these networks less likely to collapse under single points of failure.
It Helps Protection from Inflation
In a nutshell, inflation refers to when the value of money is gradually eroded over time. When it comes to traditional fiat currencies, governments can print more money or implement policies to reduce its purchasing power. Periods of high inflation disempower individuals and impair their quality of life, particularly those with limited income or those who live in economically precarious conditions.
Cryptocurrency is believed to be more insulated from inflation in large part because there are mechanisms in place to limit the number of coins being issued at a given time. Bitcoin, which is currently the world’s best-known and most successful cryptocurrency, has a cap in terms of supply at 21 million coins maximum. This limit ensures scarcity and makes Bitcoin’s value less vulnerable to inflationary pressures. Investors can thus consider adding cryptocurrencies to their portfolios as a hedge against the devaluation of conventional assets.
It Facilitates Smooth Peer-to-Peer Transactions
Most traditional business transactions necessitate the presence of a trading company, a bank, a broker, or some other intermediary. Regardless of the transaction’s specific nature, working with a middleman is likely to introduce delays, additional fees, complicated paperwork, and long settlement periods.
In contrast, cryptocurrency transactions allow users to transact privately and directly with each other. This enables both buyers and sellers to save valuable time and money, and it also increases accountability between the involved parties—therefore reducing the risk of scams.
The Cons of Investing in Cryptocurrency
It’s Characterized by Its Highly Volatile Value
As a relatively young, developing technology, cryptocurrency’s value is known to be highly volatile. Prices can fluctuate wildly within periods of several days or even several hours, leading to sharp downturns followed by equally abrupt spikes, and vice versa. A range of different factors accounts for this volatility, including market sentiment, regulatory developments, technological advancements, and macroeconomic events.
Many crypto investors enjoy or at least tolerate this volatility for the opportunities it presents to buy low and sell high. However, there’s no denying that constant price fluctuations make investing in crypto an inherently risky endeavor. New investors must carefully assess their risk tolerance before diving in, and experts generally advise beginning with small, conservative investments in established coins.
You Can Experience Security Problems Off-Chain
Cryptocurrency transactions’ lauded security comes from the immutable and tamper-resistant nature of blockchain technology. However, it’s also possible for the security of cryptocurrency holdings to be compromised off-chain. Crypto exchanges, which facilitate the buying and selling of a wide array of different coins, remain vulnerable to security breaches and hacking attempts. This makes it imperative for users to exercise vigilance when working with exchanges and to prioritize dealings with established, reputable platforms with airtight security protocols.
The digital wallets many users employ for storing crypto can also be compromised if wallet holders don’t follow proper security measures. Implementing security best practices, such as using hardware wallets and activating two-factor identification, can help crypto users safeguard their holdings.
Crypto Trading Comes with Sustainability Concerns
The environmental impact of cryptocurrency transactions is one of the most contentious topics of conversation in the crypto sphere, and it’s been so since cryptocurrency’s inception in the 2000s. Some coins, such as Bitcoin, rely on highly energy-intensive processes to make new tokens and verify new transactions—at times as much energy as some countries produce annually.
Crypto’s most vocal critics thus argue that the crypto sector’s carbon footprint is an egregious contributor to the climate crisis. And while the industry is actively exploring more sustainable alternatives and transitioning towards greener technologies, a greener future for the cryptocurrency sector remains a work in progress.
In conclusion, many of the advantages crypto offers make it a highly attractive asset class to new investors or those interested in entering the sector. However, it’s just as important for a trader like you to consider the potential risks and challenges associated with crypto before you invest in any coins. Weigh the pros and cons thoroughly before you develop an investing strategy that suits your financial goals and aligns with your risk tolerance.
