Cryptocurrencies are risky but if you are careful and understand the market, they can also be very rewarding. They have been drawing lot of attention from investors and crypto prices have zoomed over last year.
Several factors make cryptocurrency not entirely safe, at least currently, while other signs are emerging that cryptocurrency is here to stay.
Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. These security breaches have led to sizable losses for investors who have had their digital currencies stolen.
Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase (NASDAQ:COIN) make it fairly easy to buy and sell crypto assets such as Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH), but many people don’t like to keep their digital assets on exchanges due to the aforementioned risk of cyberattacks and theft.
Some cryptocurrency owners prefer offline “cold storage” options, such as hardware or paper wallets, but cold storage comes with its own set of challenges. The biggest is the risk of losing your private key, without which it is impossible to access your cryptocurrency.
Despite the inherent risks, cryptocurrencies and the blockchain industry are consistently growing stronger. Much-needed financial infrastructure is being built, and investors are increasingly able to access institutional-grade custody services. Professional and individual investors are gradually receiving the tools they need to manage and safeguard their crypto assets.
Crypto futures markets are being established, and many companies are gaining direct exposure to the cryptocurrency sector. Financial giants such as Square (NYSE:SQ) and PayPal (NASDAQ:PYPL) are making it easier to buy and sell cryptocurrency on their popular platforms, while other companies, including Square, have collectively invested hundreds of millions of dollars in Bitcoin and other digital assets. Tesla (NASDAQ:TSLA) purchased $1.5 billion worth of Bitcoin in early 2021.
While other factors still impact the riskiness of cryptocurrency, the increasing pace of adoption is a sign of an industry maturing. Individual investors and companies alike are seeking to gain direct exposure to cryptocurrency, considering it safe enough for investing large sums of money.
Should you invest in cryptocurrency?
Owning some cryptocurrency can increase your portfolio’s diversification since cryptocurrencies such as Bitcoin have historically shown almost no price correlation with the U.S. stock market. If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time.
If buying cryptocurrency seems too risky, you can consider other ways to potentially profit from the rise of cryptocurrencies. You can buy the stocks of companies like Coinbase, Square, and PayPal or invest in an exchange like CME Group (NASDAQ:CME), which facilitates crypto futures trading. While investments in these companies may be profitable, they do not have the same upside potential as investing in cryptocurrency directly.