Posted in  Crypto, Crypto & NFTs  |  March 14, 2024  |  Steven Peterson

What to Expect?

  • Uncover Cryptocurrency and the Opportunities it Offers
  • Understand Cryptocurrency’s History, Mechanics and Potential
  • Navigate the Complexities of Investing in Cryptocurrency vs. Traditional Investments
  • Explore the ROI on Cryptocurrency and Traditional Investment Assets
  • Assess the Risks and Rewards of Investing in Cryptocurrency

Cryptocurrency has been a hot topic in the financial world for a while now. Like AI, it’s a bandwagon everyone wants to hop on—uncertain of the outcome, but not wanting to miss out. And it's not hard to see why.

In 2013, the leading Cryptocurrency Bitcoin experienced a remarkable surge and its price skyrocketed from around $13 per Bitcoin at the beginning of the year to over $1,000 by the end of the year. It peaked at over $60,000 per Bitcoin in April 2021, and $70,000 in March 2024.

In terms of capital, it means that if you had purchased $1,000 worth of Bitcoin in early 2013 at around $13 per Bitcoin, your investment would have been worth over $5.4 million in 2024 with a remarkable ROI of 540,000%.

Overview of Cryptocurrency: Definition, History, And Current Status

Wondering, what exactly is a cryptocurrency, and how can it fit into your investment portfolio? Here are the various details about cryptocurrency, including its history and current status:

Defining Cryptocurrency

Cryptocurrency is a digital or virtual form of currency that uses cryptography for security and operates independently of a central bank. Unlike traditional currencies like the US Dollar or the Euro, cryptocurrencies are decentralized.

They typically utilize blockchain technology for transparency and immutability. Bitcoin, the first and most famous cryptocurrency, was introduced in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto.

Historical Context

However, the history of the cryptocurrency is older and can be traced right back to the early 2000s. This was the time that the concept of digital currency gained traction among technologists and cypherpunks. The online buzz in chat rooms and other forums continued until things got interesting with the introduction of Bitcoin.

That was when the chatter became a reality and the cryptocurrency as we know it today came into existence. Over the years, thousands of alternative cryptocurrencies, commonly referred to as altcoins, have emerged. Each of these have their own unique features and use cases.

For more insights into the history of cryptocurrency, check out this History of Cryptocurrency Report.

Current Status

Today the cryptocurrency market has a diverse array of digital assets, from Bitcoin and Ethereum to Solana and Cardano. Its total market capitalization surpasses $2,000,000,000,000 (2 trillion dollars). Cryptocurrencies have gathered significant attention from investors, institutions, and mainstream media alike.

However, the volatility and speculative nature of this market have led to both massive gains and steep losses for investors. This only serves to highlight the need for careful consideration and risk management for investors.

Top Cryptocurrencies to Invest

These are some of the top Cryptocurrencies that have found favor with investors:

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Binance Coin (BNB)
  • Cardano (ADA)
  • Solana (SOL)
  • XRP (XRP)
  • Polkadot (DOT)
  • Dogecoin (DOGE)
  • Avalanche (AVAX)
  • Terra (LUNA)

CoinMarketCap is a good place to check the current prices of various cryptocurrencies.

Cryptocurrency vs. Traditional Investments (Fiat Currencies)

Cryptocurrencies are quite different from your traditional alternative investments. Here are the various aspects that put them in a different league altogether:

1. Asset Characteristics

When you compare cryptocurrency to traditional investments like stocks, bonds, and real estate, it's essential to consider their fundamental characteristics. Take for example stocks – they represent ownership in a company and offer dividends and voting rights. While cryptocurrencies function primarily as a medium of exchange or store of value.

Bonds, on the other hand, are debt securities that can generate fixed income for you through interest payments. In comparison, cryptocurrencies do not provide any such guaranteed returns.

2. Market Dynamics

Another key difference between cryptocurrency and traditional investments is the market dynamics. Traditional markets are subject to various regulatory oversight, such as economic indicators, and geopolitical events. All of these can influence asset prices, investor sentiment, and your return on investment.

In comparison, the cryptocurrency market operates 24/7 on a worldwide scale. The prices of various cryptos are instead determined by supply and demand dynamics, speculation, and technological developments.

3. Risk Profile

All investments carry some level of risk, however, cryptocurrencies are known for their high volatility and lack of intrinsic value. Compared to tangible assets you invest in, like real estate or commodities, cryptocurrencies derive their value from network adoption, utility, and investor sentiment. This makes them highly vulnerable to extreme price fluctuations.

Also, the decentralized nature of cryptocurrencies presents unique challenges in terms of security, regulatory uncertainty, and market manipulation. You need to be aware of these aspects and follow a risk mitigation strategy to deal with them.

4. Liquidity and Accessibility

Cryptocurrency markets offer high liquidity as these digital assets are traded on various exchanges around the clock. This is totally unlike traditional investments, which you can trade, buy, or sell only during limited trading hours and with liquidity constraints.

Cryptocurrencies, in comparison, can be bought, sold, and transferred instantaneously. This provides you with a high level of flexibility and easy access to capital.

5. Ownership and Control

When you invest in cryptocurrencies, you have full ownership and control over your digital assets. This is because they are stored in a digital wallet that you control.

This is sharply in contrast with traditional investments that you can only hold through intermediaries like brokerage firms or custodians. In such cases, you have only limited control over your assets and are often subject to third-party fees and restrictions.

6. Transaction Costs

Transactions in cryptocurrency attract much lower fees compared to traditional financial transactions. With cryptocurrencies, you can send monetary value across transnational borders quickly and cost-effectively. The system bypasses intermediaries and reduces friction in the financial system.

7. Innovation and Disruption

Cryptocurrency investments offer you exposure to innovative technologies and disruptive business models. These have the potential to reshape industries and economies – fueled by what some believe is the currency of the future.

Projects and platforms built on blockchain technology are driving innovation in finance, supply chain management, healthcare, and other sectors. This puts in the center of the action, in technology and currency that is creating new investment opportunities and unlocking value for all stakeholders.

8. Regulatory Arbitrage

The decentralized nature of cryptocurrencies enables regulatory arbitrage. This allows you to capitalize on regulatory disparities between jurisdictions. In comparison, traditional financial markets are subject to complex and burdensome regulatory frameworks.

Cryptocurrencies operate in a global, borderless environment with varying degrees of regulatory oversight. This creates opportunities for regulatory arbitrage and market inefficiencies to be exploited that ultimately benefit you as an investor.

ROI of Cryptocurrency vs. Traditional Investments

One of the biggest reasons that investors are flocking to cryptocurrencies is the fabulous returns it offers. While Bitcoin is amongst the shiniest stars of this horizon, other cryptocurrencies are also not lagging behind.

Here’s how the remarkable returns of cryptocurrencies have outperformed many traditional investment assets over a similar period:

1. Cryptocurrencies vs. Stocks (Equities)

Cryptocurrencies are a new asset class, which has exhibited exceptional growth compared to traditional stocks as an alternative investment over the past decade. Various cryptocurrencies like Bitcoin and Ethereum have seen amazing increases in value.

The stock market, such as the S&P 500, has also shown substantial gains. However, the percentage returns of cryptocurrencies far exceed those of traditional stocks during the same period.

2. Cryptocurrencies vs. Commodities (Gold, Silver, etc.)

Cryptocurrencies have also been compared to various commodities like Gold and Silver. Commodities like gold have historically served as a hedge against inflation and economic uncertainty. Likewise, cryptocurrencies have emerged as a digital alternative with the potential for swift price appreciation.

When you compare the two asset classes, you’ll find that the percentage gains of cryptocurrencies are far greater than those of traditional commodities.

3. Cryptocurrencies vs. Real Estate (Property)

Another asset class that has long been favored by investors for its stability and potential for appreciation is Real Estate, however, traditional real estate markets are no match for the growth of cryptocurrencies in terms of return percentages.

It is easy for you to look at real estate as an asset class that offers tangible asset ownership and income generation through rental properties. However, if you are looking for high-growth opportunities in the digital economy, then cryptocurrencies are a better option.

4. Cryptocurrencies vs. Bonds (Fixed-Income Securities)

Bonds are known for their income-generating potential and are relatively stable compared to equities. In comparison, cryptocurrencies are a high-growth alternative investment with the potential for fabulous returns.

As an asset class, bonds provide diversification benefits and income through interest payments. However, you’ll find that the percentage gains of cryptocurrencies far exceed those of such traditional fixed-income securities.

This ROI Study compares the ROI of cryptocurrency with traditional investments.

The Good and Bad of Cryptocurrencies

Like every asset class, cryptocurrencies have their pros and cons. As an investor, you should carefully weigh these before deciding to invest in the same.

The amount of capital that you allocate to cryptocurrencies as an alternative investment should be based on your risk tolerance and the need for portfolio diversification.

Here are the various advantages and disadvantages of investing in cryptocurrencies:

Pros of Cryptocurrency Investments

1. Accessibility

One of the primary advantages of investing in cryptocurrency is its accessibility to a global market. Traditional financial markets have various barriers to entry such as minimum investment requirements or geographical restrictions.

However, the cryptocurrencies that you invest in can be bought, sold, and traded anywhere, anytime – all you need is an internet connection and a digital wallet.

This democratization of finance has empowered individuals worldwide. No matter where you live or operate, you can easily participate in the digital economy and access the various alternative investment opportunities that cryptocurrencies offer.

2. Potential for High Returns

Another appealing aspect of cryptocurrency investments is the potential for high returns. Over the past years, various cryptos such as Bitcoin and Ethereum have delivered astronomical gains for early adopters and savvy investors.

For example, Bitcoin's price surged from less than $1 in 2010 to over $60,000 in 2021, and $70,000 in 2024. This represents a staggering return on investment for those who had the foresight to hold their Bitcoins.

3. Portfolio Diversification

With cryptocurrency, you can diversify your investment portfolio beyond traditional asset classes like stocks and bonds. When you add cryptocurrencies to your portfolio, you reduce overall risk by spreading your investments. This even spread of alternative investments across different asset types with low correlation can also enhance your long-term returns.

4. Transparency and Security

Blockchain technology, which is the underlying technology behind most cryptocurrencies, provides transparency and security as it is decentralized and has an immutable ledger.

All your transactions that are recorded on the blockchain are visible to all network participants. This helps to reduce the risk of fraud, tampering, and unauthorized access. These are all the common risks that are associated with centralized systems.

5. Innovation and Technological Advancement

Investing in cryptocurrency allows you to participate in ongoing innovation and technological advancement within the digital asset space. The projects and protocols built on blockchain technology are continually pushing the boundaries of what's possible, driving innovation in finance, decentralized applications, and beyond.

6. Global Market Access

Unlike traditional asset classes, the cryptocurrency markets operate 24/7. This allows you to trade digital assets at any time of day from anywhere in the world.

The global accessibility of cryptocurrencies eliminates traditional market hours and geographical barriers. This provides you with greater flexibility and opportunity to capitalize on price movements and arbitrage opportunities.

7. Decentralization and Financial Sovereignty

Cryptocurrency promotes decentralization and financial sovereignty. It does this by enabling you to control your funds without depending on intermediaries like banks or governments. This peer-to-peer network empowers you to transact directly with other investors or traders. This fosters financial inclusion and autonomy worldwide.

Cons and Risks of Cryptocurrency Investments

1. Volatility

One of the most well-known risks associated with cryptocurrency investments is their volatility. Price swings of 10% or more within a single day are common in the crypto market. This makes them highly volatile, compared to traditional investments.

While volatility can present opportunities for traders to profit from short-term price movements, it also exposes you to significant downside risk and can lead to substantial losses.

2. Regulatory Landscape

Another factor that you need to consider when investing in cryptocurrency is the evolving regulatory landscape. Governments and regulatory bodies around the world are trying to deal with the rise of digital assets. As such, there is a growing focus on implementing regulations to address various concerns related to consumer protection, money laundering, and financial stability.

There is uncertainty surrounding future regulatory actions and compliance requirements. This can further impact investor confidence and contribute to market volatility.

You can gain deeper insights into the regulatory landscape surrounding cryptocurrency investments with the Regulatory Landscape Research.

3.Market Manipulation

There is a lack of regulatory oversight and transparency in the cryptocurrency market. This makes it vulnerable to manipulation by market manipulators. Various large holders of cryptocurrencies can influence prices through coordinated buying or selling. This leads to artificial price movements and market volatility that can impact your investments in cryptocurrencies.

4. Technological Risks

The blockchain technology is known for its security and immutability. However, cryptocurrencies are not immune to technological risks such as hacking, bugs, and network attacks.

Various security breaches and exploits have occurred in the past that have resulted in the loss of funds and damage to investor confidence in various cryptocurrencies. This also poses a risk to you and your investment.

5. Legal And Tax Uncertainty

The legal landscape surrounding cryptocurrencies remains uncertain and fragmented. Different jurisdictions have imposed varying levels of oversight and enforcement. Other related actions such as bans, restrictions, or taxation can also impact the legality and usability of cryptocurrencies and your investment.

You need to be aware of all such legal, taxation, and compliance-related challenges. Consider taking the help of taxation, financial, and legal experts before you invest in cryptocurrencies.

6. Custodial Risks

The nature of investment in cryptocurrencies makes you entrust your assets to third-party custodians or exchanges. This raises the prospect of custodial risks such as theft, insolvency, or mismanagement of funds.

While these services offer convenience and liquidity, they also pose the threat of a single point of failure and undermine the decentralized aspect of cryptocurrencies.

7. Environmental Concerns

The energy-intensive nature of cryptocurrency mining, such as proof-of-work-based (PoW) networks raises concerns about its environmental impact and carbon footprint. The growing demand for electricity to power mining operations increases climate change and contributes to unsustainable energy consumption.

Assess the environmental impact of cryptocurrency mining operations with this Environmental Impact Analysis.

Conclusion

Cryptocurrencies offer a great opportunity for investors seeking investment options outside of traditional financial markets. With its decentralized nature, accessibility, and potential for high returns, cryptocurrencies have become popular with both individual investors and institutions.

However, you need to invest in cryptocurrencies with caution and due diligence, as the market is still evolving and subject to various risks and uncertainties.

Before making any investment decisions, be sure to consult an alt-investment advisor company or a financial advisor who can provide personalized guidance based on your financial situation and risk tolerance.

Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial advice. Always consult with a qualified financial professional before making investment decisions.

FAQs

Q1: Is crypto a good investment?

Ans: Crypto can be a potentially lucrative investment, but it's essential to recognize its intrinsic volatility and risks. Conduct thorough research, consider your risk tolerance, and consult a financial advisor before investing.

Q2: What are crypto investments?

Ans: Crypto investments involve buying digital assets like Bitcoin, Ethereum, and Altcoins for capital appreciation over time. You can trade cryptocurrencies on exchanges or hold them in digital wallets as long-term investments.

Q3: What are the four types of cryptocurrency?

Ans: The four main types of cryptocurrencies are:

  1. Bitcoin (BTC) - pioneer in digital currency
  2. Ethereum (ETH) - known for its smart contract capabilities
  3. Ripple (XRP) - designed for fast and low-cost international transactions
  4. Litecoin (LTC) – an improvement over Bitcoin in transaction speed and scalability

Q4: Is crypto real money?

Ans: While cryptocurrency isn't a physical asset like fiat currency, it holds value in the digital realm. It can also be used for transactions and investments. Its value is derived from market demand and adoption, which is similar to traditional forms of money.

Q5: Is crypto currency safe?

Ans: Cryptocurrency’s safety varies depending on various factors like security measures, regulatory compliance, and user practices. While blockchain provides inherent security, risks such as hacking, scams, and regulatory changes can pose threats.

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About the Author

Steven Peterson is our staff writer and he has been interested in alternative investing strategies since 2016. He first started his research on gold, and real estate investment trusts which later expanded into wine, hedge funds, and lithium.

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