One of the most exciting new avenues for investing is the cryptocurrency market. More than a decade ago, Bitcoin (BTC) made its debut on the global market. Since then, hundreds more crypto coins have appeared, some with more success than others. But during the intervening years, at least a dozen competitors to BTC have carved out a niche in this highly competitive, extremely volatile market.
Cryptocurrency is unique among investment vehicles for a number of reasons. In fact, they were designed to be digital, not physical, assets used primarily as a means of exchange. All ownership documents are securely stored on a computerized ledger in cryptographic language (hence the name cryptocurrency). The ledgers serve two other functions: they act to verify all ownership transfers and closely regulate the creation of new coins. Because cryptos are not issued by any national or centralized authority, many investors wonder if they’re safe. Here are the most relevant pros and cons of using this new kind of currency as a form of investment or as a store of value.
There’s a Possibility for Huge Returns
A quick glance at the BTC or other major coin price charts and you instantly see what the true definition of the word volatility is. In the early years of cryptocurrency trading, some folks become overnight millionaires by putting modest amounts of money into the crypto market. Investors are still rather fickle about this relatively new form of money, and prices are still quite unstable. So, while there indeed is the possibility for large profits, anyone who invests should be fully ready to lose their entire investment.
Liquidity is a Big Question Mark
Depending which coin you choose to buy, liquidity can be a concern. For the big names like BTC and others, there’s almost never a problem finding willing buyers or sellers. But if you plunk down your hard-earned cash into any of the new coins, be ready to struggle when you try to sell. That’s why it’s imperative to research the popularity and age of any form of cryptocurrency you decide to purchase. It’s one thing if prices shoot up after you buy in, but quite another situation when you can’t locate a willing buyer when you want to sell.
There’s a Chance of Mismanagement
Another thing investors should make note of is the management team behind any newly issued coins. Think of initial coin offerings (ICOs) the same way you would for an initial public offering (IPO), when a company issues its first shares of stock to the public. These are considered more stable if they have a solid management team at the helm. Do your due diligence and study everything you can about a new crypto issue. That includes reading the resumes and experience narratives about each founding team member.
Minimize the Risk
Fortunately, there are ways to minimize risk when investing in cryptocurrency. Stick with the big names that have been around for several years. Check liquidity and recent price charts. Don’t dive in with a huge amount of money. Go slowly, and keep a close eye on when you can take profits or when losses loom.