What is cryptocurrency and is it a good investment?

We’ve heard a lot about cryptocurrencies in recent years, but they also come with big risks. Here’s what you need to know about investing in crypto.

There’s no doubt that if you get it right, investing in cryptocurrencies can result in great returns for savvy investors. You might have heard of some of the more popular virtual coins like Bitcoin, Litecoin, Ethereum, Ripple and Stablecoin, and many currencies have made headlines in 2021. Some have seen big gains while others burned out spectacularly. Like any investment, you’ve got the best chance of success in the cryptocurrency market if you’re armed with as much knowledge as possible before jumping in.

Here are some key points to consider when it comes to investing in cryptocurrencies in 2021.

What are cryptocurrencies and how do they work?

Cryptocurrencies are a form of electronic cash, and a cryptocurrency unit, such as Ethereum or Bitcoin, is what’s known as a digital token. Digital tokens are created from blockchain, which is a type of computer code using highly encrypted strings of data blocks.

When it comes to how they work, cryptocurrencies are essentially all types of payment systems that are deployed to execute contracts, run programs and pay for things. Unlike hard currency, anyone can create a cryptocurrency, and at any given time there can be hundreds, or even thousands, of cryptocurrencies in circulation on the internet.

Pros of investing in cryptocurrencies

Cryptocurrencies are a good investment if you’re an investor who wants to gain direct exposure to the demand for digital currency. The big example that supporters of crypto point to is Bitcoin, with that virtual currency making many investors around the world rapid millionaires. However, it also fluctuates wildly and is notoriously volatile.

So, price volatility is a big thing with cryptocurrencies. It’s part of what makes the market so exciting and provides significant opportunities to traders, but it also brings increased risk. 

Trading hours is another plus. Unlike, for instance the stock market, the crypto market usually trades 24/7 as there’s no centralised governance.

Another advantage, versus traditional currency, is lower inflation risk. That’s because a major difference from real-world currencies is that virtual currencies aren’t regulated by governments, so they’re protected from inflation.

Cons of investing in cryptocurrencies

While there’s lots of upside if you get it right, investing in cryptocurrencies is not for the faint-hearted and comes with significant risks.

One of the big risks, for instance, is the fact that the financial system around crypto contains fewer safeguards than the traditional real-world system. This means that you’re not protected if the platform where you buy and sell your cryptocurrency is hacked, or fails.

Another potential downside, starkly witnessed in 2021, is the fluctuation in prices of some cryptocurrencies. While price volatility provides opportunities, it also means you could lose a lot of money if you get it wrong, as values fluctuate significantly in short periods of time.

The virtual nature of crypto also means your money could be stolen if a hacker gets hold of the contents of your digital wallet. Unlike thefts from banks or other financial institutions, if an online thief steals your digital currency there’s little chance you’ll get it back.

The internet is a hotbed of scams and this can pose another risk. With less regulation of the sector than exists with real-world financial markets, scammers have an easier time tricking people into investing in fake opportunities to buy cryptocurrency.

Get educated and be smart

So, if you’re thinking of commencing investing in cryptocurrency, make sure to consider all your options carefully before starting out. Like any market, those making money usually have in-depth knowledge of what they’re trading, and the risks and opportunities involved.

Also, if you don’t have the risk appetite to invest directly in crypto, there’s always the option to buy the stocks of companies with exposure to cryptocurrency, which may represent a safer option, albeit one with potentially less upside.

Remember, it’s usually the case that most serious investors in cryptocurrency will not consider putting their money into projects that are not already well known, and most sophisticated investors will often only invest in Bitcoin, if they invest in crypto at all.

Information provided in this article is of a general nature only and we have not taken your personal financial objectives, situation or needs into account. We recommend you consider if you need to seek professional financial advice before making any financial decisions.

This article is issued by Simple Financial Choices Pty Ltd (ABN 58 629 890 900; AFS Representative No. 001269407), a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956; AFS Licence No. 238184), as the Sub-Promoter of Simple Choice Super. Simple Choice Super is a sub-plan of the Grosvenor Pirie Master Superannuation Fund – Series 2 (ABN 32 367 272 075; RSE Registration R1001204), which is marketed under two brands – Simple Choice Super and Slate Super. Visit our website or call us on 02 8074 1772 or email us at [email protected] to discuss your superannuation.