What about Investment In cryptocurrency ,Is it a good investment?

It is important before investing in bitcoin or other cryptocurrencies that you go in with your eyes open.

In this article we explain:

Is it a good idea to invest in cryptocurrency?

If you invest in cryptocurrency, do it based on the facts, not the hype – and there is a lot of hype.

Before you buy and sell digital currency, know the risks so you can judge if investing in it is a good idea for you and your personal finances. Here, we help you understand how cryptocurrency works.

The Bank of England would not agree that it is a good investment. Governor Andrew Bailey warned that people who invest should be prepared to lose all of their savings.

What are the risks of investing in cryptocurrency?

Governments and financial regulators in almost every country have warned investors of the risks posed by buying cryptocurrency.

When an investment starts to appear in headlines, on advertisements or through celebrity endorsements as a way to get rich, investors pile in without thinking through the risks.

1. Volatility

Extreme volatility is a defining factor of cryptocurrency. While you may make high returns, you could lose everything.

Read the experiences of one Times Money mentor reader: “Buying bitcoin instead of spending on nights out has made me $16,600”.

2. Scams

In November 2021, around £1 million–worth of cryptocurrency scams were being reported to Santander UK by its customers each month. The real scale of fraud is much larger.

One of the most common types is when a criminal hacks into your computer and freezes you out of your account.

3. Fake promises of high returns

Cryptocurrency firms may also be overstating how much investors could receive from investing in crypto, while minimising the risks.

4. No compensation scheme

UK bank deposits are almost always covered by protective schemes such as the Financial Services Compensation Scheme, this is often not the case for cryptocurrency investments. If a cryptocurrency exchange goes bust, there is no guarantee you will get your money back. If you lose your password, again, there is no one to go to to get it back.

For those wanting to get to grips with crypto investing, check out our article: Six cryptocurrency tips (and five mistakes to avoid).

Is cryptocurrency a good way to make money?

Early investors in cryptocurrencies like bitcoin will likely have made money: if you had invested £310 to buy one bitcoin in April 2016, six years later your investment would be worth about £24,000.

Bitcoin’s price soared through 2021, reaching record highs of just under $67,000 in November, but dropped to $21,000 now at its lowest in August 2022.

While that is certainly worth more than £310 for one bitcoin, it shows how volatile even the most popular cryptocurrency is. The price of bitcoin has been falling in 2022 amid a wider cryptocurrency sell-off as investors steer clear or riskier investments at a time of rising inflation and interest rates.

Some of the world’s biggest cryptocurrency exchanges are listing on mainstream stock exchanges. San Francisco’s Coinbase* debuted on the US Nasdaq stock market in April 2021 with a value of over $100bn (£70bn), making its market cap more than twice that of Barclays Bank.

But as of May 16, 2022, Coinbase’s value had fallen to $15bn.

New cryptocurrencies, most using blockchain technology, are coming out all the time. Some are intended to replace traditional currencies such as pounds or dollars, while others are used to create new types of financial application, or swap value between various digital currencies.

So if you are considering buying into digital assets, look closely at projects individually to see how they might pan out in the future.

Are you buying a totally worthless digital coin or something that offers innovative solutions to existing financial problems. If you are new to digital assets, read our article cryptocurrency trading for beginners here.

What are average returns for cryptocurrencies?

There is no guarantee a cryptocurrency will remain in action in the long run.

For example, of the top 10 cryptocurrencies by market value in 2013, only seven are still functioning today.

Using industry data provider Coinmarketcap.com, the top 10 cryptocurrency coins in 2013 were:

bitcoin
litecoin
peercoin
namecoin
feathercoin
terracoin
devcoin
freicoin
novacoin
CHNcoin

In 2013, one bitcoin was worth just under $112, and had a total market value of just over $1.2bn. On May 16, 2022, one bitcoin is worth about $30,000 and has a total market value of $1.3trn.

Eight years ago, one litecoin was worth $3.38. In April 2021 it commanded a value of about $245 per coin. Now it is worth $67.

Devcoin, novacoin and CHNcoin are no longer listed by Coinmarketcap, while two of the 10, freicoin and terracoin , have actually fallen in value in the intervening time; terracoin is worth a fraction what it was in 2013.

So buying smaller coins and holding onto them as a long term investment is not necessarily going to make anyone any real money.

There is a constant stream of new cryptocurrencies entering the market. Dogecoin is just one recent example that took off in May 2021 but has struggled to sustain investor momentum.

Is Ethereum a good investment?

If the price of any asset rises rapidly, there is always a chance it could fall just as quickly. We have seen that with ethereum in 2022.

A correction is usually defined by an asset dropping by more than 10%. That can be a good buying opportunity for an investor.

Launched in 2015, ethereum had been on a steep upwards trajectory since July 2021, reaching it’s record high of $4,617. In late January 2022, it’s price had fallen to $2,411 and as of May it’s value is $2,021.

Bear in mind however that almost two years ago it was around $122. It is still one of the most popular cryptocurrencies largely because it has more uses beyond just being a cryptocurrency.

Ethereum is used in smart contracts and payments company Visa recently said it would use it to record cryptocurrency payments.

When you look at the history of bitcoin, it reached the £10,000 mark after about four years, so ethereum could follow a similar trajectory given its popularity.

But remember there are no guarantees, so don’t put all your eggs in one basket. Check out our guide to bitcoin alternatives here.

The important thing to bear in mind about investing is that you only lose money if you sell when the investment falls below what you paid for it as you end up crystallising your losses. Read more in our Beginner’s guide to investing.

Is cryptocurrency a good long-term investment?

Yes, according to sophisticated investors such as banks, hedge funds and pension funds.

More of them are investing in cryptocurrency than ever before, and investment banking giant JP Morgan Chase advised in February 2021 that investors could consider putting 1% of their investments into bitcoin as a way to diversify their portfolio.

However — this investment advice is aimed at financial professionals — not your average investor who owns a few thousand pounds in stocks and shares.

Investing in crypto that is not particularly well known or well supported is fraught with serious risk.

Some early investors who have persisted have evidently made themselves rich. Those who haven’t? Well, it should be fairly clear that their value has fallen to next to nothing.

Most serious investors in cryptocurrency will not consider putting their money into projects that are not already well known.

Top tip:

Watch what sophisticated investors are buying. Pension funds or university endowments, which manage billions of pounds in cash and specialise in long-term investments, will often only invest in bitcoin — if they invest in crypto at all.

Bitcoin is the original cryptocurrency and commands a high long-term value because it has never been hacked and has maintained 100% uptime since it was launched.

Is bitcoin a good inflation hedge?

Investment pros have been talking a lot about digital currency as a way for investors to hedge against inflation.

When inflation rises, as it is doing at the moment, the value of cash in a savings account falls over time. As the years pass, we can buy fewer goods and services with the money in our bank accounts.

Investment options touted as a “hedge” — government bonds or gold, for example — tend to either keep more of their value than cash over the long term, or they tend not to be affected by declines in other parts of the economy.

That’s why so much long-term investment advice is focused on moving cash out of our bank accounts and into stocks and shares, or assets like cryptocurrency, that could appreciate over time.

Baked into the bitcoin code is the promise that no more than 21m units of bitcoin will ever be created. So instead of being an inflationary currency like sterling or dollars, some experts argue bitcoin is the opposite: it is deflationary, increasing in value just with the passing of time.

Of course, the deflationary argument in favour of bitcoin falls down if governments decide to regulate specifically against it. India, for example, has proposed a ban on cryptocurrency trading, suggesting it will impose fines on anyone caught holding onto digital assets of any kind.

The regulatory uncertainty that surrounds bitcoin, and cryptocurrency in general, is one of the reasons so many investors discount it entirely.

Is cryptocurrency a good investment? Checklist

Cryptocurrency investors should do their due diligence, as they would with any other investment.
Think long and hard about which cryptocurrency has the genuine potential to change the world.
Try not to be swayed by malicious money-grabbers shouting this or that coin is “going to the moon”.
Remember there is nothing quite like losing a month’s wages in a day to bring an investor right back down to earth.