What Are Advantages and disadvantages of using cryptocurrency?

Cryptocurrency is a digital version of money that takes the form of virtual tokens or coins. You can use it to buy or sell items from people or companies that accept such payments.

There are a range of cryptocurrencies available including, Bitcoin, Ethereum, Litecoin and Cardano, each with individual values and rules. Bitcoin is currently the most widely used.

To make a Bitcoin payment, Bitcoins are transferred from a digital wallet, which are obtained when you buy the currency from a crypto exchange, to someone else’s using an app or website and the person’s unique Bitcoin address.

Advantages of using cryptocurrency

Using cryptocurrency could offer opportunities for some businesses. The benefits may include:

A cryptocurrency transaction is generally a quick and straightforward process. For example, Bitcoins can be transferred from one digital wallet to another, using only a smartphone or computer.
Every cryptocurrency transaction is recorded in a public list called the blockchain, which is the technology that enables its existence. This makes it possible to trace the history of Bitcoins to stop people from spending coins they do not own, making copies or undoing transactions.
Blockchain aims to cut out intermediaries, such as banks and online marketplaces, which means there are no payment processing fees.
Cyptocurrency payments are becoming more widely used, amongst large organisations, and in sectors including fashion and pharmaceuticals.

Disadvantages of using cryptocurrency

There are some business disadvantages to using cryptocurrency:

It is possible to lose your virtual wallet or delete your currency. There have also been thefts from websites that let you store your cryptocurrency remotely.
The value of cryptocurrencies such as Bitcoins can change significantly, so some people don't feel it is safe to turn 'real' money into Bitcoins.
The cryptocurrency market is not regulated by the Financial Conduct Authority (FCA) so there are no rules in place to protect your business.
If companies or consumers move to a new cryptocurrency from you or stop using digital currencies entirely, it could lose value and become worthless.
Cryptocurrency exchanges are vulnerable to cyber attacks, which could lead to an irreparable loss of your investment.
Cryptocurrency can be vulnerable to scams. Scammers often use platforms like Facebook, Instagram and Twitter to trick people into these investments. If you suspect you’ve been targeted, it's important to report this to Action Fraud.Cryptocurrency can be a risky investment and you should only consider investing if you're financially equipped and willing to lose any money that you put into it.

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.

Cryptocurrency may be a good investment if you are willing to accept it is a high risk gamble which could pay off – but also that there is a strong chance you could lose all of your money. Prices of cryptocurrencies including bitcoin have been falling in 2022 amid a worldwide crypto price crash.

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

In this article we explain:

Related content: Should you invest in bitcoin?

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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

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

“The FCA is aware that some firms are offering investments in crypto assets, or lending or investments linked to crypto assets, that promise high returns. If consumers invest in these types of product, they should be prepared to lose all their money.”

Financial Conduct Authority, UK market watchdog, In January 2021

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 $29,000 (£23,700) at its lowest in May 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 .

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.