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Is cryptocurrency a good investment?

An advertisement of Bitcoin, one of the cryptocurrencies, is displayed on a building in Hong Kong, on Nov. 18, 2021. C(AP Photo/Kin Cheung, File) An advertisement of Bitcoin, one of the cryptocurrencies, is displayed on a building in Hong Kong, on Nov. 18, 2021. C(AP Photo/Kin Cheung, File)
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2022 ended uneventfully, as far as cryptocurrency markets were concerned. Prices remained low, especially after the FTX exchange scandal, which caused investors to lose billions of dollars.

However, it seems that some cryptos have experienced a recovery so far in 2023. Most notably, Bitcoin’s (BTC) price increased from C$22,473 on January 1st to C$29,103 on February 12, per Google Finance.

The recent upturn has inspired many to reconsider investing in crypto. But is it really a good idea?

Today, I’ll explore some of the pros and cons of investing in cryptocurrency so that you can make an informed choice.

AN OVERVIEW OF THE PROS AND CONS

Before you get excited about crypto’s recent upturn, remember that it’s not the first time that this has happened before. In fact, when it comes to crypto, sudden changes are the norm. The price of Bitcoin, for example, has seen massive (and often very random) shifts many times in the past.

Here’s a quick review of some of the pros and cons of investing in cryptocurrency.

Pros

  • Potential for high returns: Cryptocurrencies can increase in value dramatically over short periods of time. However, this can be very unpredictable.
  • Decentralization: Most cryptocurrencies operate independently of central banks, which can give investors more freedom.
  • Accessibility: Thanks to its decentralized nature, your cryptocurrency funds can be accessed anywhere in the world at any time and converted into most major fiat currencies, which is a government-backed currency not backed by a commodity, like gold.

Cons

  • Volatility: As profitable as a crypto pump can be for some, the crash on the back end can be just as devastating. Cryptocurrency’s monetary value is incredibly volatile and can flip on a dime.
  • Lack of regulation: Cryptocurrency regulations are still developing in Canada, and there’s limited protection for investors.
  • Exchanges may go bankrupt: Due to the lack of regulation, investors who hold money in an exchange risk losing their investments if the exchange goes under.
  • Security risks: Cryptocurrency exchanges and wallets can be vulnerable to hacking and theft, which can result in the loss of funds for investors.
  • Crypto and blockchain tech can be a complicated subject: The technology behind cryptocurrencies and blockchain networks can be complex and difficult to understand, making it challenging for many individuals to participate in the market.

WHAT ARE THE BENEFITS OF INVESTING IN CRYPTOCURRENCY?

Here’s a more in-depth look at the reasons why you may want to consider investing in cryptocurrency.

Massive potential for future growth

Cryptocurrency has massive potential for growth. Proponents of cryptocurrency investment claim that the current value of crypto is just the tip of the iceberg. They believe that once cryptocurrency sees widespread adoption, the price of top-performing coins will skyrocket.

Unfortunately, there’s no way to determine when this will happen or if it ever will.

Access your funds from anywhere in the world

If you like the idea of complete freedom for your money, cryptocurrency is one of the most accessible currencies in the world. Most cryptocurrencies are completely decentralized and can be sent to any wallet address anywhere in the world without filing paperwork with a traditional bank.

You can also access your wallet and convert crypto into local fiat currency wherever you can find a Bitcoin ATM.

WHAT ARE THE RISKS OF INVESTING IN CRYPTOCURRENCY?

Now, here’s a more in-depth look at some of the more prominent risks associated with investing in cryptocurrency markets.

Cryptocurrency markets are incredibly volatile

Even the most stable cryptocurrencies have shown remarkable potential for extreme price fluctuations over short periods of time. Although the internet often glorifies so-called “Bitcoin millionaires,” these represent a very small percentage of investors.

The reality is that there are far more investors who lose money investing in crypto, but you don’t hear about it as much in the media.

Cryptocurrency exchanges may go bankrupt

In June 2022, FTX moved into Canada after acquiring the Bitvo cryptocurrency exchange. Just five months later, in November, Sam Bankman-Fried’s FTX empire collapsed. This event rocked the crypto world to the core, and many investors lost trust in the market.

Shortly thereafter, news of behind-the-scenes scandals and misuse of investor funds were revealed. In mid-December, the U.S. government charged Bankman-Fried with fraud.

If you lose your hardware wallet, you lose your crypto

Savvy crypto investors have long known that holding their crypto assets on an exchange isn’t very safe. Instead, they keep most of their cryptocurrency assets in “cold storage” on hardware wallets.

The only problem is that if you lose your hardware wallet or forget your unique password to access it, there’s no way to recover your assets. They’re as good as lost.

Is crypto a viable investment for 2023?

Crypto could see a decent recovery in 2023. However, it could just as easily crash again, and investors could see another all-time low. At the end of the day, investing in cryptocurrency is risky.

While it may be profitable for some, I don’t recommend investing money in crypto you can’t afford to lose. On the other hand, if you have extra money, want to take a risk, and truly believe in the technology, you could take a shot at investing in this disruptive product.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.

Do you have a question, tip or story idea about personal finance? Please email us at dotcom@bellmedia.ca.

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