When it comes to cryptocurrency like Bitcoin, people tend to have very strong opinions either for or against it. Supporters praise the potential to build wealth, whilst critics deride cryptocurrencies as scams or threats we’d be better off avoiding entirely.
This argument tends to oversimplify things, as it portrays cryptocurrency as either a miraculous investment or a disastrous scam. The truth is likely somewhere in between.
So as a beginner investor if you’re looking to buy Bitcoin online, what do you do? Here we examine the key upside opportunities and downside risks of investing in crypto. When you have a balanced understanding instead of hype or fear, you can then make informed decisions.
The Pros: Why Crypto is Promising
#1 – Diversification and Growth Potential
Cryptocurrency offers investors a new asset class outside of traditional stocks, bonds, and cash. Adding some cryptocurrency exposure to a portfolio provides greater diversification given that crypto tends to have a low correlation to other assets.
For example, if stocks decline due to market conditions, cryptocurrency may rise or remain stable, minimising losses. It also acts as a hedge to manage risk. Having a 5-10% crypto allocation helps balance portfolios against stock/bond downturns.
Additionally, the cryptocurrency space is constantly evolving with thousands of new projects and potential opportunities. Investing in promising emerging cryptos allows you to tap into major growth runways.
#2 – Technological Innovation
Another factor that makes the crypto space quite promising is the adoption of blockchain technology. Instead of needing centralised third parties like banks, blockchain allows peer-to-peer transactions via an immutable digital ledger distributed across computers globally.
This decentralisation offers the potential for increased transparency, enhanced security against hacking, increased trust through consensus mechanisms, and greater efficiency through automation.
Today, the technology is starting to gain more real-world adoption in industries like finance and security. The programmable nature of blockchain technology also makes it promising for many future applications.
#3 – Greater Mainstream Adoption
While cryptocurrency is still considered a niche investment, it is slowly gaining mainstream acceptance and use. Large companies like PayPal, Visa, and Microsoft now facilitate crypto payments and operations which lends legitimacy to the asset.
High-profile investors like Paul Tudor Jones and Michael Saylor are also allocating significant funds to Bitcoin which further boosts public confidence. Additionally, some progressive countries like El Salvador have adopted Bitcoin as a legal tender and this signals its broader acceptance.
#4 – Inflation Hedge
Cryptocurrency could potentially also serve as a hedge against inflation, just like assets such as gold. Crypto experts believe that the decentralised nature and limited supply of cryptos ensures their purchasing power will not get diluted over time, unlike fiat currencies which are prone to ‘money printing’ and inflation.
As central banks continue expansionary policies, crypto acts as a haven for maintaining value compared to dollars or euros. Nevertheless, you must bear in mind that this opinion is quite controversial due to the extreme volatility of crypto.
#5 – Decentralisation and Accessibility
By removing centralised intermediaries like banks and payment processors, cryptocurrencies allow peer-to-peer financial transactions without government or corporate control. This decentralised nature levels the playing field by giving everyday individuals autonomous control over their funds. Users enjoy self-custody of funds, privacy, minimal fees, and the ability to send payments anytime globally. While the decentralised nature and reach of crypto are promising, controls also protect mainstream consumers.
The Cons of Cryptocurrency
While crypto has some intriguing benefits, it also comes with some significant drawbacks every investor needs to consider. Let’s look at some of them:
#1 – Extreme Volatility and Risk
One of the most concerning risks with cryptocurrency is its extreme volatility. Unlike stable assets like bonds or gold, crypto valuations fluctuate massively and unpredictably day-to-day, sometimes rising or falling over 10% in value within 24 hours. These wild price swings make it difficult to determine appropriate prices and valuations for cryptocurrencies.
The volatile nature of crypto also makes this asset a less reliable medium of exchange or a stable store of value compared to traditional currencies. Prices can shift before a transaction is complete. Such turbulence can be too much of a risk for new investors.
#2 – Lack of Regulation
Today, cryptocurrencies largely operate in a regulatory gray area without clear legislation or oversight governing them. While this lack of regulation has enabled decentralisation, it raises major concerns about consumer protection, fraud, market manipulation, and tax evasion at crypto exchanges and platforms.
More regulations will likely emerge as crypto grows, though they may negatively impact aspects of decentralisation. A clear policy would provide more legitimacy and safety for the average investor. The current legal uncertainty and lack of accountability remain a major drawback for mainstream adoption.
#3 – Cybersecurity Dangers
Being a digital asset, cryptocurrency faces constant threats of hacking, data breaches, and theft. There have been high-profile security failures at many prominent crypto exchanges and platforms over the years, causing investors’ confidence to falter.
Unlike regulated banks, violated crypto exchanges don’t guarantee recovery of lost funds. Additionally, if investors lose or misplace their private keys, they may lose access to their coins permanently with no recovery options. The pseudo-anonymous nature of blockchain transactions also makes cybercriminals hard to track and prosecute.
#4 – Environmental Damage
Bitcoin’s proof-of-work mining system has received backlash for its vast energy consumption since it relies on fossil fuels. By some estimates, mining Bitcoin burns more electricity than small countries! Such massive environmental impacts raise sustainability concerns and objections. However, newer consensus models like proof-of-stake aim to solve these energy issues by reducing mining computational power needed.
#5 – Use in Illicit Activities
Due to crypto’s private and decentralised nature, it’s been associated with illegal uses like money laundering, tax evasion, and buying illegal substances on the dark web. While most crypto activity is legal, critics argue it facilitates crime and unethical deeds.
Cryptocurrencies carry both unique opportunities and serious risks. If you look past the hype and fear, you can analyse the pros and cons objectively to make informed investing decisions. While crypto is not without challenges, it offers exciting possibilities in finance worth understanding even for the cautious.