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The crypto craze has died down a bit, but these assets are still very popular. Bulls are still able to point to major benefits of this asset class, but there are serious risks to consider. Weigh these pros and cons and decide for yourself if crypto has a place in your financial plan.
Reason to buy #1: Potential returns
The most obvious reason to invest in cryptocurrency is the possibility of huge returns. The ultimate fate of today’s slate of cryptos and tokens remains to be seen, but it’s hard to ignore the huge gains that many have delivered to early holders.
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As digital currencies are adopted, they tend to deliver huge increases in value. The same can be said for various tokens that power blockchain utilities and related software. These are emergent technologies that are already disrupting some important functions. Blockchain and Web3 have obvious application for payments, financial transfers, property rights, cyber security, insurance, supply chain management, and documentation.
In many of these cases, crypto owners will be the beneficiaries of new tech adoption. That gives just about everyone access to venture capital-style opportunities. Those previously weren’t really a thing for publicly traded stocks and retail investors.
Reason to buy #2: Supporting important disruption
Along with the allure of huge gains, the crowd of early crypto adopters have also been largely mission driven. Buying certain crypto assets can support the adoption and development of new software. Many blockchain projects are democratizing certain financial and business functions that were previously infeasible for people with limited resources.
Any crypto or token requires market adoption to function properly. With the network effect, many exciting projects come to life. Liquid assets with lively secondary markets give value to cryptos. That provides incentive to developers and stakers who allow the blockchain to function. Early adopters also help to legitimize these assets in the eyes of financial institutions and regulators.
By investing in crypto, you’ll have a chance to accelerate the proliferation of exciting new technology.
Reason to buy #3: Learning
Finally, buying cryptocurrency can help you learn about the assets and the technology. Dabbling in these markets will give you an idea of their important dynamics. Reading white papers and analyst commentary provides a great foundation for understanding the latest relevant trends in the technology — and potential future opportunities as well.
Cryptocurrencies are a new asset class, and we’re still learning about the shape it will eventually take. Things might change a lot due to regulation, development, or adoption trends. However, it’s unlikely that they’re going away any time soon.
Investors who really understood the internet were in a great position to benefit as the rest of the world reacted fearfully to the dot com bubble bursting. A similar situation is emerging now.
Reason not to buy #1: Limited fundamentals and major speculation
Risk is the flip side of growth potential. Stocks rise and fall with supply and demand, but shareholders of real companies are ultimately entitled to the cash flows produced by the business in the long term. If all else fails, a stock at least has some relationship with fundamentals.
That’s not too prominent with cryptos. Instead, the markets have largely been fueled by speculation. Many people are just buying crypto on the chance that more momentum will drive the price even huge, with no concern for the function of the token. Many blockchain projects have interesting functions built in that deliver returns for holders, but the market value of cryptos are largely divorced from those fundamental returns.
This makes it hard to really analyze these assets as investments. Instead, it leaves a lot of the success and failures to guesswork. It also creates situations where huge losses are possible.
Reason not to buy #2: Lack of regulation
The original minds behind Bitcoin and other cryptocurrencies were very purposefully seeking to create financial tools that limited the powers of regulators and central banks. Those desires are understandable, but investors are starting to see why many capital market regulations exist — and they’re learning the hard way.
Pump and dumps, rug-pulls and other forms of market manipulation or outright fraud are serious considerations for crypto buyers, especially those who dabble in smaller altcoins. There have also been questionable practices from the teams behind certain high profile cryptos, and those can lead to major losses in shareholder value.
These risks don’t necessarily characterize the market as a whole, and most crypto projects are genuine. Still, an unregulated market can be hazardous for people who aren’t experts.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
