It’s no surprise that the investment world is mesmerized by cryptocurrencies. Nearly every day, a new crypto company bubbles to the surface, offering a new way to invest in this up-and-coming digital currency.
To add fuel to the fire, almost everyone has heard a story from a friend, family member, co-worker, or colleague who knows someone who has “hit it big” investing in these digital assets.
So what makes cryptocurrency so special? What is blockchain technology, and why is it integral to the success of this new technology now and in the future?
Is Blockchain Technology The New Frontier?
At its most basic level, a blockchain is a type of digital database (or method for storing large amounts of data). It’s the engine that cryptocurrencies run on.
Blockchain collects data together in a “block,” each holding a certain set of information. Once the block is full, it’s chained together to the next block in a line. If you want to establish the value of a given cryptocurrency, you must fundamentally start with its blockchain.
Contrary to your traditional database, blockchains are nearly impossible to hack or change. They are essentially a digital ledger of transactions that are duplicated and distributed across the blockchain. This is what makes crypto so appealing to investors.
In theory, blockchain technology can significantly decentralize data within ecosystems such as banking, supply chain, and government. As you can imagine, this is a very polarizing proposition. Some view blockchain technology as the ultimate solution to corruption and a way to increase efficiency in the way we do things. Others view it as a threat to society and unnecessary global risk.
Crypto and Stocks—What’s The Difference In These Two Volatile Investments?
Investing in cryptocurrencies such as Bitcoin has gotten lumped in with your traditional stock market investing. Many view both of these investments as volatile bets on the future. While you can certainly stand to gain or lose money in either investment, there is one major difference:
Book Value:
Unlike cryptocurrency, stocks (or companies) have a book value. In other words, they have a quantifiable value if you were to liquidate all of the company’s assets. With crypto, there is nothing to liquidate. There is just speculation on the future price of the security.
As an example, imagine you bought stock in McDonalds. If the company were to go out of business, it would still have some value to distribute to its shareholders. They could sell all of their real estate locations, liquidate their inventory, and distribute their cash on hand.
Compare the McDonalds example to an investment in Bitcoin. What happens if Bitcoin were to “fail”? There’s nothing to liquidate. No assets to distribute. No tangible value.
This book value concept makes investing in the stock market vastly different from investing in cryptocurrencies. There is a real (and frightening) path to zero for cryptocurrencies. With most traditional stock market investing, the idea of having zero value is much harder to imagine.
Should You Invest In Cryptocurrency?
Cryptocurrency is speculative and should be approached with caution, but there is an opportunity to learn more about it.
Think about investing in crypto like investing in a course—if you make money, great; if not, no worries because you didn’t lose a significant amount of your portfolio.
If you’re interested in learning more about this investment, start small—like really small. Only buy what you can afford to lose completely.
Why should you take crypto investing with a grain of salt?
As with all investing, past performance is not a guarantee of future results. Sure, there are people who’ve hit the jackpot investing in specific coins—but those examples are more sensational than anything, like winning the lottery, not investing for your future.
As it stands, it’s impossible to compare stock market returns and cryptocurrency returns. There simply isn’t the same amount of historical, financial, and economic data to support it.
If you’re still interested in exploring crypto, ask yourself the following questions.
- Is your retirement savings on track?
- Are you allocating enough money to your short, medium, and long-term goals?
- Would crypto investment jeopardize the opportunity for added long-term savings or cash flow?
- Does investing in crypto align with your goals?
Is Crypto Here To Stay?
Maybe.
It’s doubtful that every new coin will stand the test of time, but the overarching technology and principles of blockchain and decentralized investing will likely gain momentum.
Alternative investing comes with a different set of risks and considerations, and hopefully, crypto volatility will taper with time, but no one knows what the future for this investment holds.
Invest With Purpose
Your financial goals are the bedrock of your investment plan. You must prioritize your goals and long-term vision as opposed to short-term investment trends.
If you’re interested in trying your hand at crypto investing, do so in small, controlled doses. Remember, consider crypto as a learning exercise should you be interested in investing in it at all. Cryptocurrency and stocks are vastly different securities and should be treated as such.
At Woven Capital, we strongly believe in developing a tailored financial plan that addresses all aspects of your financial life. Schedule some time with our team today to build a long-term investment strategy fit for you and your goals.