From the sidelines, you've watched cryptocurrencies rise and fall dramatically over the past year. But now that Bitcoin (BTC 0.69%), the most popular cryptocurrency, is down 35% from its November 2021 high, you might wonder if there's opportunity behind that volatility.
Is 2022 the year you'll dip into crypto? That's a question only you can answer. There are good reasons to invest in crypto right now -- and equally good reasons not to. Here are five factors both positive and negative to consider as you define what role crypto could play in your portfolio this year.
1. Crypto is gaining traction as a form of payment
Cryptocurrency can gain and lose value on the ebbs and flows of investor demand alone. But crypto's bigger promise is to become a universally accepted form of payment for goods and services.
Image source: Getty Images.
That transition, from speculative asset to functional currency, is well underway. The list of companies that accept Bitcoin and other cryptocurrencies is growing. Early adopters Microsoft, Overstock.com, and e-commerce company Rakuten have accepted Bitcoin for years. More recently, PayPal, Whole Foods Market (part of Amazon), Visa, and Starbucks have joined those ranks.
2. Exchanges are evolving
The exchanges that facilitate cryptocurrency trades can be centralized, decentralized, or a mix of the two. Centralized exchanges are third parties that oversee traditional money-to-crypto or crypto-to-crypto transactions. Coinbase (COIN -0.34%), one of the best-known crypto exchanges, is centralized.
A decentralized exchange has no intermediary -- transactions happen directly between peers via automated code.
There are pros and cons to each approach. Centralized exchanges provide customer support, but they are more susceptible to hacking. Decentralized exchanges are more secure because they have no single point of failure. Unfortunately, the decentralized exchange is also harder to use.
Experienced crypto users are supporting the decentralized model, but novices still need a user-friendly model. Exchanges are evolving to serve that full range of needs. Centralized exchanges are decentralizing and upgrading security.There are also a new crop of hybrid exchanges, like Qurrex, in development.
These trends should benefit users, and the industry's reputation, going forward.
3. Stablecoins are providing liquidity
Another crypto evolution is the stablecoin -- a cryptocurrency that's backed by a reserve to keep prices stable. Where Bitcoin's trendline looks like the world's scariest roller coaster, stablecoins are designed to hold their purchasing power.
You won't get rich buying and selling stable-value currency, but that's not really the point. Crypto investors use stablecoins for liquidity. They can store value in stablecoins knowing they shouldn't become worthless tomorrow or next week. When they need funds to send payments or buy other crypto assets, they can access that value quickly from their stablecoins.
PayPal is developing a stablecoin pegged to the U.S. dollar. That could provide an easy entry point for new crypto investors, especially if PayPal pays interest on stablecoin deposits.
4. Crypto doesn't act like equity
The optimistic investor sees opportunity in a stock market downturn. The logic goes like this: When share prices fall across the board, you can buy quality stocks for less -- even when there's no fundamental change in the companies' ability to generate value.
Unfortunately, it's risky to take that same view on crypto. Yes, Bitcoin's value spiked last year nearly to $70,000. And yes, Bitcoin's current value is now hovering in the low-$40,000s. But you shouldn't interpret that to mean Bitcoin is on sale. It only means Bitcoin has lost value since last November. If or when Bitcoin recovers is an unknown.
5. Regulatory outlook is uncertain
Regulation can be bad or good for cryptocurrency. Purists argue that overregulation will crush innovation and alienate those who appreciate the privacy of the crypto economy. Others say regulation legitimizes crypto and, as such, will encourage greater adoption.
Regardless of where your opinion falls on that spectrum, the future of crypto regulation -- and its effects -- is yet to be determined. Should you decide to invest in crypto in 2022, it's another risk to consider.
Investing in crypto in 2022
Adoption of cryptocurrency is on the rise, which bodes well for crypto users and investors. But there are also uncertainties in play that could add to the already high volatility of crypto assets.
If you want to dip into crypto in 2022, check your expectations -- and be prepared for a wild ride.
