Cryptocurrency has been having quite the year. Digital currencies are the latest phenomenon in the investing world, and several different types of currencies have been shattering records.
Bitcoin (BTC -5.04%), the most popular type of cryptocurrency, has seen its price increase by nearly 90% so far this year. Ethereum (ETH -6.75%) has soared around 435% this year. And the price of Dogecoin (DOGE -4.41%) has skyrocketed a whopping 7,800% in the same time period.
If you're on the fence about investing in crypto, it can be tough to tell whether it's a smart investment. For every investor who swears it's going to change the world, there's another saying it's a terrible investment.
The truth is that nobody knows what the future holds for crypto. But there are a few reasons you may want to consider investing -- and reasons you might avoid it.
Why invest in cryptocurrency
1. It could be the next big thing
It's true that cryptocurrency could potentially change the world as we know it. Crypto is a global currency, and it can be used for transactions across countries without having to pay high fees -- which could potentially revolutionize the banking and financial services industries.
Right now, cryptocurrency isn't widely accepted around the world. But as more merchants start to accept it as a form of payment, it could potentially have an enormous impact on society. By investing now, you could get in on the ground floor, so to speak.
Bitcoin has also been referred to as "digital gold" because there is a limited number of coins that can be created. Supporters of Bitcoin say this scarcity increases its value, which could also drive up its price.
2. It could help diversify your portfolio
If you're eager to get involved in the crypto space, it may not hurt to invest a small portion of your portfolio in cryptocurrency.
In fact, diversifying into a new industry can give you the incentive to better understand crypto and how it works. After all, it's often easier to research unfamiliar topics when you have skin in the game. And the better you understand crypto, the better decisions you'll be able to make.
Just be sure you're only investing money you can afford to lose because cryptocurrency is a highly volatile investment. In addition, choose your investments wisely. Not all cryptocurrencies are created equal, so if you choose to invest, do your homework to make sure you're buying the right one for your situation.
Why avoid cryptocurrency
1. It's extremely volatile
One of the biggest risks of investing in crypto is its extreme volatility. Bitcoin, for example, lost roughly 80% of its value at one point, and it continues to experience turbulence regularly.
If you're the risk-averse type, investing in crypto could be incredibly stressful. Even if cryptocurrency does succeed over the long run (which is far from guaranteed), not all investors have the stomach to deal with the short-term ups and downs.
2. It's highly speculative
Nobody knows how cryptocurrency will perform over time. Even some of the biggest names in finance can't agree on whether crypto is a good investment. To some extent, speculation is a factor to consider with any investment. Even if you're investing in relatively safe stocks from well-established companies, there's no guarantee those stocks will continue to perform well over the long run.
However, cryptocurrencies are far riskier than most stocks because they're a relatively new type of investment. We're in uncharted territory right now, so it's uncertain whether cryptocurrencies will find a place in society or whether they'll fall by the wayside in a few years. That uncertainty makes crypto a high-risk investment.
3. There are risks involved in owning crypto
Aside from the risks of crypto as an investment, there are also risks involved in owning and keeping cryptocurrency itself. Cryptocurrencies don't trade on traditional stock market exchanges. Rather, they're bought and sold through crypto exchanges. You'll also need a special digital wallet to hold your coins.
Digital wallets aren't immune to hackers, so there's a chance your coins could be stolen. In addition, if you forget your password to your online wallet, you have no way to access your investments.
Weighing the pros and cons
There are advantages and disadvantages to investing in cryptocurrency. Ultimately, whether you choose to invest will depend largely on your tolerance for risk.
If you're willing to take on higher levels of risk and believe cryptocurrency may be the next big thing, it may not hurt to add a small amount to your portfolio. Otherwise, you're better off avoiding cryptocurrency for right now.