Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Reasons to Invest in Crypto -- and 1 Reason Not to

By Adam Levy - Jul 2, 2021 at 7:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does cryptocurrency belong in your investment portfolio?

Cryptocurrency is gaining broader adoption among investors these days. Fintech companies are making it easier to get started buying and using crypto; companies like Tesla have experimented with accepting bitcoin ( BTC -11.44% ) as payment; and El Salvador's government has even made it legal tender in the country. 

After a pullback in prices across the cryptocurrency market in the past two months, some investors may be eyeing the declines as an opportunity to buy in. Here are three reasons you should invest in crypto, and one reason you shouldn't.

A chart with graphics of crypto token symbols overlaid,

Image source: Getty Images.

Why you should invest

1. You think decentralized finance is the future

2020 saw a lot of decentralized finance, or DeFi, projects enter the market, but the idea of using DeFi applications for transactions is still very niche. However, the ability to exchange currency and send money quickly and inexpensively holds a lot of promise for a global economy, and that's why DeFi could play a significant role in our financial systems in the future.

DeFi is an industry that uses blockchain technology to replace centralized financial institutions like banks and exchanges with decentralized versions. The benefit is greater access, faster transactions, and in some cases, lower transaction costs.

There are hundreds of ongoing projects with entrepreneurs creating new organizations every day. Luckily, you don't have to pick the winners and losers in this emerging space. You can, instead, invest in the platform they all use.

There are only a handful of blockchains that support the smart contracts needed to develop and operate a decentralized application. Ethereum is, by far, the most popular, but it has a growing list of rivals, including Binance Smart Chain and Polkadot.

Ethereum has a couple of important competitive advantages that could make Ether ( ETH -9.76% ) a simple and lucrative way to invest in the future of DeFi.

First of all, it benefits from the first-mover advantage and network effect. DeFi apps work better when they have broad adoption, which Ethereum already enjoys. As a result, it's easier to get a project off the ground on the Ethereum blockchain than its newer rivals.

Second, Ethereum is truly decentralized. Its biggest competitor, Binance Smart Chain, has gained adoption by offering lower transaction fees while Ethereum's transaction fees have climbed to become extremely expensive.

But Binance achieves those low fees by using a proof-of-authority (PoA) system for validating transactions. Under the system, Binance chooses who gets to run the network and has full authority to give them the boot. That's not truly decentralized.

Ethereum, by comparison, uses a proof-of-work system, which gives anyone with compute power relatively equal opportunity to mine the next block and earn the transaction fees. Ethereum is looking to help mitigate its high transaction fees by moving to a proof-of-stake system.

2. Increased adoption from institutional investors

One factor that made the recent rally in bitcoin different from previous climbs in the cryptocurrency's price is the broad adoption among institutional investors. More and more financial institutions are creating a position in bitcoin as part of their portfolio.

Not only do institutional investors create a big buyer in the market, they also effectively remove a supply of bitcoin from trading. Bitcoin has a fixed lifetime supply (21 million coins), and miners mint just 6.25 new bitcoin every 10 minutes or so after the last halving event about a year ago. Earlier this year, institutions were buying up supply more quickly than it was created, resulting in a surge in price for coins still in circulation.

Furthermore, there's a big push toward bitcoin ETFs that can make it easier for retail investors to gain exposure to the cryptocurrency in a regular brokerage account. That could result in even more demand for bitcoin among institutions.

3. It's a good form of diversification for stock investors

If the majority of your portfolio is composed of stocks, bitcoin and other cryptocurrencies can offer a good form of diversification. The price correlation between cryptocurrencies and the U.S. stock market is close to zero. That means the crypto market is unaffected by the stock market, and vice versa.

As a result, you could improve your diversification by allocating a portion of your portfolio to cryptocurrency. That said, cryptocurrency will increase the volatility of your portfolio too. If you can't handle the wild price swings, be sure to allocate just a small percentage of your holdings to the asset class.

Why you shouldn't invest in crypto

1. You're trying to get rich quick

You can grow your wealth extremely quickly if you pick the right crypto asset. Tons of Dogecoin ( DOGE -19.45% ) millionaires popped up overnight earlier this year with the sudden spike in its price.

But let's be clear: Buying Dogecoin earlier this year wasn't really an investment -- it was speculation, gambling. The value of Dogecoin goes down just as easily as it goes up, and those Dogecoin millionaires could've just as easily gone broke.

The goal of investing in cryptocurrency is to make a profit, but it's highly unlikely you'll see the value of your portfolio increase by 100 times in just a few months. If you buy a currency or token with an investment thesis, and you're right, you should see the value increase over time similarly to buying a stock in a company with a strong outlook.

Investing in this space doesn't have to be like playing the lottery. There are good reasons to buy cryptocurrency, but trying to get rich quick isn't one of them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bitcoin Stock Quote
Bitcoin
BTC
$47,500.00 (-11.44%) $-6,138.04
Ethereum Stock Quote
Ethereum
ETH
$3,805.25 (-9.76%) $-411.68
Dogecoin Stock Quote
Dogecoin
DOGE
$0.16 (-19.45%) $0.04
Polkadot Stock Quote
Polkadot
DOT
$28.40 (-15.79%) $-5.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
640%
 
S&P 500 Returns
139%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/04/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.