It is possible to make a lot of money by investing in cryptocurrency -- but it is also very possible to lose all of your invested money. Investing in crypto assets is risky but can be a good investment if you do it properly and as part of a diversified portfolio.
Good investment?
Is cryptocurrency a good investment?
Cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency. A safer but potentially less lucrative alternative is to buy the stocks of companies with exposure to cryptocurrency. Between these extremes, some cryptocurrencies are now available as spot-price exchange-traded funds (ETFs).
Let's examine the pros and cons of investing in cryptocurrency.
Is it safe?
Is cryptocurrency safe?
Multiple factors show that cryptocurrency is not always a safe investment. Still, other signs are emerging that say cryptocurrency is here to stay.
Cryptocurrency
Risks
Risks of investing in cryptocurrency
Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen, spurring many exchanges and third-party insurers to begin offering protection against hacks.
Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase (COIN -16.57%) make it fairly easy to buy and sell crypto assets, such as Bitcoin (BTC -0.84%) and Ethereum (ETH -2.87%). But many people don't like to keep their digital assets on exchanges due to the risks of allowing any company to control access to their assets.
Storing cryptocurrency on a centralized exchange means you don't have full control over your assets. An exchange could freeze your assets based on a government request, or the exchange could go bankrupt and you wouldn't be able to recover your money.
Some cryptocurrency owners prefer offline cold storage options, such as hardware wallets, but cold storage comes with its own challenges. The biggest is the risk of losing your private key; without one, it's impossible to access your cryptocurrency.
There's also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and many projects are no more than scams. Only a small percentage of cryptocurrency projects will ultimately flourish.
Regulators may also crack down on the entire crypto industry, especially if governments view cryptocurrencies as a threat rather than an innovative technology. For instance, the Securities and Exchange Commission (SEC) has filed enforcement lawsuits against many players in the cryptocurrency sector with mixed results.
On the upside, these suits should help Congress and courts hammer out long-term rules and regulations for owning and trading digital assets in the long run. The cutting-edge technology elements of cryptocurrency also increase the risks for investors.
Much of the tech is still being developed and is not yet extensively proven in real-world scenarios. As an example, many sector watchers worry that quantum computing could mature into an effective encryption-cracking tool. If so, every project that relies on un-hackable blockchain security will have to develop quantum-safe protocols.
Adoption
Cryptocurrency adoption
Despite the risks, cryptocurrencies and the blockchain industry are growing stronger. Much-needed financial infrastructure is being built, and investors are increasingly able to access institutional-grade custody services. Professional and individual investors are gradually receiving the tools they need to manage and safeguard their crypto assets.
Crypto futures markets are being established, and many companies are gaining direct exposure to the cryptocurrency sector. Financial giants, such as Block (NYSE:SQ) and PayPal (PYPL -2.38%), are making it easier to buy and sell cryptocurrency on their popular platforms.
Other companies, including Block, have poured hundreds of millions of dollars into Bitcoin and other digital assets. Tesla (TSLA -1.69%) held almost $2 billion of the cryptocurrency in early 2022. The electric vehicle maker sold off most of its crypto holdings later that year but still owned $580 million in Bitcoin in September 2024.
MicroStrategy (MSTR -8.78%) -- a business intelligence software company -- has been accumulating Bitcoin since 2020. It held $13.5 billion in the crypto at the time and continues to buy more. MicroStrategy's software operations are now financing its Bitcoin buying sprees, along with additional debt and the occasional issuing of more stock. Chairman Michael Saylor is a so-called Bitcoin maximalist, arguing that it's the only cryptocurrency that matters and should gain lots of value over time.
Although other factors still affect the riskiness of cryptocurrency, the increasing pace of adoption is a sign of a maturing industry. Individual investors and companies seek to gain direct exposure to cryptocurrency, considering it safe enough to invest large sums of money.
Long term
Is crypto a good long-term investment?
Many cryptocurrencies, such as Bitcoin and Ethereum, are launched with lofty objectives that may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, early investors in a crypto project that reaches its goals can be richly rewarded over the long term. However, achieving widespread adoption is necessary for any cryptocurrency project to be considered a long-term success.
Bitcoin as a long-term investment
As the most widely known cryptocurrency, Bitcoin (BTC -0.84%) benefits from the network effect -- more people want to own Bitcoin because Bitcoin is owned by the most people. Bitcoin is currently viewed by many investors as "digital gold," but it could also be used as a digital form of cash.
Bitcoin investors believe the cryptocurrency will gain value over the long term because its supply is fixed, unlike that of fiat currencies such as the U.S. dollar or the Japanese yen. The supply of Bitcoin is capped at fewer than 21 million coins; most currencies can be printed at the will of central bankers.
Many investors expect Bitcoin to gain value as fiat currencies depreciate. After the fourth halving event in April 2024, Bitcoin's inflation rate is slower than the annual supply-side increase of physical gold on the global market. People who are bullish about Bitcoin being extensively used as digital cash believe it has the potential to become the first truly global currency.
Ethereum as a long-term investment
Ether is the native coin of the Ethereum platform and can be purchased by investors who want to gain portfolio exposure to Ethereum (ETH -2.87%). While Bitcoin can be viewed as digital gold, Ethereum is building a global computing platform that supports many other cryptocurrencies and a massive ecosystem of decentralized applications (dApps).
The large number of cryptocurrencies built on the Ethereum platform and the open-source nature of dApps create opportunities for Ethereum to also benefit from the network effect and to create sustainable, long-term value. The Ethereum platform enables the use of smart contracts, which execute automatically based on terms written directly into the contract code.
The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has significant potential to disrupt massive industries, such as real estate and banking, and to create entirely new markets.
As the Ethereum platform becomes increasingly used worldwide, the Ether token increases in utility and value. Investors bullish on the Ethereum platform's long-term potential can profit directly by owning Ether. That's not to say Ethereum doesn't have competition.
A number of "Ethereum Killers," including Solana (CRYPTO:SOL), Polygon (POL -0.38%), and Avalanche (CRYPTO:AVAX), are built to handle smart contracts and use a blockchain system capable of processing more transactions per second. The speed has the added advantage of being less expensive for users. But Ethereum is the most broadly adopted platform for using smart contracts.
Related investing topics
Should I invest?
Should you invest in cryptocurrency?
Owning some cryptocurrency can increase your portfolio's diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market. If you believe cryptocurrency usage will become increasingly widespread over time, it probably makes sense for you to buy some crypto directly as part of a diversified portfolio.
For every cryptocurrency you invest in, be sure to have an investment thesis as to why that currency will stand the test of time. If you do your research and learn as much as possible about how to invest in cryptocurrency, you should be able to manage the investment risk as part of your overall portfolio. If buying cryptocurrency seems too risky, you can consider other ways to potentially profit from the rise of cryptocurrencies.
You can buy the stocks of companies such as Coinbase, Block, or PayPal or invest in an exchange like CME Group (CME 0.89%), which facilitates crypto futures trading. Finally, spot Bitcoin ETFs and Ethereum ETFs are options, with more cryptocurrencies probably entering the ETF space over time.
Expert Q&A
Dr. Christine Parlour
The Motley Fool: What advice would you give to someone interested in investing in blockchain technology?
Parlour: Be curious but also be cautious. It is important to recognize that there is not a complete regulatory framework in this area. So, it is important to do your homework. First, consider the venue that you use to access the market. There are regulated crypto exchanges and trading places; however, there are also unregulated ones. Second, while most tokens are based on open-source code, it is not the case that they have the same disclosure regimes as blue chip stocks. So, be careful and investigate the nature of the underlying token. Note that in other countries (Canada, Europe), there are ETFs and ETPs that track crypto portfolios; these have not received regulatory approval yet in the U.S. If and when they are offered to consumers, these will be a low-cost way of accessing the crypto market, and then someone else will handle the market mechanics.
Dr. Merav Ozair
The Motley Fool: What advice would you give to someone interested in investing in blockchain technology?
Dr. Ozair: Blockchain technology is definitely the future. There is no escaping that. However, it is difficult to predict which projects will last and which will fail and be forgotten.
Most blockchain technology companies are in their early, if not very early, stages. Hence, investing in companies utilizing blockchain technologies has all the same risks as investing in a start-up. And like in any start-up, the risk-reward ratio is high.
Therefore, learn about blockchain technology, do a thorough due diligence on any project -- from its technology to business model to execution. Learn about the "problem" it is trying to solve and what solution it's offering -- both from a technological perspective and a business perspective.
There's a lot of potential with blockchain technology, but the execution is in the details.
The Motley Fool: What innovations or trends in blockchain technology are you most excited about?
Dr. Ozair: The ecosystem of blockchain technology is evolving very rapidly. Every day (literally) you learn about new applications and new business use cases that have utilized blockchain technology. It is truly – slowly but surely – being implemented in any industry and any "traditional" application. From finance to healthcare to retail to art to education, the implementations are boundless.
The true power of blockchain technology is its ability to facilitate services to underserved communities and genuinely to democratize society. That was the premise of Bitcoin, when it was first launched in January of 2009 – i.e., a peer-to-peer payment system, and we somewhat lost focus on the main purpose of blockchain technology as" greed" got in the way.
The utilization of Decentralized Autonomous Organization (DAO) as the governance of any blockchain system and application, will enable blockchain applications to provide the needs of the underserved communities, nationally and globally.
Dr. Jimmie Lenz
The Motley Fool: What advice would you give to someone interested in investing in blockchain technology?
Lenz: Learn and keep learning. The developments in the space are happening at a rapid pace, so much so that new knowledge is being generated constantly. As a professor teaching blockchain, this is the hardest part, reinventing the course every semester, but it keeps my students and me as current as possible. This doesn't mean neglecting base knowledge; having this is crucial, as well as some sense of the history to understand why developments have occurred at specific times.
