Investing can be complicated, and we often hear questions about which types of assets are worth pursuing. But questions about stocks and bonds seem downright boring compared to some of the debates we see about cryptocurrency. 

And it’s no wonder. Cryptocurrency is an extremely complicated topic, and it’s easy to find wildly differing opinions from all types of financial professionals. Plus, there are plenty of self-titled “experts” online who are happy to share their “tips on the next big cryptocurrency.”

So that’s the real answer? Should you invest in cryptocurrency? Is it the investment of the future, a complete scam, or something in between?

Let’s take a look at this complex topic and get a better understanding of all the variables. Of course, it’s still best to work with a certified fiduciary when it comes to investing your money. But having a basic understanding of crypto can help you decide whether it’s something you want to consider or avoid altogether.

What exactly is cryptocurrency?

The Oxford Dictionary defines cryptocurrency as, “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography (which, you could call coding, in a sense), rather than by a centralized authority.” Many cryptocurrencies are based on blockchain technology and can be used to make secure online transactions without going through any third-party systems.

Although some retailers accept cryptocurrency for purchases, these assets are more commonly used for trading and investing. You can purchase cryptocurrency from an exchange or use a computer to “mine” it. You can also receive cryptocurrency as a “reward” for working on the blockchain that’s foundational to that particular currency. 

Bitcoin is probably the most well-known cryptocurrency, but it’s definitely not the only one. Other popular cryptocurrencies include Ethereum, Tether, and yes, Dogecoin. However, there are over 22,000 different publicly traded cryptocurrencies, many of which are essentially worthless.

Bitcoin is probably the most well-known cryptocurrency, but it’s definitely not the only one. Other popular cryptocurrencies include Ethereum, Tether, and yes, Dogecoin. However, there are over 22,000 different publicly traded cryptocurrencies, many of which are essentially worthless.

What’s the allure?

If people aren’t really using cryptocurrency to make purchases, why is it such a popular investment? Many people believe that blockchain technology will be extremely important in the future, so it’s important to get involved now. 

Additionally, some experts think that decentralized currency will be the standard in the future because it’s secure and not tied to a particular country’s currency. Finally, people believe that cryptocurrency is a good investment because demand will skyrocket at some point in the future. While that did in fact happen with Bitcoin, you probably won’t end up a billionaire because of your investment in Shiba Inu coin.

Potential cryptocurrency concerns

If you’ve spent any time researching cryptocurrency, you’ve probably seen some wild stories about people who have made tons of money — or lost everything — by investing in crypto. Because crypto is so new, and often misunderstood, it’s particularly volatile. And while all investments are unpredictable to some extent, there’s a bigger concern with crypto: It’s unregulated.

Unlike many other types of investments, cryptocurrency isn’t subject to federal regulations. Crypto promoters will say this is a good thing because it means that this type of currency is immune to government manipulation or interference. However, this also means that authorities don’t have as many tools to protect investors from unethical behavior. The lack of regulation even means that a Certified Financial Planner™ professional can’t recommend it without violating their professional ethics.  

Finally, the tax consequences of investing in crypto can be significant, and it’s not always easy to plan ahead for them. All of these concerns don’t necessarily rule out crypto entirely. But they do highlight just how new and potentially risky this type of investment is.

Crypto can help you diversify your portfolio

Now that we’ve gotten most of the downsides out of the way, let’s talk about the potential benefits of investing in cryptocurrency. You may want to invest in cryptocurrency as a way to round out and diversify your portfolio. 

Should you invest everything in Bitcoin or some other cryptocurrency? NO. But we’d say the same thing about any other asset. It’s never a good idea to put all your eggs in one basket — having multiple different types of investments helps keep your finances stable. Generally, when market forces cause one type of investment to tank, others stay strong or even gain value. 

So if you do want to put a small portion of your investment funds into crypto, it’s not necessarily a bad idea. If the crypto fans are right and these assets do skyrocket in value, you’ll benefit no matter how big or small your initial investment was.

Think through the risks

At the end of the day, there’s still a lot we don’t know or understand about cryptocurrency. It may be what the future financial landscape is built on — and blockchain technology may change the world. But those possible advantages aren’t enough to ignore the potential risks of investing in cryptocurrency.

So, should you invest in cryptocurrency? There’s not a hard-and-fast answer. It can be a good way to diversify your assets, but just like any investment, you shouldn’t put too much of your money there. And if you do decide to purchase or mine cryptocurrency, it’s a good idea to find a CPA with the right experience and knowledge when it comes time to file your taxes. 

Balance risk and reward in your investments

We hear a lot about cryptocurrency these days, but it’s not the only investment possibility out there. And it’s not the only one with significant risks (and potential rewards). Investing by definition is all about taking some level of risk.

To invest wisely, you must ensure that your portfolio includes several different types of assets. That’s how you protect yourself from the unpredictability of the market. And deciding what to invest in is only half the battle. You also need to determine the amount of your investment. 

Whether you decide to invest in crypto or another type of asset, make sure your budget accounts for the money you invest.

If you don’t have a budget yet (or you never feel motivated to check in with yours), try BudgetingBlocks™. This game-inspired budgeting tool simplifies financial conversations and makes it easy to decide exactly where you want your money to go. 

Get all the details about BudgetingBlocks™ here.