What are the risks of buying cryptocurrency?

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Bitcoin and the entire cryptocurrency industry have gained a ton of popularity over the past year. The industry has already experienced this. However, this time around there seems to be a real revolution with blockchain technology and the industry as a whole.

Investors are encouraged by the incredible potential of the entire industry. Additionally, a lot has gone well for cryptocurrencies over the past year, including a significant tailwind due to the pandemic.

With technology continually undergoing major innovations, it seems the opportunities are endless. As with any asset, however, the greater the potential reward, the greater the inherent risk. So while Bitcoin and several other cryptocurrencies have a growth potential of a ton, they are also very volatile.

For this reason, it is not uncommon to see Bitcoin rally or even drop by more than 10% in a single day.

What are the risks of Bitcoin and other cryptocurrencies?

Depending on the cryptocurrencies you buy, sell, or use, there are several different risks to consider. That’s why, no matter what, it’s essential to do your research ahead of time.

Even with all the research in the world, there are some risks that are very prevalent in the cryptocurrency industry.

First of all, it is relatively easy and quite common to send cryptocurrency to the wrong address, and in many cases, unlike traditional banking services, it is not recoverable.

It can also be extremely expensive to send cryptocurrencies. Also, with Bitcoin, for example, it can sometimes take hours.

Fees can also be extremely high, making it difficult to buy and sell on the stock exchange or send cryptocurrencies to wallets. And, of course, with little regulation in the industry, there is always an increased risk of fraud.

How to reduce the risk of cryptocurrency investments

There may seem like many reasons to avoid cryptocurrencies and Bitcoin. However, as I said before, there are ways to dramatically reduce investment risk, starting with doing a ton of research.

It is essential that you know what you are buying. It is essential to take into account factors such as the amount of transaction costs and their duration. You’ll also want to consider how the new coins are distributed and the currency’s inflation rate. Knowing all the facts is essential to assess the potential of an investment.

Another way to reduce risk is to make a long-term commitment to the industry. Since these coins are so volatile, it is difficult to trade them in the short term. However, if you’ve done a ton of research and are confident in one or more coins, taking a long-term position is considerably less risky.

Another way to reduce risk, like investing in stocks, is to stick with larger, more well-known cryptocurrencies. Smaller, lesser-known coins are much more likely to be full bets. The best coins with the best underlying technology and the best use case will be the coins with the highest market caps. And don’t forget that diversification is an easy way to reduce the risk of any portfolio.

Finally, one of the most difficult aspects of buying Bitcoin and many other cryptocurrencies is the liquidity factor, time and cost it takes to buy or sell. However, if you buy cryptocurrency stocks, you can avoid this. Plus, if you buy into a registered account like a TFSA, you may be exposed to these tax-free high growth stocks.

The best stocks to buy today

One of the main titles to consider in the industry is HIVE Blockchain Technologies. The stock is a cryptocurrency miner with one of the best growth potentials. However, it is also considerably more diverse, with many of its peers only mining Bitcoin.

Buying a miner, however, is riskier than owning the currency because, in addition to the price of the coin, you are also exposed to the operations of the business.

If you really want to reduce the risk, the best way is to buy the cryptocurrency outright. the Bitcoin ETF objective, for example, is a better way to get exposure. You have a custodian to hold the Bitcoin, and you can buy and sell it cheaply and instantly.

So whether you’re buying an ETF or a high-growth growth stock like HIVE, it’s critical that you do what you can to mitigate the risk.

The post Bitcoin: What are the risks of buying cryptocurrency? first appeared on The Motley Fool Canada.

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Silly contributor Daniel Da Costa doesn’t have a position in any of the stocks mentioned.

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