A cryptocurrency is a digital currency stored on blockchain technology.
Cryptocurrencies can be more volatile than traditional investments and involve various other risks.
What’s a cryptocurrency?
A cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren’t backed by major governments or developed economies. This decentralisation means that blockchain technology validates these digital transactions without oversight or intermediaries. While cryptocurrencies are generally meant to serve as a medium of exchange, much of the attention they receive is as a financial investment.
Realise the risks
- The surging value of various cryptocurrencies—such as Bitcoin, Dogecoin, and the like — can make it tempting to invest, but consider these risks before purchasing a digital currency:
- With value comes volatility. In recent years, cryptocurrency prices have experienced wider fluctuations than traditional assets (such as stocks and bonds) and some have had dramatic short-term drops. This volatility makes cryptocurrencies impractical as a medium of exchange, and the sudden price movements can encourage impulsive buying and selling. Additionally, these market conditions can make it difficult to liquidate a position in a timely manner, making liquidity risk a real concern.
- Risk without reward. Unlike stocks and bonds, cryptocurrencies don’t pay dividends or cash payments, and therefore don’t offer any intrinsic value for the sizable amount of risk the investor takes on.
- Who’s in charge here? Cryptocurrencies are largely unregulated, without the backing of major governments or economies. This lack of regulation makes it unlikely that cryptocurrencies will be able to achieve the value and quality of other currencies. Additionally, the anonymity of the digital transactions lends them to possible illegal activity.
- Cybersecurity scares. Cryptocurrency exchanges are subject to breaches, disruptions, and failures that can jeopardise investors and their personal information. Since cryptocurrencies aren’t currently backed by any major governments, investors are unlikely to recover lost funds.
What do we think?
Since cryptocurrencies are highly speculative in their current state, their long-term investment case is weak. Our investing philosophy encourages staying the course and tuning out the noise. Time-tested principles emphasise that investing for the long-term is essential and reacting to short-term trends can be costly for one’s portfolio. While we don’t currently offer cryptocurrencies as an investment option, we acknowledge the impact they’re making in the investing world. As cryptocurrencies and blockchain become increasingly mainstream, we’ll continue to monitor their development and discern the best path forward for our investors.
An iteration of this article was first published in Vanguard’s Smart Investing
Written by Vanguard