One type of investment that is arguably experiencing its heyday is cryptocurrency.
A form of virtual currency that is traded on a digital public ledger called a blockchain, crypto has gained traction among young, daring, and offbeat investors because of its decentralized trading structure and potential for high rewards.
But amidst the hype around this type of investment, there’s also a high risk of trading cryptocurrency in a country like Singapore.
Many experts, including those from the Monetary Authority of Singapore, actually advise against investing in crypto, especially if one considers themselves a new and inexperienced investor.
What are some unique risks of cryptocurrency trading that an investor like you should take note of?
Here’s an overview of the six most notable risks of investing in cryptocurrency, as well as three viable alternatives that you can invest in instead.
Their Speculative Nature
Cryptocurrency falls under the umbrella of speculative investments, or investments in financial instruments that carry high financial risk. Savvy crypto investors may be able to take advantage of the market price fluctuations that generate high rewards.
However, a fledgling investor who has neither the knowledge nor the financial resources to deal with such high risk should be careful about investing in crypto. Otherwise, it’s likely that they’ll incur huge financial losses that will be difficult to recover from.
Another thing to be cautious of is the volatile nature of the crypto market. Crypto prices are often subject to great extremes, and they can quickly soar or dip at unpredictable times. It’s easy for crypto investors to be optimistic about a bullish market, or a market that sees consistent upwards growth in prices.
But their hopes can just as easily be dashed by the sudden emergence of a bearish market, where crypto prices are affected by prolonged downturns. Investors who worry about constant, severe fluctuations in the value of their assets will always be ill at ease with their crypto investments.
Suffice to say, if volatility is a big issue for you, then you should reconsider trading in crypto.
Their High Cost of Ownership
It’s no secret that most cryptocurrencies require hefty upfront investments for the trader to be involved in the market. But in addition to high starting costs for their investments, traders will also have to deal with fees for transacting on crypto trading platforms and for using certain types of crypto wallets. Crypto might end up becoming a money drain due to the cost of ownership alone. Worse yet, crypto-assets can be difficult to sell off when their markets aren’t performing as well as expected.
Their Lack of Regulation
One of cryptocurrency’s biggest selling points is that crypto transactions are free of the conventional intermediaries or middlemen that facilitate currency exchange, like banks. But while this lack of barriers might translate to lower costs of exchange and heightened financial flexibility, the decentralized structure of crypto may actually be a double-edged sword.
Investors have fewer financial protections when there is no central authority to oversee and regulate their transactions. That means that if anything goes awry during a crypto exchange—for example, if it turns out to be a scam—it will be harder to hold malicious agents to account.
Their Association with Criminal Activity
It is also worth noting that cryptocurrency has factored into a number of financial crimes over the years. Lack of regulation means that no central authority can place consumer safeguards on crypto transactions, which allows money launderers and scammers to thrive on crypto platforms.
Moreover, given that the world’s most well-known cryptocurrencies have public blockchains, it’s possible for malicious agents to trace user activity and match someone’s blockchain info with their name, address, and how much cryptocurrency they’re moving. The risks of getting hacked, phished, or being on the receiving end of identity theft are good enough reasons for you to reconsider your crypto investment.
Their Risk of Discontinuation
No one knows how long cryptocurrency will trend, but many investors have already suffered significant heartbreak from seeing their crypto markets dissolve. Of the 18,000 cryptocurrencies that are known to exist, many have been shut down due to a lack of popularity and liquidity in the market.
If you pool your money towards a crypto coin that fails to catch on, it won’t be easy for you to recoup your loss. It’s a better idea to invest in assets that, unlike crypto, have proven longevity.
What Are Better Investment Vehicles for Your Money?
It may be risky to trade in crypto-assets, but that shouldn’t turn you off from investing entirely.
Other investment options may prove to be safer, more beginner-friendly, and ultimately more rewarding for you.
Three viable investment vehicles that you can explore instead of crypto are the following:
High-Yield Savings Accounts
A high-yield savings account is a type of bank account that accrues interest for the account holder if the money is locked into the account for a set period.
This will prove to be a great option if you’d like a “hands-off” approach to investing. And since your account is held by a bank, you can rest assured that the money you invest is in safe hands.
Bonds or Fixed-Income Securities
Though they don’t typically come with high returns, bonds or fixed-income securities are low-risk investments that guarantee steady streams of payments.
If you’re based in Singapore, you can check out government bonds that are offered by Singapore Government Securities (SGS) or corporate bonds tied to trustworthy companies.
If you’d like a taste of multiple securities like stocks, bonds, or money market instruments, you can invest in a mutual fund handled by a professional money manager.
A mutual fund can help you learn about and benefit from diversified investments at a relatively low price. This is a popular option among retiree investors.
Among the golden rules of investing, there’s one that you should pay particular attention to never invest in something that will expose you to financial risk that you can’t handle.
It may certainly be the case with cryptocurrency. Be wise about your money matters and consider investing in an asset that’s safer and more viable.