One of the most exciting – and frustrating – things about cryptocurrency is its wild volatility. While investors are often attracted to these digital currencies by their rapid and dramatic increases in value, cryptocurrencies are also subject to sudden crashes. In the eyes of some speculators, this boom/bust dynamic makes crypto the perfect asset class to buy low, sell high and get rich quick.
But seasoned investors know getting rich doesn’t typically happen overnight. It often takes long-term planning and a disciplined approach. Despite being a relatively new asset class, cryptocurrency may already be a viable long-term investment worth your consideration. Below, we’ll break down how to invest for the long run and more.
A financial advisor can help you determine whether cryptocurrencies are the right investment for you. Find a trusted fiduciary advisor today.
Is Crypto a Good Long-term Investment?
Looking at the relatively short history of cryptocurrency provides some semblance of an answer to the question of whether crypto is a good long-term investment. Take Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, for example. Bitcoin has appreciated nearly 12,000% since its launch in 2009, while Ethereum has increased in value by more than 92,000% since its inception in 2015. Had you invested early in either digital currency, you’d likely be considerably wealthy today.
Indeed, many cryptocurrencies have produced astronomical returns since Bitcoin kicked off the crypto craze 13 years ago. That’s led to the launch of hundreds of alternative coins over the years and trillions of dollars invested in the space. Does that make crypto a “good” investment for the long-term? It depends on your view of the industry and its future, including potential government regulation.
Many cryptocurrency enthusiasts who believe in its long-term viability have adopted the HODL strategy. This acronym, which stands for “hold on for dear life,” refers to the wild volatility that has come to define crypto markets. Bitcoin, for instance, has suffered 10 drops of at least 40% or more over the last decade. The HODL approach relies on whether these frequent crashes with the belief that the asset’s value will recover and appreciate further.
Which Cryptocurrencies are Best for Long-Term Investment?
With more than 10,000 cryptocurrencies in existence as of February 2022, it’s important to do your research on particular coins before investing in them. Because cryptocurrency is largely unregulated, the space is rife with financial scams and fraud. Here’s a look at some of the best cryptocurrencies to invest in for the long haul:
Bitcoin: The first cryptocurrency has dominated the space since its inception. Bitcoin is by far the largest cryptocurrency with a larger market cap than the next 20 largest cryptocurrencies, combined. There’s a finite supply of Bitcoin, as only 21 million will be mined, including nearly 19 million that are already in circulation. While the crypto market has rapidly expanded and evolved since Bitcoin was created, it has remained the gold standard of digital assets.
Ethereum: The second-largest cryptocurrency by market cap, Ethereum has been a powerful force in the world of digital currency and blockchain technology. While Bitcoin functions purely as a store of value, Ethereum is a network onto itself with its own native coin called Ether. Beyond serving as a tradable currency like Bitcoin, Ether powers applications and contracts that are built on the Ethereum network, giving it more real world usability than its big brother. This makes Ethereum a potentially valuable asset for the long term.
Tether: While Bitcoin and Ethereum are often subject to volatility, the third-largest digital currency by market cap seeks to provide greater stability. That’s because Tether is a stablecoin, a cryptocurrency linked to a fiat currency or commodity. Tether tracks the value of the U.S. dollar, so it offers investors much greater stability than other cryptocurrencies but not nearly the potential upside.
Cardano: The sixth-largest cryptocurrency by market cap, Cardano is a proof-of-stake blockchain platform that validates transactions by using existing tokens. The native coin of the Cardano network is ADA, which like Bitcoin, has a finite supply. While there are currently approximately 33.6 billion ADA tokens in circulation, only 45 billion will be mined in total.
Strategies for Long-Term Investment
Beyond simply buying a specific amount of cryptocurrency and holding it indefinitely, there are several strategies for investing in this asset class for the long run. No matter the strategy you choose, it’s best to only invest money that you can afford to lose, considering the volatile nature of many coins.
Dollar-cost averaging: Dollar-cost averaging is the process of investing a specific dollar amount over a set period of time. For instance, if you have $10,000 to invest in a security, dollar-cost averaging allows you to spread money out over the course of a year by purchasing $833 worth of the security each month.
When investing in cryptocurrency with dollar-cost averaging, the number of coins you purchase each time you invest depends on the trading price of the coin. As a result, when the price of a cryptocurrency is high, your periodic investment will buy you less of the coin and vice versa. Given the volatile nature of many cryptocurrencies, dollar-cost averaging can help you avoid investing all your money when prices are highest. Although this strategy can mitigate that particular risk, it can also erode the potential reward of investing when prices are lowest.
Staking: Staking is the process by which a crypto investor leaves coins in their digital wallet and pledges them to the network, which in turn uses them to validate more transactions. Like the dividends that some stocks earn, investors who engage in staking can earn rewards, like additional coins or interest. As a result, staking can be an effective long-term investment strategy, allowing you to passively increase your holdings or investment income over time. However, staking is only available with cryptocurrencies that employ a proof-of-stake model (as opposed to a proof-of-work model), like Cardano.
Buy the dips and HODL: Market timing is one of the most difficult and risky investing strategies to implement. No one truly knows how an individual stock, asset class or industry is going to perform. However, if you’re able to capitalize on crypto’s volatility by buying low, it’s possible your investment could offer robust long-term returns.
Invest indirectly with Bitcoin ETFs: The first Bitcoin exchange-traded funds were launched in 2021, giving investors the opportunity to add Bitcoin exposure to their portfolios without actually owning the asset. While these funds don’t directly hold Bitcoin, they often deal in Bitcoin futures or invest in blockchain companies. By investing in a Bitcoin ETF, you can also avoid the security issues sometimes associated with the storage of digital assets.
What Are the Risks of Investing in Cryptocurrency?
Like investment, putting your money in cryptocurrency carries inherent risks. Like stocks and other securities, the price of the coin you buy could plummet as soon as you commit to it. However, there are specific risks associated with cryptocurrency that people who invest in stocks, bonds and mutual funds don’t typically have to worry about.
First is the looming threat of potential government regulation. Cryptocurrencies have exploded in recent years, in part due to their decentralized and deregulated nature. No central bank or government controls them. But if governments take a more aggressive stance on digital currencies and begin regulating them more actively, growth could slow down.
As mentioned above, the internet has become a breeding ground for crypto scams. The Federal Trade Commission reported that between October 2020 and May 2021 alone, nearly 7,000 people reported losing $80 million in crypto scams.
“Online, people may appear to be friendly and willing to share their ‘tips.’ But that can also be part of the ruse to get people to invest in their scheme,” Emma Fletcher of the FTC wrote. “In fact, some of these schemes are based on referral chains, and work by bringing in people who then recruit new ‘investors.’”
Additionally, where you store your digital assets is also critically important and can present significant risks. While keeping your assets with an online exchange is easiest and most convenient, it may leave your assets vulnerable to a potential hack. Also, if you lose your password to your digital wallet, your assets could be lost forever. And as the FTC notes, “because you typically transfer cryptocurrency directly without an intermediary like a bank, there is often no one to turn to if you encounter a problem.”
These risks aren’t to say that cryptocurrency cannot serve as a long-term investment. It’s simply important to identify the potential threats you may face as a crypto investor.
The launch of Bitcoin in 2009 and subsequent explosion of cryptocurrencies has changed the financial world. Millions of investors have poured money into these digital currencies, not just for the impressive returns they have delivered, but for their long-term promise as decentralized, unregulated assets.
If you’re looking to invest in crypto for the long haul, it’s important to go in with a plan. Select one or more specific cryptocurrency and only invest money that you can afford to lose if the investment goes south. That way you can ride out potential volatility and hold onto the asset for the long term. When starting out, consider the cryptocurrencies with the longest track records and/or largest market caps, but keep the unique risks associated with cryptocurrency in mind.
Tips for New Investors
- Having an expert in your corner can give you peace of mind as you begin to invest. A financial advisor can help you invest according to your risk tolerance, time horizon and financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Seeing how your money can grow over time when it’s consistently invested in a diversified portfolio can offer all the motivation you need to start investing in the first place. SmartAsset’s investment calculator can show you how your portfolio can increase in value for up to 30 years.
- Asset allocation refers to how much of a portfolio is invested in different asset classes. SmartAsset’s asset allocation calculator can help you decide how much of your portfolio should be invested in stocks, bonds and cash based on your risk tolerance. Give it a try and see what your asset allocation should look like.
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