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For many years now crypto has been seen as a bubble or a scam. Many people said you would lose any money invested. Still others familiar with the topic viewed it as the future of currency. Where does it currently stand? The major cryptocurrencies that still exist, Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), and Zcash (ZEC) still exist and have maintained value over time. In light of this, in 2020, is investing in crypto a good way to grow your money? How does it compare to some traditional ways to do this? These questions can be hard to answer because it really depends on your situation. Here are a few things that should be considered.
How do we acquire cryptocurrency?
Buying — Using a fiat currency, such as USD, CAD, EUR, etc. to buy crypto to hold for some time or to trade for products or services.
Mining — Using computer hardware to solve the mathematical equations needed to allow the crypto networks to function by creating new units for digital currency, validate transactions, as well as adding to the performance of the network as a whole.
Staking — Buying or mining certain cryptocurrencies that reward the owner with more of that currency simply for holding it. The rate of return differs based on the coin.
There are other methods such as master/supernodes which generate crypto income but are a more advanced topic. The methods above would likely be the ways most people would generally obtain crypto.
In what ways can you grow your money with crypto?
In the early days mining was a very technically involved process of using certain hardware, running and sometimes compiling special (hard to use) software to mine your currency. Today anyone can buy a mining machine, plug it up, turn it on and start mining. Your investment cost is in hardware and power. Once the crypto is mined you can hold it while waiting for the price to appreciate. If we mined say 3 Bitcoin at a value of $10k and tomorrow that price appreciates to $11k, that $30k of Bitcoin we mined is now worth $33k since we held on to it. We have to also note that it can also depreciate from $10k per coin to $8k per coin leaving us with $24k in value.
Buying crypto is pretty straight forward. Start by creating an account on one of many major exchanges, such as Coinbase in the US or Bitstamp in the UK as two of the larger ones, and use one of the many traditional currencies to purchase your cryptocurrency of choice. At this point, we can hold it with the hope that it will grow in value. The same appreciation/depreciation scenario applies here as well when comparing mining vs. buying crypto with the one difference that if the Bitcoin we bought with traditional currency depreciates to say $8k, that represents $2k or lost crypto as well as $2k of losses in traditional currency.
In addition to the appreciation, if the coin supports staking you also get a staking percentage. Some minable coins also supporting stake include Komodo (KMD) and NEO (NEO). Others that are not minable and have to be bought include USD Coin (USDC) and Tezos (XTZ). With about 1730 coins of XZT (~$5k) at 5.52% staking reward for 12 months, we would get about an additional $276 if the coin worth and staking percentage stayed the same the entire time. Or with about 424 coins of NEO (~$5k) at 1.75% staking reward for 12 months we would get about $87 if the coin worth and staking percentage stayed the same the entire time.
What are some traditional ways to grow your money?
High-Interest Savings Accounts — Savings accounts where the bank pays you a percentage to deposit and hold your money in the account for long periods.
Certificate of Deposit (CD) — Accounts that are used to get a guaranteed amount of interest over an agreed-upon time. The rates tend to be a bit better than high-interest savings accounts due to not having access to the deposited funds over that period.
Stocks and Funds — Shares of a company or shares of a fund (basket of securities that represent many different companies) that are bought or sold on an exchange like Fidelity or Robinhood.
High-Interest Savings Accounts — As of 7/21/2020 the interest rates on these accounts aren’t that exciting but there is still a small (sometimes very small) amount of interest that can be earned by holding money in these accounts. For 1.11% APR on a balance of $5k, you’d gain about $55 in 12 months.
CD’s are another good way of getting more consistent interest back on our money. Although one downside is that the money is not easily accessible for a set amount of time, unlike the high-interest savings account. For a 1.46% APR on a balance of $5k, you’d gain $73 in 12 months.
Stocks and funds (as well as other related tradable assets) are a way we can buy in and hope for appreciation. If the companies stock or the stocks making up the fund appreciate, you benefit from that gain in value. If you buy 500 shares of a stock or fund at the cost of $10 per share, you have an initial investment of $5k. If that stock/fund appreciates to $20 per share, your investment has doubled in value. But at the same time, if it depreciates to $5 per share, the value of your investment has halved.
Dividends are stocks or funds that reward the holder with cash or additional stock simply for holding that stock or bond. Since the stock/fund value will fluctuate, the added benefit of a dividend could make holding that stock/fund a little less worrisome. The price may decrease but if the company/fund is still in relatively good financial standing the dividend will continue. The appreciation/depreciation scenario of the stock/fund still holds true here but we have the additional dividend calculation to consider. If we still have the 500 shares but they also afford us a $0.15 per share dividend we would see an additional $75 per month, quarter, half, or year depending on the dividend schedule.
So how do they compare?
With some of the traditional methods such as high-interest savings accounts and certificates of deposits, there are some protections for your money from the FDIC since banks and other financial institutions offer these products. With stocks/funds and the associated dividends, there are no real protections. If the fund or the company offering the stock goes under, has a really bad quarter, or anything else that severely affects their finances, the stock price could drop drastically. They may stop their dividend and/or could delist from the stock exchange altogether. At this point that investment is lost.
With crypto coins, regardless of the method used to acquire them, you still are dependent on the fluctuating value of the coin. The long-standing coins have proven to be more reliable than the offshoots (a.k.a Alt Coins) but they still can vary drastically in value. There are no FDIC type safeguards in the crypto world as far as I know making it somewhat similar to the stock market at risk.
So what is my non-financial professional opinion?
You may have read this looking for a straight yes or no answer. I’m sorry to say, just like with most investments with risk, safer methods should be used unless you can afford to lose the money being invested. If you already have adequate savings, crypto can be an interesting and at times exciting way to explore growing your money. I have a brokerage, crypto, and high-interest savings accounts and together they can contribute to a well-rounded wealth strategy. Research is very important when considering investing in crypto just as you would when investing in the stock market.