Even though cryptocurrency isn’t exactly new, it’s only been in the last couple of years where it started to gain mainstream recognition from businesses and financial institutions as a legitimate investment asset.
So far, we’ve seen large corporations like PayPal dip their toes into crypto, we’ve heard of banks like Wells Fargo recommending investing in crypto as means to diversify portfolios, and most recently, we saw Tesla investing $1.5 Billion of their capital into buying bitcoin. Experts are assuming that Tesla’s bitcoin investment has made them even more profit than producing and selling their cars.
Now that we know that crypto is here to stay and that big players have made significant moves into the crypto space, the question to answer is, should your company get involved with crypto?
This article will give you five pros and four cons to help you in your process of deciding if going deeper into crypto makes sense for you.
Five Pros and Four Cons of Investing in Cryptocurrency
As is the case with all investments, they all have pros, cons and a specific set of risks involved. So before jumping into crypto, it’s essential to make sure that you understand all the possibilities in order to make an informed decision.
Pro: Potential for significant, even exponential returns
Unless you happen to invest in a unicorn startup at the right time, there’s a low chance that you’ll see exponential returns on your investments. It’s for this reason that crypto is such an exciting asset to invest in.
In the specific case of bitcoin, you’ve probably heard of people who bought a few dollars worth of bitcoin back in 2010 when it was worth under $0.10. If these people held on to their bitcoin up to now, their worth would be millions.
Pro: Potentially shorter time of investment
Bitcoin is the cryptocurrency in the spotlight right now, but there are dozens of more cryptos that you can invest in. It’s in these so-called altcoins where many investors find success since these altcoins can often increase in price in a matter of days. For this reason, it’s possible to exit positions in a couple of weeks rather than months or years, as is the case with more traditional investments.
Pro: Increased liquidity
One of the benefits of investing in crypto is that you are buying a digital asset; for this reason, it’s typically an entirely liquid asset. If you use platforms like Coinbase, eToro and Robinhood, you can open and close your positions and come out with your crypto in a matter of hours in some cases.
Example: If your business comes into a situation where you need access to these funds, you can rest assured that you won’t have any problems accessing them and converting them into fiat currency.
Also worth mentioning is that nowadays, most major crypto trading platforms have a large amount of liquidity. As such, the probability of coming across problems in your transactions is low.
Pro: Clear direction and transparent governance
While cryptocurrencies are typically decentralized, there is always a group of people involved in the development and have a detailed roadmap of where they see the cryptocurrency’s future.
These organizational goals are public so that everyone considering investing in crypto can decide for themselves if they want to be a part of it or not. In many cases, you can also be involved in each of these cryptos’ decision making processes and influence where it will go.
Pro: Decentralized and independent
The decentralization and independence of cryptocurrencies are some of the main reasons why crypto has seen an increased adoption rate in the US and around the world. In the context of cryptocurrency, decentralization refers to the fact that there is no central bank, president or any other type of institution with complete power over the direction of the cryptocurrency.
In the case of bitcoin, its decentralization comes from the fact that peer-to-peer transactions can happen over the web without the need for an intermediary.
Con: Increased volatility
Interestingly enough, the number one pro is also the number one con of investing in cryptocurrency. Cryptocurrencies at a point in time are subject to vast amounts of volatility. This volatility means that you can get huge gains; you can likewise incur huge losses on your investment.
Right now, investing in crypto should be considered an investment with a high level of risk. So before jumping into crypto, you need to make sure that you accept what could happen if your crypto investment goes south and you should never invest more than you can afford to lose.
Business in Bitcoin: Tesla invested $1.5 Billion in Bitcoin earlier this year, which may seem like a lot. However, keep in mind that Tesla’s last quarter’s earnings were $6.3 Billion. So from that perspective, they aren’t risking much.
Con: Environmental concerns
Depending on the cryptocurrency, the way that the blockchain operates can require a large amount of energy. If the consensus algorithm is using proof of work, confirming transactions can leave quite a large carbon footprint.d.
Con: Protocol risks
As stated earlier in this article, as of right now, investing in cryptocurrency should be considered a high-risk investment. Because of this, how much of your cash you devote to your crypto investments needs to be analyzed carefully. There are two main potential pitfalls to going all-in on crypto that are a little different than traditional investments:
- Since the technology is still new, there can be bugs in certain protocols that hackers can exploit to steal your crypto if you’re not vigilant..
- If you make a mistake and send crypto to the wrong address or lose your private keys, you may never be able to access those funds again. Unlike a bank, there is no one to call to reset your password in the event that you don’t remember it..
Con: Filing Taxes Incorrectly
Crypto is still in its infancy as an investment vehicle. This means that there will most likely be a large amount of change and adaptation to how crypto is taxed. As of right now, crypto is taxed the same as stock, with some limited exceptions.
This novelty can lead to filing taxes incorrectly, which can lead to fines and legal fees.
Use an Accounting Service That Understands Crypto and Startups
Crypto has a considerable amount of potential. That’s why over 86% of executives polled have shared that they are dabbling in crypto to some extent.
Suppose you are seriously considering crypto and want to make sure that everything will be handled properly. In that case, you need to work with experts who understand and have the experience of working with cryptocurrencies and startups.
Click here to set up a free consultation with one of our crypto savvy CPAs so we can help make your journey into crypto a profitable one.