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Is Cryptocurrency a Good Investment?

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investing in Crypto – It is possible to get filthy rich by investing in cryptocurrency — but it is also very possible that you lose all of your money. Investing in crypto assets is risky, but can be a good investment if you do it properly and as part of a diversified portfolio.

Cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency. A safer but potentially less lucrative alternative is buying the stocks of companies with exposure to cryptocurrency.

crypto investment,investing in Crypto

Image source: The Motley Fool

Let’s examine the pros and cons of investing in cryptocurrency.

Is cryptocurrency safe?

Multiple factors show that cryptocurrency is not always a safe investment. All the while, other signs are emerging that cryptocurrency is here to stay.

Cryptocurrency risks

Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen, spurring many exchanges and third-party insurers to begin offering protection against hacks.

Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase (COIN -2.58%) make it fairly easy to buy and sell crypto assets such as Bitcoin (BTC -0.15%) and Ethereum (ETH -0.1%), but many people don’t like to keep their digital assets on exchanges due to the risks of allowing any company to control access to their assets.

Storing cryptocurrency on a centralized exchange means you don’t have full control over your assets. An exchange could freeze your assets based on a government request, or the exchange could go bankrupt and you’d have no recourse to recover your money.

Some cryptocurrency owners prefer offline “cold storage” options such as hardware wallets, but cold storage comes with its own set of challenges. The biggest is the risk of losing your private key; without a key, it’s impossible to access your cryptocurrency.

There’s also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and many projects are no more than scams. Only a small percentage of cryptocurrency projects will ultimately flourish.

Regulators may also crack down on the entire crypto industry, especially if governments view cryptocurrencies as a threat rather than an innovative technology.

The cutting-edge technology elements of cryptocurrency also increase the risks for investors. Much of the tech is still being developed and is not yet extensively proven in real-world scenarios.

Cryptocurrency adoption

Despite the risks, cryptocurrencies and the blockchain industry are growing stronger. Much-needed financial infrastructure is being built, and investors are increasingly able to access institutional-grade custody services. Professional and individual investors are gradually receiving the tools they need to manage and safeguard their crypto assets.

Crypto futures markets are being established, and many companies are gaining direct exposure to the cryptocurrency sector. Financial giants such as Block (SQ 0.33%) and PayPal (PYPL 1.23%) are making it easier to buy and sell cryptocurrency on their popular platforms. Other companies, including Block, have poured hundreds of millions of dollars into Bitcoin and other digital assets. Tesla (TSLA 0.54%) purchased $1.5 billion worth of Bitcoin in early 2021. By February 2022, the electric vehicle maker reported that it held almost $2 billion of the cryptocurrency. MicroStrategy (MSTR -6.67%) — a business intelligence software company — has been accumulating Bitcoin since 2020. It held $5.7 billion in the cryptocurrency by the end of 2021 and said it plans to buy more with excess cash generated from operations.

Although other factors still affect the riskiness of cryptocurrency, the increasing pace of adoption is a sign of a maturing industry. Individual investors and companies are seeking to gain direct exposure to cryptocurrency, considering it safe enough for investing large sums of money.

Is crypto a good long-term investment?

Many cryptocurrencies such as Bitcoin and Ethereum are launched with lofty objectives, which may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, early investors in a crypto project that reaches its goals can be richly rewarded over the long term.

For any cryptocurrency project, however, achieving widespread adoption is necessary to be considered a long-term success.

Bitcoin, as the most widely known cryptocurrency, benefits from the network effect — more people want to own Bitcoin because Bitcoin is owned by the most people. Bitcoin is currently viewed by many investors as “digital gold,” but it could also be used as a digital form of cash.

Bitcoin investors believe the cryptocurrency will gain value over the long term because the supply is fixed, unlike the supplies of fiat currencies such as the U.S. dollar or the Japanese yen. The supply of Bitcoin is capped at fewer than 21 million coins, while most currencies can be printed at the will of central bankers. Many investors expect Bitcoin to gain value as fiat currencies depreciate.

Those who are bullish about Bitcoin being extensively used as digital cash believe it has the potential to become the first truly global currency.

Ether is the native coin of the Ethereum platform and can be purchased by investors wishing to gain portfolio exposure to Ethereum. While Bitcoin can be viewed as digital gold, Ethereum is building a global computing platform that supports many other cryptocurrencies and a massive ecosystem of decentralized applications(“dApps”).

The large number of cryptocurrencies built on the Ethereum platform, plus the open-source nature of dApps, creates opportunities for Ethereum to also benefit from the network effect and to create sustainable, long-term value. The Ethereum platform enables the use of “smart contracts,” which execute automatically based on terms written directly into the contract code.

The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has significant potential to disrupt massive industries such as real estate and banking and also to create entirely new markets.

As the Ethereum platform becomes increasingly used worldwide, the Ether token increases in utility and value. Investors bullish on the long-term potential of the Ethereum platform can profit directly by owning Ether.

That’s not to say Ethereum doesn’t have competition. A number of “Ethereum Killers,” including Solana(SOL -0.35%), Polygon (MATIC -0.19%), and Avalanche (AVAX -0.2%), are all built to handle smart contracts and use a blockchain system capable of processing more transactions per second. The speed has the added advantage of being less expensive for users as well. But Ethereum is the most broadly adopted platform for using smart contracts.

Should you invest in cryptocurrency?

Owning some cryptocurrency can increase your portfolio’s diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market. If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time. If you do your research and learn as much as possible about how to invest in cryptocurrency, you should be able to manage the investment risk as part of your overall portfolio.

If buying cryptocurrency seems too risky, you can consider other ways to potentially profit from the rise of cryptocurrencies. You can buy the stocks of companies such as Coinbase, Block, and PayPal, or you can invest in an exchange like CME Group (CME -1.08%), which facilitates crypto futures trading.

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Ethereum’s Parity Users Lose Millions in a Multi-Sig Hack

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Parity Wallet Hack – On July 19 the ethereum community was warned that the Parity client version 1.5 and above contained a critical vulnerability in the multi-signature wallet feature. Further, a group of multi-signature “black hat exploiters” has managed to drain 150,000 ether from multi-sig wallets and ICO projects.

A Vulnerability Found in the Multi-Signature Contract “Wallet.sol” Used in Parity Clients

Parity Wallet Hack

According to the company Parity and the firm’s founder Gavin Wood, the startup’s product the Parity wallet version 1.5 and above contained a bug that enabled the theft of $30 million worth of ETH. The vulnerability discovered in these specific Parity wallets used a multi-signature contract called “wallet.sol” and the contract was utilized by a few initial coin offerings (ICO) as well. Circulating reports believe that three particular ICO projects were compromised including Swarm City, æternity, and Edgeless Casino.

The Parity startup had issued a security warning on its website on July 19 detailing the extent of the issue stating;

A vulnerability in Parity Wallet’s variant of the standard multi-sig contract has been found — Immediately move assets contained in the multi-sig wallet to a secure address.

The Mysterious ‘White Hat Group’ Returns to Rescue Funds

Parity Wallet Hack

Following this incident, a group of unknown “white hat group” hackers took it upon themselves to drain the rest of the vulnerable multi-sig wallets by sweeping the network. According to the group, they recovered 377,105 ether worth about $85M at the time of writing. The group says they will be returning the funds to accounts that have been drained and are using the DAO rescue donations for the gas to send the ether forward.

“The White Hat Group were made aware of a vulnerability in a specific version of a commonly used multisig contract,” explains the hacker’s announcement. “This vulnerability was trivial to execute, so they took the necessary action to drain every vulnerable multisig they could find as quickly as possible. Thank you to the greater Ethereum Community that helped finding these vulnerable contracts.”

If you hold a multisig contract that was drained, please be patient. We will be creating another multisig for you that has the same settings as your old multisig but with the vulnerability removed and we will return your funds to you there. We will be using the donations sent to us from The DAO Rescue to pay for gas.

How Many More Faulty Contracts Will Be Found in the Future?

The news of the vulnerability comes just after the Coindash ICO hack last week which saw the loss of $10M worth of ether. The malicious hacks from that event last week and yesterday’s multi-signature wallet drain has had little effect on the price of ethereum. However, the cryptocurrency community is once again discussing the issue of faulty contracts held within the Ethereum network that currently hold millions of dollars in funds. Close to a quarter of a billion dollars in ether has been drained by either the “black hat exploiters” or the “white hat group” since the notorious DAO debacle last year.

What do you think about the latest multi-signature wallet ethereum hacks? Let us know in the comments below.


TAGS IN THIS STORY

æternity, Black hat, ether, Ethereum, Gavin Wood, ICOs, Multi-sig, Multi-signature, N-Featured, Parity, White Hat Group

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Coinbase Under Investigation for Ethereum ‘Flash Crash’

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Ethereum Flash Crash – The Commodity Futures Trading Commission is investigating Coinbase for an Ethereum“flash crash” that occurred in June. During the crash, the ETH exchange rate plummeted down in an instant, but quickly regained its price. According to Bloomberg, Ethereum dropped from trading at $317.81, down to 10 cents in a split second. However, its recovery was also swift. It regained a $300 price point in mere seconds. 

Ethereum Flash Crash

The Bloomberg article said, “The Commodity Futures Trading Commission has requested information from Coinbase Inc. about a June 21 incident on its GDAX platform in which the Ether digital token suffered a precipitous drop, falling to 10 cents from $317.81 in milliseconds before quickly recovering, said two people familiar with the matter.”

Could Margin Trading have caused the Plunge?

The CFTC is concerned that leveraged or margin trading may have precipitated the flash crash. Margin trading allows users to borrow money to trade. This is called trading “on margin” or “leveraged” trading.

Among the issues the agency is focused on is what role leverage might have played in the plunge, as Coinbase allowed traders to use borrowed money to make bigger wagers than would have otherwise been possible, said the people, who asked not to be named because the review isn’t public.

After the flash crash, Coinbase discontinued their margin trading service. Their actions quickly piqued regulatory interest and scrutiny.

The Cryptocurrency Wild West and Coinbase Cooperation

Regulators are now scrutinizing cryptocurrency exchanges even more. It comes as no surprise that the CFTC is thoroughly investigating Coinbase because the CFTC wants to control the “wild west” nature of the digital currency ecosystem. The Bloomberg article also pointed out that Coinbase had conducted $20 billion in cryptocurrency transactions.

“As a regulated financial institution, Coinbase complies with regulations and fully cooperates with regulators,” the company said in an emailed statement. “After the GDAX market event in June 2017, we proactively reached out to a number of regulators, including the CFTC. We also decided to credit all customers who were impacted by this event. We are unaware of a formal investigation.”Ethereum Flash Crash

Even though officials and regulators are putting pressure on Coinbase, Coinbase doesn’t seem to be sweating it. They are fully cooperating with the CFTC’s investigation and even emailed this statement in response to the investigation:

“As a regulated financial institution, Coinbase complies with regulations and fully cooperates with regulators. After the GDAX market event in June 2017, we proactively reached out to a number of regulators, including the CFTC. We also decided to credit all customers who were impacted by this event. We are unaware of a formal investigation.”

Even though Coinbase is cooperating, some people are still curious about the cause of the crash.

What Initiated the Flash Crash?

Coinbase Under Investigation for Ethereum 'Flash Crash'

According to sources, the Ethereum flash crash was caused by one monstrous trade. A single $12.5 million dollar sell order triggered auto-trades preset by other traders. This resulted in the immediate crash down to 10 cents. Luckily, as soon as Ethereum hit the 10 cent mark, a multitude of traders immediately placed new orders for the digital currency. This caused a jump back to around $300.

It is currently unclear if margin trading was the culprit, or if Coinbase was culpable for the incident. Regardless, the cryptocurrency and bitcoin markets will continue to generate mainstream regulatory scrutiny, as well as mainstream adoption.

What do you think of the Ethereum “flash crash” on Coinbase? Was it caused by margin trading? Even if Coinbase had a hand in it, is it up to regulators to control the markets and market actors? Let us know in the comments below.

Ripple CEO and Ethereum Co-Founder Bash ICO Industry

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Ripple CEO – In a recent interview, Ripple chief executive officer, Brad Garlinghouse, and Ethereum co-founder, Joseph Lubin, have criticized the current state of the ICO industry. The pair expressed concerns that although many “high-quality projects” are using ICOs as a fundraising vehicle, numerous “copycat projects” have raised money without “intend[ing] to deliver any value to the people buying the tokens.”

Ripple’s CEO Believes That Regulators Need to Catch up With the ICOs Industry

Ripple CEO and Ethereum Co-Founder Bash ICO Industry

Ripple CEO, Brad Garlinghouse, expressed his belief that “a lot of what’s happening in the ICO market is actually fraud,” also mentioning the increasing number of ICOs facing litigation. Although concerned by the actions of many token sales, Garlinghouse expects that said fraudulent activity will “stop” once regulators catch up with the industry.

Garlinghouse also asserted that token issuers currently operate in a legal “gray area,” whilst they wait for regulators to catch up with the industry. The Ripple CEO suggested that the futures markets may prove to be analogous – as it took significant time to develop a regulatory framework for the futures markets.

“There are a lot of really fabulous things that get done with digital assets and blockchain technologies to reduce friction, to reduce costs, and enable things that weren’t possible before. I think instead of focusing on those, we’re distracted by what’s going on in this gray area.”

Ethereum’s Joseph Lubin Has Described China’s ICO Ban as An “Appropriate Approach”

Ripple CEO and Ethereum Co-Founder Bash ICO Industry

Joseph Lubin stated that although ICOs are being conducted by many “high-quality projects, …there have been a lot of copycat projects where people copy all the same materials (and) don’t intend to deliver any value to the people buying the tokens.” Mr. Lubin asserts that many of the said “copycat projects” were based in China, leading him to support China’s decision to ban token sales within its borders.

“With China’s political approach to things, and with the fraud that was rampant there, it made a lot of sense for them to pause things a little bit and get a better, deeper understanding of the ecosystem, and scare potential fraud perpetrators,” Lubin said.

What do you think of Joseph Lubin’s and Brad Garlinghouse’s concerns regarding the current state of the ICO industry? Share your thoughts in the comments section below!

Ethereum Network Congestion Forces Exchanges to Halt Withdrawals 

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Ethereum Network – Scaling problems that have been sporadically affecting the Ethereum network have resurfaced. While bulls and bears were battling it out in the markets, the Ethereum blockchain was fighting to restore some semblance of normal service. The congestion forced a number of exchanges to halt withdrawals, with one going so far as to advise customers to use a different cryptocurrency.

Also read: Despite Regulations, One South Korean Crypto Exchange Rises to the Global Top

Ethereum Enters the Slow Lane

Ethereum Network Congestion Forces Exchanges to Halt Withdrawals

Over the last couple of months, the Ethereum network has reported record activity, peaking at over one million transactions a day. This growth has come at a price in the form of slow or backlogged transactions, causing fees to reach record highs and ICO participants to miss out on token sales after failing to push their ether through in time. On Wednesday January 17, two exchanges reported ethereum withdrawal issues that were affecting users.

First up was Bitstamp, which noted that there were ETH withdrawal delays, before updating the situation four hours later to say the matter had been resolved. Users of Kucoin exchange have been more significantly affected  on account of ethereum withdrawal delays that have dragged on for days. The exchange posted the following notice on Wednesday, including a novel suggestion: that users withdraw in neo instead of ether. This suggestion is unlikely to have been of much help to users who needed their ETH to interact with the ethereum ecosystem.

Ethereum Network Congestion Forces Exchanges to Halt Withdrawals

More Gas, More Money, More Problems

Ethereum Network Congestion Forces Exchanges to Halt Withdrawals

Following the notice, Kucoin followed up with a blog post containing a form to be filled in by users who were still waiting for their ethereum withdrawals to be processed. A week prior, the exchange had explained that ETHwithdrawals were subject to delays as they were being released at four-hour intervals. Not everyone has been convinced by Kucoin’s decision to lay the blame on the Ethereum network though, with some users pointing out that the exchange’s ETH withdrawal fees are five times higher than on other sites, which seem to be processing transactions just fine.

What is beyond dispute is that numerous exchanges have encountered similar problems of late, with Bittrex reporting only a week ago: “Due to incredibly high gas prices, we’re preventing new ETH and asset deposit addresses from being created. Existing deposit addresses will work as normal.”

Eth Gas Station currently reports fast transactions as requiring 51 gwei, or around $0.93 to process. The web is awash with crypto projects promising that their new blockchain can handle a gazillion transactions a second. The reality, however, is that if these networks were ever to be stress tested in the wild like Ethereum or Bitcoin, they would face the exact same same problems. Scaling blockchains while preserving decentralization is even harder than it sounds.

Do you think scaling problems are inevitable as blockchains become busier? Let us know in the comments section below.

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