There are more than 4,000 different cryptocurrencies in existence now, but should you invest? That depends entirely on whom you ask. There are both advantages and disadvantages to investing in cryptocurrencies — and the answer to this question won't be the same for everyone.

Large publicly-listed companies like Tesla, MicroStrategy, and Twitter have all invested in Bitcoin. But that doesn't mean the move is suitable for every investor.

What are the advantages of investing in cryptocurrencies?

During May last year, Bitcoin underwent its third halving cycle; whereby the block mining rewards are halved and as a result of this supply shock, the price skyrockets. Whilst, there is a lot of debate as to when this bitcoin bull run might end — one thing remains certain, there will be both winners and losers.

That said, perhaps the most significant advantage for investing in any cryptocurrency lies within the opportunity to make solid gains. But those gains come with a price, being able to ‘stomach’ massive amounts of volatility. 

Even though some investors might get scared off by this ‘volatility,’ Michael Saylor, CEO of MicroStrategy says that volatility is a good thing. In a recent interview, Saylor told Stansberry Research that “I would much rather have a volatile 300% return than a non-volatile 15% return.” 

Saylor further goes on to say that, “It’s like a Jedi-mind trick to convince you that you should be afraid of volatility. If volatility is going to return 200% pre-tax a year for 12 years, or for 10 years — and you're afraid of it — you lost 99.5% of your wealth because you’re afraid of volatility.”

Apart from volatility, cryptocurrencies also provide investors with a mechanism to diversify their portfolios that are traditionally held in stocks, commodities, and bonds. What does this mean? Well, institutional investors, high-networth individuals (HNWIs) and retail investors have now begun allocating a small percentage of their portfolios towards cryptocurrencies.  

Recently, Mike Novogratz, the CEO of Galaxy Digital Assets sheds light on how this effect is transforming the way investors are changing their tune. Novagratz  told CNN, “I now think it can be a more significant part of people’s portfolios… I think a new investor could put 5% into Bitcoin. Bitcoin’s not going back to zero — this idea that it can go to zero is not right anymore. It could certainly trade back to $14,000, you could lose 30% to 40%, but you’re not losing 80% to 90% of your money. There’s too much infrastructure built there.”

That said, in the era of ‘inflation instability’ and rampant money printing by the Fed, gold hasn't been doing as well as of late. Right now, commodities and precious metals should be booming, but they’re not, which has caused some investors to speculate that bitcoin ‘is stealing’ gold’s thunder.

Citigroup analyst Aakash Doshi explains why this might be the case, and says “The most palpable reason gold investment activity may have flipped to net outflows in recent months seems to be an expanding investor base if not an outright preference by some institutional players for digital alternative assets,” he wrote. Bitcoin is up 84% this year, and its total market value recently rose above $1 trillion.

Warren Buffett

As with every investment, there are some caveats to keep in mind. Volatility is both good and bad. That’s because there is potential to lose money, as there is to make gains from it. This is why you should never invest more than you can afford to lose.

Warren Buffett has spoken out against cryptocurrencies like bitcoin, saying that they are a good investment. In 2019, Buffett had this to say about bitcoin, “Bitcoin has no unique value at all. It doesn't produce anything. You can stare at it all day and no little Bitcoins come out or anything like that. It's a delusion, basically.”

Cryptocurrency trading and investing

If you've decided that you want to add cryptocurrencies to your investment portfolio, then you'll need to to sign up for an exchange. It is important to note that different exchanges have different features. For example some open-source exchanges don’t ask for invasive identification documents. Also, not every exchange allows you to buy cryptocurrencies with a credit card, but OKEx does. Plus, be sure to check out the exchanges KYC/AML requirements, fees, derivatives trading options, and if the exchange is legally available in your jurisdiction.

There are also plenty of other options for investors that are ‘hodling’ over a long-term horizon (5-10+ years), whereby you can earn passive income on your crypto holdings. It is important that if you are using any services like BlockFi or Celsius Network that you do your due diligence and be aware that if you are earning interest on your crypto that there is risk associated with this.

On a long-term horizon, cryptocurrencies like Bitcoin do have large upside potential over the next 10+ years. This is especially true for those starting crypto businesses such as an exchange or creating new coins. That said, every investment holds risk and it is vital for investors to constantly rebalance their portfolios to manage risk accordingly. Since it's widely known that Bitcoin runs on 4-year cycles, the best time to be dollar-cost averaging into crypto assets will always be during the bear markets— buy the fear, sell the greed.