The Pros and Cons of Investing in Cryptocurrency as a Millennial - Money Mastery Millennial (2024)

You might have heard about the crazy success stories of people making millions overnight with cryptocurrencies, but you might also have heard about the risks and volatility that come with it.

As a millennial, you might be wondering if investing in cryptocurrency is worth it.

Well, we’re here to give you a comprehensive rundown of the pros and cons of investing in cryptocurrency.

According to a survey by Gemini, a cryptocurrency exchange, 63% of millennials are interested in learning more about cryptocurrency, compared to just 28% of Baby Boomers.

Additionally, a separate survey by Charles Schwab found that 45% of millennials view cryptocurrencies as a good investment opportunity, compared to just 16% of Gen Xers and 9% of Baby Boomers.

Millennials are more open to investing in cryptocurrency than other generations.

In this article, we’ll take a deep dive into the pros and cons of investing in cryptocurrency as a millennial, and give you some important considerations to keep in mind before making any decisions.

So, whether you’re a seasoned investor or just getting started with your investment journey, keep reading to learn everything you need to know about investing in cryptocurrency as a millennial.

1. Pros of Investing in Cryptocurrency as a Millennial

1.1 Potential for High Returns

One of the most attractive features of investing in cryptocurrency as a millennial is the potential for high returns.

While there are certainly risks involved, the historical performance of cryptocurrencies suggests that there is significant potential for growth.

1.1.1 Historical Performance of Cryptocurrencies

When Bitcoin was first introduced in 2009, it was worth just a few cents. By the end of 2017, it had reached an all-time high of nearly $20,000.

Ethereum, another popular cryptocurrency, was launched in 2015 at a price of just $2.80 per token. By early 2021, it had reached an all-time high of over $2,000.

Of course, the performance of cryptocurrencies is not always consistent.

Both Bitcoin and Ethereum experienced significant drops in value during the 2018 “crypto winter,” with Bitcoin losing over 80% of its value at one point.

However, in recent years, both cryptocurrencies have experienced significant growth again during the pandemic. But they crashed as fast as they rose.

It’s worth noting that the performance of cryptocurrencies can be influenced by several factors, including global economic conditions, regulatory changes, and technological developments.

However, if you’re willing to take on some risk, investing in cryptocurrency could potentially yield high returns.

1.1.2 Potential Future Growth

Looking to the future, several factors could contribute to the continued growth of cryptocurrencies.

For example:

• Increased adoption: As more companies and individuals begin to accept cryptocurrencies as a form of payment, their value could increase.
• Advancements in technology: The underlying blockchain technology behind cryptocurrencies is constantly evolving and improving, which could lead to new use cases and increased demand.
• Inflationary pressures: Some investors see cryptocurrencies as a potential hedge against inflation, as the supply of many cryptocurrencies is limited.

Of course, it’s impossible to predict the future of cryptocurrencies with certainty.

However, the potential for high returns combined with the possibility of future growth makes investing in cryptocurrency an appealing option for many millennials.

Table: Historical Performance of Bitcoin

1.2 Low Barrier to Entry

Another advantage of investing in cryptocurrency as a millennial is the low barrier to entry.

Unlike traditional investments such as real estate or stocks, investing in cryptocurrency doesn’t require a large amount of capital to get started.

1.2.1 Accessibility of Cryptocurrency Markets

One of the main reasons for the low barrier to entry is the accessibility of cryptocurrency markets.

Unlike traditional investments, which often require the assistance of a financial advisor or broker, anyone with an internet connection can buy and sell cryptocurrencies.

Cryptocurrency exchanges such as Coinbase, Binance, and Kraken make it easy for beginners to get started.

These platforms allow users to buy and sell cryptocurrencies using fiat currencies or other cryptocurrencies.

Additionally, many exchanges offer educational resources to help beginners learn about cryptocurrency investing.

1.2.2 Fractional Investing

Another factor contributing to the low barrier to entry is fractional investing.

With traditional investments, you typically need to buy an entire share or property, which can be expensive.

However, with cryptocurrency, you can purchase fractions of a coin or token.

For example, let’s say you want to invest in Bitcoin, but you don’t have the funds to buy a full coin, which is currently worth over $27,000.

With fractional investing, you could invest as little as $10 and still own a small fraction of a Bitcoin.

This makes it easier for millennials with limited funds to invest in cryptocurrency and potentially benefit from its growth.

Table: Cryptocurrency Exchanges with Low Minimum Investment Requirements

Overall, the low barrier to entry and accessibility of cryptocurrency markets, combined with the option for fractional investing, make cryptocurrency investing an attractive option for many millennials.

However, it’s important to remember that investing in cryptocurrency still carries risks and should be approached with caution.

1.3 Diversification

Diversification is an important strategy in investing.

It involves spreading your investments across different asset classes to reduce risk and potentially improve returns.

Cryptocurrency can be an effective way for millennials to diversify their investment portfolios.

1.3.1 Cryptocurrency as a Portfolio Diversifier

One advantage of including cryptocurrency in your investment portfolio is that it has a low correlation with traditional asset classes such as stocks and bonds.

This means that the price movements of cryptocurrency are less likely to be influenced by the same factors that affect traditional investments.

For example, during the COVID-19 pandemic, the stock market experienced significant volatility as investors reacted to the economic impact of the pandemic.

However, during the same period, cryptocurrency prices remained relatively stable, with some even experiencing growth.

This shows that cryptocurrency can serve as a hedge against economic uncertainty and provide diversification benefits for your portfolio.

1.3.2 Correlation with Traditional Asset Classes

To illustrate the low correlation between cryptocurrency and traditional asset classes, let’s take a look at the correlation matrix of cryptocurrency and the S&P 500 index.

Table: Correlation Matrix of Cryptocurrency and S&P 500 Index

As you can see, the correlation between Bitcoin and the S&P 500 index is only 0.023, indicating a very weak correlation.

This means that including cryptocurrency in your investment portfolio can help reduce overall portfolio risk by diversifying across asset classes.

In summary, diversification is an important strategy for reducing risk and improving returns in your investment portfolio.

Cryptocurrency can be an effective way for millennials to diversify their portfolios due to its low correlation with traditional asset classes.

However, it’s important to remember that investing in cryptocurrency carries risks and should be approached with caution.

2. Cons of Investing in Cryptocurrency as a Millennial

2.1 Volatility and Risk

One of the biggest drawbacks of investing in cryptocurrency is its volatility and risk.

The price of the cryptocurrency can be extremely volatile and subject to sudden and extreme price swings.

This can lead to significant gains or losses in a short period, which can be difficult to predict and manage.

2.1.1 Extreme Price Swings

The volatility of cryptocurrency is illustrated by the history of Bitcoin’s price.

In December 2017, the price of Bitcoin hit an all-time high of nearly $20,000, but by December 2018, it had dropped to around $3,000.

This shows how quickly the price of the cryptocurrency can rise and fall, and how difficult it can be to predict its future performance.

Furthermore, cryptocurrency markets can be easily influenced by news and events that affect investor sentiment.

For example, a negative news story about the security of a particular cryptocurrency can cause a rapid sell-off, leading to significant price declines.

2.1.2 Regulatory Risk

Another risk associated with investing in cryptocurrency is regulatory risk.

Cryptocurrency is a relatively new asset class that is not yet subject to comprehensive regulation.

This means that there is a risk that governments around the world could introduce regulations that could impact the price and viability of cryptocurrency investments.

For example, in 2017, China banned initial coin offerings (ICOs) and closed down cryptocurrency exchanges in the country, leading to a sharp decline in the price of Bitcoin and other cryptocurrencies.

In addition to regulatory risks, there are also risks associated with the security of cryptocurrency exchanges and wallets.

Cryptocurrency exchanges have been subject to hacking and cyber attacks in the past, leading to the loss of significant amounts of funds.

In summary, investing in cryptocurrency comes with significant volatility and risk.

The price of the cryptocurrency can be extremely volatile, and regulatory risks and security risks associated with exchanges and wallets can add to the overall risk of investing in cryptocurrency.

Therefore, it’s important for millennials to carefully consider the risks and potential rewards of investing in cryptocurrency before making any investment decisions.

2.2 Lack of Fundamental Valuation Metrics

Another major disadvantage of investing in cryptocurrency is the absence of fundamental valuation metrics.

Unlike traditional assets such as stocks and bonds, cryptocurrencies do not generate cash flows or pay dividends.

This makes it difficult to determine the true value of a cryptocurrency.

2.2.1 Absence of Cash Flows or Dividends

One of the fundamental ways investors determine the value of an asset is by analyzing its cash flows or dividends.

However, since cryptocurrencies do not generate cash flows or pay dividends, there is no clear way to determine their underlying value.

As a result, investors may have to rely on other factors such as market sentiment and speculation to determine the value of a particular cryptocurrency.

2.2.2 Reliance on Speculation and Sentiment

The lack of fundamental valuation metrics means that the price of cryptocurrency is largely determined by speculation and sentiment.

This can lead to wild price swings that are difficult to predict or manage.

For example, a positive news story about a particular cryptocurrency can cause a surge in its price, while a negative news story can cause a sudden drop.

Additionally, the cryptocurrency market is highly influenced by the actions of large investors such as hedge funds and institutional investors.

This means that market sentiment can change quickly and unpredictably, leading to rapid price changes.

Table: Examples of the Extreme Price Swings in Cryptocurrencies

In summary, the absence of fundamental valuation metrics for cryptocurrency means that investors must rely on speculation and sentiment to determine the value of their investments.

This can lead to unpredictable and volatile price movements that can be difficult to manage.

As a result, it’s important for millennials to carefully consider the lack of fundamental valuation metrics before investing in cryptocurrency.

2.3 Complexity and Technical Expertise

While investing in cryptocurrency can be appealing due to its potential returns and diversification benefits, it’s important to recognize that it can also be complex and require technical expertise.

Here are some factors to consider:

2.3.1 Security Risks

Cryptocurrency investments are highly susceptible to security risks, such as hacking and fraud.

According to a report by Atlas VPN, the number of crypto-related scams increased by 1,000% in the first six months of 2021 compared to the same period in the previous year.

Investors must take steps to protect their digital assets, such as using strong passwords, enabling two-factor authentication, and storing their cryptocurrency in a secure wallet.

2.3.2 Limited Understanding of Blockchain Technology

Blockchain technology is the underlying infrastructure of most cryptocurrencies.

While it’s not necessary to have a deep understanding of blockchain to invest in cryptocurrency, having some knowledge of how it works can be helpful.

Unfortunately, a survey conducted by the Financial Conduct Authority (FCA) in the UK found that only 15% of respondents were able to correctly identify the definition of cryptocurrency.

Investors need to educate themselves on the basics of blockchain technology to make informed investment decisions.

This can involve reading up on the topic or even taking online courses.

Additionally, investors should be cautious of investing in cryptocurrencies they don’t fully understand, as this can lead to poor investment decisions.

Overall, while the complexity and technical expertise required to invest in cryptocurrency can be a challenge for some, millennials need to weigh the potential risks and benefits before making any investment decisions.

3. Considerations for Millennial Investors

3.1 Risk Tolerance and Investment Goals

As a millennial investor, it’s important to consider your risk tolerance and investment goals before jumping into the cryptocurrency market.

Here are some factors to keep in mind:

3.1.1 Short-term vs. Long-term Investment Horizons

Cryptocurrencies are known for their volatility, with prices fluctuating rapidly in short periods.

This means that investing in cryptocurrency can be risky for short-term investors who may not be able to tolerate the price swings.

On the other hand, those with a longer investment horizon may be able to weather the storms of volatility and potentially reap the benefits of long-term growth.

It’s important to consider your financial situation and timeline before deciding on your investment horizon.

3.1.2 Balancing Risk and Return

Like any investment, investing in cryptocurrency involves a tradeoff between risk and return.

While the potential for high returns is certainly attractive, it’s important to balance this against the risks involved.

It’s important to diversify your portfolio with a mix of asset classes, including both traditional investments like stocks and bonds, as well as alternative investments like cryptocurrency.

This can help to mitigate risk and potentially maximize returns over the long term.

Here is a table comparing the risk and return potential of different asset classes:

As you can see, investing in cryptocurrency has its pros and cons.

While the potential for high returns and portfolio diversification may be appealing, it’s important to consider the risks involved, such as extreme price swings, regulatory risk, and lack of fundamental valuation metrics.

Ultimately, the decision to invest in cryptocurrency should be based on your financial situation, risk tolerance, and investment goals.

3.2 Knowledge and Education

As with any investment, it’s important to have a good understanding of the technology and mechanics behind cryptocurrencies.

This is especially true for millennials, who have grown up in a digital world and may be more comfortable with technology than previous generations.

3.2.1 Understanding the Technology and Mechanics of Cryptocurrencies

To invest in cryptocurrencies, it’s essential to have a basic understanding of blockchain technology.

Blockchain is a decentralized ledger that records all transactions on a network of computers. Each block of transactions is cryptographically secured and linked to the previous block, forming a chain of blocks.

This makes the ledger secure and transparent, with all transactions publicly visible.

Cryptocurrencies are digital assets that are built on blockchain technology.

Bitcoin, the first cryptocurrency, was created in 2009 and has since been joined by thousands of others.

Each cryptocurrency has its unique features and uses cases, and it’s important to research and understand these before investing.

3.2.2 Researching Different Cryptocurrencies and Exchanges

When investing in cryptocurrencies, it’s important to research different cryptocurrencies and exchanges to find the ones that best fit your investment goals and risk tolerance.

Some popular exchanges include Coinbase, Binance, and Kraken, but there are many others to choose from.

Researching cryptocurrencies and exchanges involves looking at factors such as:

• Market capitalization: the total value of a cryptocurrency
• Liquidity: the ease with which a cryptocurrency can be bought or sold
• Volatility: the degree to which a cryptocurrency’s price fluctuates
• Use case: the practical applications of a cryptocurrency
• Development team: the people behind the cryptocurrency and their track record
• Security: the measures in place to protect investors’ assets

In addition to researching individual cryptocurrencies and exchanges, it’s also important to stay up-to-date on news and developments in the cryptocurrency world.

This can include following industry experts on social media, subscribing to newsletters, and attending conferences and meetups.

By investing time and effort into educating yourself on the technology and researching different cryptocurrencies and exchanges, you can make informed investment decisions and potentially achieve greater returns.

3.3 Portfolio Allocation and Diversification

Here are some key factors to consider:

3.3.1 Determining the Appropriate Allocation of Cryptocurrency

One of the first steps in building a diversified portfolio that includes cryptocurrency is to determine the appropriate allocation.

This will depend on a variety of factors, including your risk tolerance, investment goals, and overall portfolio makeup.

Many financial advisors suggest allocating no more than 5% to 10% of your portfolio to cryptocurrency, due to its high volatility and risk.

However, this may vary based on your circ*mstances and investment objectives.

To help determine your appropriate allocation, consider using the Modern Portfolio Theory (MPT).

MPT is an investment theory that suggests that portfolio returns can be maximized by allocating investments across various asset classes based on their expected risk and return.

This theory has been widely used by financial advisors and investors to help determine appropriate portfolio allocations.

3.3.2 Considering the Role of Cryptocurrency in a Diversified Portfolio

Cryptocurrency can be a valuable addition to a diversified portfolio, as it can provide diversification benefits and potentially enhance returns.

One of the benefits of adding cryptocurrency to a portfolio is that it is largely uncorrelated with traditional asset classes such as stocks and bonds.

This means that it can provide a hedge against market downturns and potentially reduce overall portfolio risk.

A study by Grayscale Investments found that adding even a small amount of Bitcoin to a traditional portfolio could have improved portfolio performance over the past five years.

However, it is important to note that cryptocurrency is still a relatively new and speculative asset class, and its long-term performance and viability are still uncertain.

Therefore, it should only be considered as part of a well-diversified portfolio that also includes traditional asset classes.

Here is a table summarizing the potential benefits and risks of adding cryptocurrency to a diversified portfolio:

Overall, when considering portfolio allocation and diversification, it is important to carefully consider your investment goals, risk tolerance, and overall portfolio makeup.

It is also important to stay informed and educated about the cryptocurrency market and to regularly review and adjust your portfolio as needed.

Bottom Line…

In conclusion, investing in cryptocurrency can be a lucrative opportunity for millennials, but it’s not without its risks and drawbacks.

As we’ve seen, the low barrier to entry, the potential for high returns, and the diversification benefits are all compelling reasons to consider investing in cryptocurrencies.

However, the volatility, regulatory risks, lack of fundamental valuation metrics, complexity, and security risks make it imperative for investors to do their due diligence before investing.

It’s important to remember that investing in cryptocurrency should only be a part of a well-diversified investment portfolio, and investors should consider their risk tolerance and investment goals before allocating a portion of their portfolio to cryptocurrencies.

Additionally, education and research are crucial in understanding the technology and mechanics of cryptocurrencies, as well as the different cryptocurrencies and exchanges available.

While the cryptocurrency market is still evolving and has experienced significant fluctuations in the past, it’s undeniable that it has disrupted traditional finance and opened up new opportunities for investors.

As millennials continue to shape the investment landscape, it’s worth considering the potential benefits and drawbacks of investing in cryptocurrencies as part of their overall investment strategy.