What Are the Fallbacks of Investing in Cryptocurrency?

There are many benefits of investing in cryptocurrency, but there are also some drawbacks. These include illiquidity, volatility, and tax evasion. Let’s look at some of these. While investing in cryptocurrency may be a good idea for some people, it isn’t for everyone.

Volatility

Investing in cryptocurrency can be risky, but there are several ways to minimize the risks. One way is to use dollar-cost averaging, which is a strategy that limits the downside of short-term swings. Another way is to invest in stablecoins, which are designed to be low-volatile assets. These are usually pegged to a reserve asset like the U.S. dollar.

While there are thousands of cryptocurrencies available today, the industry is relatively young and volatile. The supply of coins from miners and demand for them from buyers drives their prices. This supply-demand dynamic can lead to hefty returns, but it also comes with risks. If you are not careful, investing in cryptocurrency could be disastrous.

Because of the volatility, many people don’t want to invest more than five percent of their portfolios. It’s also difficult to know what will happen tomorrow, and the market may crash without warning. However, many people still use cryptocurrency as an alternative to traditional assets like stocks. While crypto may be volatile, the market is still growing and mainstream companies are getting involved. For example, PayPal and Square are offering their users the ability to purchase crypto on their platforms. In addition, Tesla is now accepting payments in Dogecoin and Bitcoin. Tesla has a billion dollar portfolio of crypto assets.

Illiquidity

One of the most important factors when trading and investing in cryptocurrency is liquidity. A lack of liquidity makes a market volatile and can affect trading and investing decisions. Liquidity refers to the ease with which an asset can be bought or sold. For instance, cash is the most liquid asset as it can be converted into any asset. On the other hand, rare art and real estate are considered illiquid.

If the market is illiquid, investors may not be able to sell their assets for cash. This may cause dramatic price changes and slippage. If a market is illiquid, there is usually a large market spread, which can indicate the price is low. Often, this spread is small and unnoticeable, but if it is too large, it indicates an illiquid market.

To measure the liquidity of a cryptocurrency market, look for the bid-ask spread. This measure is a good indicator of how easy it is to trade in the currency. High liquidity means the exchange is stable, and price changes are minimal.

Tax evasion

Virtual currencies like Bitcoin, Ethereum, and Ripple have become a popular way to hide income from tax authorities. However, this method has some drawbacks. First, it is not transparent. Because these currencies can’t be bought and sold through an exchange, transactions are opaque to government officials. As a result, many individuals and businesses have been able to avoid paying taxes on their income. Moreover, the lack of a common reporting standard makes it difficult to follow taxable income.

Cryptocurrency is becoming increasingly popular as a cash alternative, and more merchants are accepting it. However, cash is still more heavily regulated, and businesses must report transactions involving more than $10,000 in currency. This could include payments from car purchases, casino winnings, and bank deposits.

While NFT and crypto fraud victims don’t get their investments back, they may still qualify for tax benefits. According to Steven Chung, a tax attorney, a victim of a fraud can take advantage of theft loss deductions, which can offset ordinary income.

Lack of understanding

Investing in cryptocurrency can be a lucrative venture, but for many people, lack of understanding is a major reason for staying away. Research shows that two-thirds of people do not invest in cryptocurrency because they don’t understand it well enough. Another third don’t have enough money to purchase cryptocurrency, citing concerns about price volatility and security. Despite this, one in ten people will make the leap into cryptocurrency trading within the next year.

The study was conducted using a self-funded survey of 1,004 adults in the U.S. and included respondents from Gen Z, millennials, Gen X and baby boomers. The survey used a probability-based panel to ensure that the sample was representative of the household population.