The pros and cons of cryptocurrency: A guide for new investors

The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.

Cryptocurrencies have the potential to reshape the financial world as we know it, and to question the very existence of traditional financial infrastructure. But what are the pros and cons of cryptocurrencies? How do you decide which one to invest in—or whether to invest at all?

If you’re a little confused by cryptocurrencies, don’t worry. We’re here to break down the advantages and disadvantages of cryptocurrency, so you can learn everything you need to know. And if you’re still stuck, check out our guide to Cryptocurrencies for Beginners.

While cryptocurrencies are a relatively recent invention (Bitcoin, for example, started up in 2009), they’re definitely here to stay, with all their benefits. From prospects of hefty returns to 24/7 trading on ultra-secure, transparent infrastructure, the world of crypto has plenty to offer—if you know how to tap into it.

There are more than 10,000 cryptocurrencies on the market today and each one has its own particular quirks. But all cryptocurrencies have a few things in common—like their tendency to experience sudden spikes (and drops) in value. Prices are driven primarily by the supply of coins from miners and the demand for them by purchasers. And these supply-demand dynamics can result in hefty returns. The price of Ethereum, for example, roughly doubled from July 2021 to December 2021—quite the payday for investors who got on board at the right time.

Some of the major benefits of cryptocurrencies aren’t linked to the currencies themselves, but to the infrastructure that supports them. That’s the blockchain—the decentralized data-storage ledger that tracks every transaction undertaken on it. Once you make an entry in the blockchain, it can never be erased. And with the blockchain stored decentrally across multiple computers, no hacker can access the entire chain in one go; any information stored in it is safe for good.

By and large, our financial system revolves around third-party intermediaries who process transactions. This means that if you make a transaction, you’re placing your trust in one or more of these intermediaries—and the recession of the early 2000s made a lot of people wonder if that was a good idea. The blockchain and cryptocurrencies offer an alternative. They can be viewed by anyone, anywhere, so you can take part in the financial markets and make transactions with no intermediaries whatsoever.

Another advantage that cryptocurrencies have over banks is that the crypto markets are always open. With coins being mined and transactions being recorded around the clock, you don’t have to wait for the NYSE, NASDAQ or any other exchange to start trading for the day if you want to buy, sell, or trade crypto. This has made such an impact that regular stock exchanges are looking into the option of trading stocks outside of regular banking hours as well—although that might still be some way off. So, for investors who are on the go 24/7, crypto might the best way to generate returns outside of normal working hours.

Cryptocurrencies aren’t tied to a single currency or economy, so their price reflects global demand rather than, say, national inflation. But what about inflation of cryptocurrencies themselves? As an investor you can rest easy, for the most part. The number of coins is capped, so the amount available can’t spiral out of control, thus, no inflation. Some coins (like Bitcoin) have an overall cap, others (like Ethereum) have an annual cap, but either way, this approach keeps inflation at bay.

So that’s a lot of glitter, but is the outlook for cryptocurrencies really so golden? Let’s take a look at some of the drawbacks. Some are easily resolved, others less so—but it always pays to keep them in mind.

Cryptocurrencies can take a while to get your head around. If you’re not a digital native, the concept of cryptocurrency (let alone the blockchain) can feel anything but second nature. And trying to invest in something you don’t really understand is itself a risk. There are plenty of online resources available to help you (including N26’s blog series on crypto), but you’ll still need to dedicate some time to truly understand the pros and cons of investing in cryptocurrency.

While the price of a cryptocurrency can spike to dizzying highs (with associated benefits for investors!) they can also crash to terrifying lows just as quickly. So if you’re looking to make stable returns, this might not be the best bet. The cryptocurrency market fundamentally thrives on speculation, and its relatively small size makes it more vulnerable to price fluctuations. That in turn can wreak havoc with the value of coins—one of the major disadvantages of cryptocurrency.

While cryptocurrencies have become widely known and are still gaining in popularity, it’s worth remembering that they have only been around for just over a decade. The concept only really emerged with the publication of a white paper on Bitcoin in 2008. Stock markets, in contrast, can look back on centuries of history. The London Stock Exchange, for example, was founded in 1801. Gold has been a proven custodian of value for millennia. But cryptocurrencies? Nobody really knows what will happen to cryptocurrencies in the future—and you need to be brave to enter these uncharted waters as an investor.

You could be forgiven for thinking that digital currencies operate at lightning speed—and they do, up to a point. But at a certain level they run into major issues which make it difficult to roll them out on a large scale. Cryptocurrency providers themselves admit this is an issue, with the people behind Ethereum saying that the blockchain has reached “certain capacity limitations” that slow the rate at which transactions can be processed. This can be a frustrating experience for transaction participants, to say nothing of the potential financial losses it can cause.

Cryptocurrencies might not have the risks that come with using central intermediaries, but that doesn’t mean they’re completely free from security issues. As a crypto owner, you could lose the private key that lets you access your coins—and with it, all your holdings. And then there’s hacking, phishing, and all the other attempts to gain control by malicious means. This is something that seasoned investors keep an eye out for, but newer investors are more likely to be vulnerable to these kinds of traps.

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There’s no one cryptocurrency that’s substantially better than all the others. It comes down to personal preference, but there are things that you might like to look out for. Think about your individual risk tolerance; can you stand to lose a substantial chunk of your investment if your chosen coin plummets in value? Are you using the coin solely to generate returns, or are you hoping to pay for things with it, too? Is it just about the money, or are you looking to invest in a coin with a broader social or environmental impact? One easy approach is simply to pick the market leader, Bitcoin. It’s the original cryptocurrency and the one which has built up the largest information base as well.

Bitcoin, which trades under the abbreviation BTC, comes with a host of benefits. It’s capped at 21 million coins, it’s guaranteed to be inflation-proof, and its headline-grabbing prices certainly offer investors scope for reaping rewards. And Bitcoin is the most widely accepted cryptocurrency for payments. Of course, it has its drawbacks. Bitcoin’s blockchain infrastructure starts to slow down once it exceeds a rate of seven transactions per second (a real issue when you consider that Visa processes around 1,700 transactions per second!). And because it’s the best-known cryptocurrency of them all, it’s a key target for hackers and scammers of all stripes. For more insight about Bitcoin, check out our article What is Bitcoin?.

Cryptocurrencies can be a minefield for new investors. From unfamiliar terminology to complex technology, it’s a topic that takes some getting used to. As with everything, trading cryptocurrencies comes with benefits and risks, but N26 is here to help. Whether you want to pay for everyday essentials with Bitcoin or use another coin to beef up your investment portfolio, we can show you all the pros and cons of cryptocurrency.

N26 has an array of resources to help you understand the latest developments in the world of finance. From Cryptocurrencies for Beginners to the details of What is a Crypto Wallet?, N26 is by your side every step of the way, empowering you to make reasoned financial decisions backed by reliable information.