In an instant:
- Cryptocurrency is a digital currency stored in blockchain technology.
- Cryptocurrencies can be more volatile than traditional cryptocurrencies and involve a variety of other risks.
- Vanguard’s time-tested philosophy can provide insights into the world of digital investment.
Like most things with increasing price tags, cryptocurrencies have gained worldwide recognition and interest in increasing their value. And it’s not just Wall Street that’s paying attention – from experienced investors to individuals starting their investment journey, many think, Is cryptocurrency something I should look for?
What is cryptocurrency?
Cryptocurrency is a digital asset that is stored in blockchain technology that acts as a kind of currency or value savings. Unlike conventional currencies, cryptocurrencies are not supported by major governments or developed economies. This decentralization means that blockchain technology verifies these digital transactions without supervision or intermediaries. Although cryptocurrencies are usually served as a medium of exchange, most of the attention they receive is as a financial investment.
It’s hard to talk about cryptocurrency without acknowledging the intelligent technology behind it. The cryptocurrency is stored and transferred to an online account known as a blockchain, which is distributed over a peer-to-peer network. These accounts are public and cannot be changed once the transaction is recorded. Blockchain technology provides key benefits such as accuracy, transparency and speed.
Realize the risks
The ging up price of various cryptocurrencies – such as Bitcoin, Dogcoin and the like – can make it tempting to invest, but consider these risks before buying a digital currency:
- Instability comes with value. In recent years, the prices of cryptocurrencies have fluctuated significantly compared to traditional historical assets (such as stocks and bonds) and have made some dramatic short-term drops. This volatility renders cryptocurrency ineffective as a medium of exchange and sudden price changes can encourage emotional buying and selling. In addition, these market conditions can make it difficult to terminate a position in a timely manner, making liquidity risk a real concern.
- Risk without rewards. Unlike stocks and bonds, cryptocurrency does not pay dividends or cash, and therefore does not pay any intrinsic value for the amount of risk the investor takes.
- Who is in charge here? As mentioned earlier, cryptocurrencies are largely unregulated without the support of large governments or economies. This lack of regulation makes it less likely that cryptocurrencies will be able to achieve the value and quality of other currencies. In addition, the confidentiality of digital transactions lends itself to potentially illegal activity.
- Fear of cyber security. Cryptocurrency exchanges are subject to violations, interruptions and failures that could endanger investors and their personal information. Since cryptocurrency is not currently supported by any major government, investors are less likely to recover lost funds.
Since cryptocurrencies are highly speculative in their current state, Vanguard believes their long-term investment case is weak. As many of our investors know, our investment philosophy encourages us to stay on course and stop making noise. Our time-tested policies emphasize that long-term investing is essential and responding to short-term trends can be costly for an individual’s portfolio. Although we do not currently offer cryptocurrencies as an investment option, we acknowledge the impact they are having on the investment world. As cryptocurrencies and blockchains become increasingly mainstream, we will continue to monitor their development and find the best path for our investors.