CDs vs. Crypto: How To Choose the Best Investment for You
Whenever considering an investment, due diligence and research are key. And when it comes to choosing between certificates of deposit (CDs) or crypto — there are major differences and risk factors to consider.
See: 8 Best Cryptocurrencies To Invest In for 2024
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“Apples to oranges comes to mind — wildly volatile speculative asset class vs. FDIC [Federal Deposit Insurance Corporation] backed fixed rate fixed term,” said Matt Willer, managing director of capital markets and partner at Phoenix Capital Group Holdings. “This is a classic, albeit polarizing, risk/reward analysis best digested by your age, risk tolerance, and most importantly what are you trying to accomplish with the capital being deployed.”
All About Investing in CDs
The more traditional route, CDs, are currently yielding between 4% and 6%. While Federal Reserve Chair Jerome Powell is expected to reduce rates this year, there’s still a window of opportunity to secure these rates.
As Experian explained, CDs offer a low-risk way to invest as your money will earn interest for the duration of the CD’s maturity period, which can range from one month to five years. While withdrawals before the term ends usually trigger an early withdrawal penalty, they can provide a simple way to diversify your investment portfolio.
According to Lucas Kiely, chief investment officer of digital wealth platform Yield App, the choice between crypto and CDs really comes down to the investor’s risk appetite, time horizon and return expectations.
“CDs are a low-risk, short-term investment option with relatively reliable returns. So this could be a suitable choice for someone with a low risk tolerance or a short time horizon,” said Kiely, adding that the current competitive yields will decrease once the Fed starts cutting rates.
He added that it’s also important to keep an eye on inflation to determine whether the rate paid by the CD provides a real return.
“CPI [Consumer Price Index] is now at 3.4%, so the real rate of return on a CD that pays 4%, for example, is only 0.6%. This is an important consideration for investors,” he added.
Another factor on CDs’ side is that they have no ambiguity, some experts said.
“You know what you have, you know what you are getting, and you know how long your commitment is,” Phoenix Capital Group’s Willer indicated.
Read: 10 Valuable Stocks That Could Be the Next Apple or Amazon
Wise Investment in Crypto Remains Possible, If Risky
As for digital assets, they are generally a lot riskier — but the potential upside is also much greater, experts said. In turn, investors need to be very diligent with their own research.
“It’s such a young industry that a lot of projects end up not making it,” said Lucas Lu, CEO of ByteTrade Lab. “That issue can be applied to any industry, including tech in general, but it’s worth pointing out for crypto because it is so young and so volatile. Yet, Lu added that the crypto space is also “incredibly promising.”
“People also need to determine their own level of risk tolerance and then invest according to that threshold. People need to be cautious when it comes to FOMO,” he said.
Other experts echoed the sentiment, saying that as crypto investments tend to be highly volatile assets, they’re not suitable for everyone.
For instance, if an investor has a short time horizon or a low-risk appetite, then cryptocurrency may not be a suitable choice, Yield App’s Kiely reiterated.
“However, for those who do want to add crypto to their portfolio, things to consider include what proportion of their assets they want to allocate to crypto and what types of crypto products they want to invest in,” he said, noting that within the crypto asset class itself, there are diverse investment options with different risk profiles.
For instance, Bitcoin aficionados argue that investing in the asset in Bitcoin is far better than investing in any other investment class. Over the past year, Bitcoin has been up 88% (as of Jan. 30, 2024), according to CoinGecko.
“If you want the best returns, you have to take some risks, but virtually every person who invested in Bitcoin, and did so over a period of time, and didn’t day trade it, has come out ahead,” said Evander Smart, founder and CEO, Bitcoin University. “You never get to the top playing it safe, but Bitcoin is a powerful risk-off investment-grade asset that has been helping people around the world for over 15 years.”
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This article originally appeared on GOBankingRates.com: CDs vs. Crypto: How To Choose the Best Investment for You
