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Cryptocurrency can be an enticing asset for investors looking to diversify beyond traditional stocks and bonds thanks to its potential for long-term growth and use as a hedge against inflation. But while bitcoin, ether and other coins are now often talked about in the same breath as assets like exchange-traded funds (ETFs), it’s important to understand what sets them apart.

Crypto comes with a unique set of challenges, including volatility, a lack of regulation and a complex taxation system. There are no earnings reports for investors to assess and no central authority backing these digital assets. Prices…