I’ve seen a lot of articles and videos telling people to invest in cryptocurrency. You should keep X amount of money in alternative assets, they say! Funny thing is most people have a polarizing opinion when it comes to investing in cryptocurrency. Most people are either crazy for it or extremely against it. Is the hype real?
Before we get into whether I think it’s worth investing in, let’s go through a brief introduction of the most well known cryptocurrencies; Bitcoin and Ethereum.
The most popular cryptocurrency is Bitcoin or BTC, which came out in 2009. It started out as an unknown project in the depths of the internet. While at college I learned about Bitcoin and even spent a few weeks using my computer’s graphics card to mine Bitcoin. Back then, it was just a neat little side project. I hardly made any Bitcoin. I soon gave up because it wasn’t worth enough.
Fast forward to 2017 and Bitcoin exploded. It had moved it’s way up into the $1,000 dollar range throughout 2013 to 2014 but during around 2018 it peaked at over $20,000 per coin. The peak was likely due to almost no regulations and the highly speculative market pumping it up. Some might even say it was artificially inflated. No matter the reason, it’s moved back down significantly since it hit it’s peak.
Bitcoin has become incredibly hard to mine, which means that a lot fewer people are doing it. They have come up with ASIC (application-specific integrated circuit) mining machines that people purchase and must run specifically for Bitcoins.
Ethereum or ETH is a somewhat newer cryptocurrency that came out in 2014 and is popular for the ability to run scripts and contracts. This allows Ethereum to be the base for countless other cryptocurrencies and applications.
The price chart for Ethereum somewhat resembles the price of Bitcoin. It peaked at over $1,500 around the same time in 2018 that Bitcoin hit it’s record highs. That’s because most cryptocurrencies are a reflection of Bitcoin price. This may be due to the fact that Bitcoin is still the most popular, and trading one cryptocurrency into another is easy. However, Ethereum has more practical purpose than Bitcoin does. This practical ability is what I credit for Ethereum still being as popular as it is today.
People are creating new cryptocurrencies all the time. These new cryptocurrencies are dangerously prone to market manipulation. Some people use “pump and dump” strategies to raise and lower the prices within days, sometimes even hours. They buy an inexpensive coin and hype it up to a certain price before cashing out. Since the government doesn’t regulate cryptocurrency like other markets, this practice is quite common even if it were illegal to do the same with stocks.
Issues with cryptocurrency
Okay, now that you know some basic information about cryptocurrency, let’s go over some of the issues with cryptocurrencies.
Cryptocurrency is not an asset
There’s a huge difference between stock and cryptocurrencies. The nice thing about stocks is that when you buy stock you’re buying a portion of that asset. With stocks it’s a portion of the company. The same goes for a REIT or farmland. You are purchasing a small portion of an entity. That entity has value. When it comes to cryptocurrency, the value the entity has is speculative and not tangible. This means that unlike a stock, your asset has no base value, meaning it would be relatively easy for a cryptocurrency to drop to zero value.
The only value cryptocurrency has is the value someone is willing to pay for it. There is no physical asset that appreciates in value.
Even if we overlook the fact that cryptocurrency has no physical asset of any value, the second problem with cryptocurrency is the volatility. While we attach the name “currency” to these electronic coins, they really aren’t very stable. This means price fluctuations all the time. These fluctuations impact the amount of money goods cost. If we were purchasing milk with Bitcoin it could be 0.001 BTC one day and 0.0005 BTC the next. Cryptocurrency was meant to be used to trade for goods and service, it was never intended to be kept as an asset.
Invest in cryptocurrency
If you would still like to get into investing in cryptocurrency, I suggest doing so cautiously. Make sure to use a reputable site like Coinbase when trading coins. Don’t invest more than you can afford to loose. This is an especially important with cryptocurrency. You may also want to stick with some of the more popular coins such as Bitcoin, Ethereum, and Litecoin. These well known coins will be more stable over time.
Remember though that all cryptocurrencies are going to be volatile, so you can see it drop or raise up to 10-20% in a normal day. Fluctuations of that magnitude can be unnerving so prepare yourself before you invest in any.
Only invest in cryptocurrency if you are sure you can lose the money you’re going to invest. That means that you’re willing to invest in something extremely speculative. It may go up today, but it could come crashing down tomorrow. Someday it may even be worthless.
With so much volatility, I don’t think it’s a good investment for new investors. People who are just starting out should make sure to invest wisely. Big mistakes in the beginning could end up making someone feel like they should never invest.