For the past few years, a new digital phenomenon has emerged: cryptocurrencies like Bitcoin. These alternative currencies have risen from nearly nothing to an estimated $700 billion market in just ten years. If you want to invest, it’s important to understand the underlying principles of what cryptocurrency is for and how it works first.
The future of currency is virtual and decentralized, with no downside to using it. There will be no transaction or exchange fees for this coin as a global one will be in place.
Countries with unstable currencies would love to have reliable, stable currencies that are harder to come by than the ones in their own country.
Bitcoin is one of the most talked about virtual currencies on the market. It’s been gaining more and more popularity as time passes. Blockchain allows people to send and receive financial transactions without the intervention of a third party. This is a new way of classifying things, so not many people are completely sure what it will allow and what it won’t.
The rise of Bitcoin & the introduction of blockchain could be revolutionary. They are leveraging technology to change the way some industries operate. Blockchain is believed to be a game-changer for financial services–but will it really?
Though the price of Bitcoin may have dipped in 2018, it has been a trend throughout the years. You can still make investments or just see what other people are trading with. But there are some problems that need to be addressed before you buy and sell anything.
Potential problems with cryptocurrencies and their overall future
Cryptocurrencies have been amazing for our technology and the safety of transactions. With the December 2017 media attention and the January 2018 crash, everyone has probably heard of Bitcoin. Why is not everyone invested? And why are we not paying with Bitcoin?
Cryptocurrencies Are Not Tied To Fundamentals
When you’re investing in an asset, it’s vital that you know the value of the investment. Otherwise, how can you compare return on investment?
When you are investing in stocks, it’s important to look at a company’s balance sheet, earnings to understand how much money they’re making, management reports to monitor the company’s progress and more. But with cryptocurrencies like Bitcoin or Ethereum, everyone is buying a part of the company – just like when you buy a stock – so as their value.
Cryptocurrencies are a bit like stocks in that they’re different than other types of assets. They’re not backed by any real value and it’s hard to compare with traditional investments. However, you have to weigh your pressing decision on the risk-reward ratio rather than the validity of cryptocurrencies.
You buy a coin, which means you can get your money back and increase the value of the item later.
Realizing that cryptocurrency is a speculative investment option.
Warren Buffett is saying that cryptocurrency doesn’t have much value as other assets. It implies that cryptocurrencies can only be sold for another asset, so in effect it has no real value when it’s used as currency. He goes on to say that any product you can purchase with cryptocurrency has a market value and tends to be highly unstable, making the whole process somewhat impractical.
Cryptocurrencies can be very volatile
Many people are now investing in cryptocurrencies without any professional investors like pension funds. This lack of oversight has led to a volatile market, with low capitalization and high risk.
Cryptocurrency is unpredictable. It can move up & down, sometimes by a significant amount, in 24 hours. However, this does not mean you should be blind to the ups & downs and do not try to protect yourself from emotional rollercoasters.
In this chart, you can see a graph of the average annualized volatility. You can see that cryptocurrencies are more volatile than other types of stocks during this time, including SP 500, gold, and other global equities. The cause for these fluctuations could be due to the lack of fundamental value for some types of crypto-assets.
Many people trade based on news, which makes it hard to suppress the FOMO and make the best decision. It is not uncommon have followed days either +10% or -10% depending on what kind of cryptocurrency you are looking at. Though this may be rare with stocks, it is not impossible.
Be prepared for volatility in the cryptocurrency market.
Cryptocurrencies Have No Government Oversight
“Many people are excited about cryptocurrencies, but very few businesses accept it as payment.” While there may be regulations in place that block this type of currency for some countries, others have no problems with it.
It’s very hard to regulate crypto coins since they’re unregulated, so people that invest in them should be prepared for the fact that fraud could happen. There are a variety of coins with mixed results — some have been successful, but others have not.
There is a concern that it is very hard to know where your money has been invested and whether or not it was used for the purposes that you had intended. Cryptocurrency investments are very anonymous, making them difficult for people to track.
Cryptocurrencies Are Too Anonymous
When you are investing in cryptocurrencies, anonymity is important. The blockchain stores any transaction, which allows you to see how much coins or tokens a particular person owns. If someone has their private key, they can sign transactions and prove ownership of cryptocurrency.
You’re trying to send money through a public cryptocurrency wallet without being able to know the identity of the person or company that is sending it. It’s not difficult, just confusing.
Using cryptocurrencies to trade and make money is a big responsibility. Cryptocurrencies can offer anonymity, but the transactions you make could be used for criminal activities, tax evasion, and money laundering. For example, let’s say you use Ethereum to buy bitcoin on your cell phone app. Your identifiable information is collected by the app and sent directly to the company’s server for verification purposes
One major drawback of the system is that it needs to be resolved before everyone will begin using Bitcoin.
Cryptocurrencies are not environmentally sustainable
Many people are mining cryptocurrencies these days because of their benefits. One of which is the chance to be rewarded for completing a block and have coins. The individual who does it fastest gets those rewards & coins.
These machines require a lot of horsepower to run, so they’re not always the most energy-efficient.
The Bitcoin network uses more electricity per year than 50 million people, which is more than Colombia. This puts into perspective how much power Bitcoin really needs for the purpose of supporting their cryptocurrency.
Data centers are always in demand and create increased competitors. This is to say that it’s common for data centers to constantly be in a race with each other and this causes an increase of power usage.
At the moment, China is leading Bitcoin mining. In China, the main source of energy is coal. We know that this makes things uncomfortable for most living creatures and find it pretty much not sustainable in the long term.
Even if mining is run with all-clean electricity, this might lead to the fact that we won’t be able to use it for more eco-friendly purposes. That’s why crypto mining has an opportunity cost.
My opinion is that the excessive use of natural resources and financial stress are enough without another currency issue. There’s a lot at stake environmentally, so I’m concerned in this one area.
All In All – Problems Of Investing Cryptocurrency
I’m really interested in cryptocurrencies and their potential to impact the world.
Cryptocurrencies offer a way to invest that circumvent traditional investment models. There is no company or inherent value involved, so there is little to base your investment decisions on.
Cryptocurrencies are a highly volatile market and could fluctuate more than 10% in a day. They cannot be guaranteed and should be used with caution.
Cryptocurrencies have been in the news for all the wrong reasons. There is a huge risk of fraud, crimes and money laundering because there is no centralized fallback.
Cryptocurrencies are a big environmental risk for many reasons. In order to generate cryptocurrency on most platforms, you need expensive computers that are more energy-hogging than many countries so they can’t be used as often in your home.
I have invested, or speculated, with cryptocurrencies in the past. They taught me a lot, caused me to lose money and some decisions were unethical. For now, I will hold and pretend the money is gone. It is just fun money; nothing serious.
Seven Lessons Learned From Investing in Cryptocurrencies
I’ve been investing in cryptocurrencies since 2018. Here are the different coins I’ve picked up and more importantly, what has helped me learn their respective lessons.
When the cryptocurrencies were all hyped up, in December 2017, my partner went for it. I tried to talk him out of it and luckily I wasn’t invested in any of that.
How did that happen?
Have you become intrigued with cryptocurrencies in the last few years and wanted to find out more about them? I’ve learned about Bitcoin, Ethereum, and many others! If you’re looking for a high-risk investment, this is probably not the place for you.
I have about 2% of my total sum invested in cryptocurrencies. I believe that you should never invest more than 10% of your net worth into very high-risk investments.
There are a few risks associated with cryptocurrencies, such as volatility and lack of regulation. However, it is ultimately a personal decision whether you want to invest in volatile and risky investments.
So I started with cryptocurrency.
In December 2017, my partner learned about cryptocurrencies. They were hyped up then and his friends made a considerable amount of money off them. A couple of months later, he invested a small amount and saw almost all of the money gone within the same timeframe!
I swore to myself that I knew enough and would never invest again, but it wasn’t long before my interest started to kick back in. I mean, buying the dip was always a good idea right?
In April 2018 I moved into my new apartment and I got roommates. They were very interested in cryptocurrencies but they invested gradually so they can grow their investment over time. They too started around December 2017 but they are certain that the cryptocurrency market will eventually succeed.
I recently learned about cryptocurrencies over the last few months, but still had a lot of concerns. After learning all the optimistic arguments for it, I decided to take a gamble and invest.
I invested an initial $800 in altcoins and Bitcoin, and haven’t looked back since.
There was a time where I was heavily involved with ICOs (initial coin offering) of a couple of companies, but that took too much of my time. There have been very high highs and very low lows. I was in for a ride.
Lessons Learned From Investing In Cryptocurrencies
1. Understand What You’re Investing In
The first thing you need to do is understand the basics of cryptocurrencies.
It seems like an open door, but many people investing have no idea what they’re doing. Someone sees value in it so they assume they know what they’re talking about and pump some money in it.
I saw my partner do this and I want you to be sure that you understand the market before diving in.
It is a fast-moving industry that is important to understand before your fully dive in and invest your money. Think about all the technical concepts and whether or not you fully understand them.
Just like in any other market – bonds, stocks, index funds, peer-to-peer lending – it is important that you understand the market and have a basic understanding of what you’re doing.
Even though many people do this so, the cryptocurrency market is no different.
Know the market is extremely volatile and stick to the basics, this will help you in the long term.
2. Get Your Emotions Under Control
When you’re investing in cryptocurrencies you are in for one hell of a ride.
In the beginning, I checked my portfolio all the time. I was in Telegram groups and I constantly checked in.
Within the same day, I am thinking “I am rich, I can retire within 5 years” to “I need to sell now, there is no hope, this will burn itself to the ground”. Good times, good times.
When I was starting investing in cryptocurrencies I had seen December 2017 and January 2018 and I knew that the volatility of the investment was extremely high.
I noticed that I was feeling all the emotions when it came to my investments, which I don’t like. I saw my portfolio balance itself most of the time, making for a lot of lost energy. Besides that, I wasn’t taking any action (buy or sell) so why bother?
That’s when I decided that I would not check on my cryptos ever again, only yearly for tax purposes.
If I was not going to invest any additional money in the market, who cares how high (or low) the currencies are valuated?
This is how I got control back over my emotions.
3. Beware Of Confirmation Bias
When I was getting interested in cryptocurrencies, I was taking in a lot of information and learning a lot.
I checked the aforementioned Telegram groups, read a lot of subreddits, and checked Twitter.
Mostly it would be only positive news. When someone would criticize or bad news would be published, it would be downvoted or I quickly scrolled past it.
This is one of the behavioral investment biases called confirmation bias. Confirmation bias is when people only search for information that confirms their current beliefs and current thinking. When there is information that is not aligned with that, they disregard it altogether.
In order to avoid this, ask people with other opinions on what they think. This can help a lot!
4. Never Invest More Than You Can Lose
This is the number one rule for investing your money. Never invest more than you can afford to lose.
While cryptocurrencies do have some value tied to them they can be purely to get some quick money, which is speculation.
When I started out with cryptocurrencies I read a lot about the different coins and I only invested in projects I believed in.
Quickly I noticed that it became very hard to resist going into coins that are just popular. Really when you do that it’s more like gambling. While gambling is a terrible money habit you should avoid, it can be hard to recognize it when it’s dressed up as an investment in a market.
Point is, that you should never invest money you can not lose.
You will make bad investments, and you will lose money.
When you’re investing in very high-risk investments like cryptocurrencies, losing money seems inevitable. The market is so volatile that it is no fun to be invested with money you absolutely need.
Prepare yourself for that and you will not make any decision based on a fear of losing money. Those are rarely the best decisions.
That’s why I try to not have more than 10% of my net worth invested in very high-risk investments.
5. You Only Have Money If You Cash Out
If there is one lesson I learned from investing in cryptocurrencies, it’s that you only have money once you cash out.
The cryptocurrency market is extremely volatile. Just like the stock market, it will go up and down. The movements are just a little bigger.
One day you’re up 100% and the next day you’re down 60%.
It’s like an emotional rollercoaster.
One day you’re dreaming about how you can take invest that money and the next day you’re anxious and want to sell your entire portfolio.
I decided to take my distance from my money and see the money as lost.
By doing that, I took a distance from my negative emotions around money and the fear of losing it. It helped me a lot and I decided to take it even to the next step.
Read More: How do I protect myself from a selfish mining attack?
6. Don’t Check On Your Investments Too Often
Because the cryptocurrency market is constantly moving up and down, I was watching it closely multiple times per day.
I was not checking my portfolio to buy or sell anything. I was checking it just because.
If you’re not looking to buy or sell, there is no reason to check your portfolio as often as I did.
I took a distance from my investments and decided to not check on them since I was not planning to invest in them. Instead of looking multiple times a day, I haven’t looked at my portfolio in over a year.
I should do my taxes soon, which means I’m going to check on them. Otherwise, I don’t really care. The money is there, I don’t plan to invest in anything else, I’m just sitting around and waiting for the next bull market to come around.
8. Set Yourself A Goal
This brings me to my last step, set a goal for your cryptocurrency investments. If there is one lesson I learned from investing in cryptocurrencies, it’s that you should set yourself a goal. When you just hold your investments, it is hard to decide when you get out because of your emotions playing a role.
You should decide for yourself: if my portfolio or this specific coin surpasses $XXX.XX, I will start to sell off my investments.
If you don’t do that, you could be taking more risk by not balancing out your portfolio and keeping the amount to less than 5% of your net worth.
Bonus: Have Fun With It!
If you’re investing in cryptocurrencies, you should have fun with it.
You’re invested in the market and not having fun? Don’t do it. It won’t be worth it.
Investing in cryptocurrencies is a crazy ride. Be sure to follow a couple of rules:
Don’t invest any money you can not lose
Understand what you’re investing in
The money is not yours until you cash out
Set yourself a goal (an exit point)If
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