If you’re not invested in cryptocurrency then you’re missing out on the investing opportunity of a lifetime right? Well, if you ask the cult-like followers of major coins like Bitcoin and Ethereum then yes you would be told as much however I’m not as convinced therefore, in this article, I will be sharing with you 7 reasons to avoid cryptocurrencies at all costs!
Now, to clarify the statement that you should avoid cryptocurrencies at all costs does not imply that if you run into a Bitcoin in a dark alley that you should run the other way to avoid being mugged. I mean this in the sense that investing in these digital assets may not be the best move when it comes to your financial progression. Sure, there are a ton of stories of people becoming rich overnight by having owned and disposed of their cryptocurrencies but as in any other domain, for every one success story there are dozens of others and you don’t want to be part of the latter group so here’s why investing in crypto may not be for you!
Reason #1: There’s No Inherent Value In A Cryptocurrency
Whether you realize it or not, when you buy a stock, you are buying a small share in a company. In most cases, this company has one or multiple products or services it offers, has employees and maybe even a fancy office with Starbucks coffee on tap. What I mean by this is that there is inherent value in the stocks you buy in the form of the human capital and revenue-generating offerings.
When it comes to cryptocurrencies, the same can’t be said. While there are some fundamentals that can be used to determine the value of these digital assets, the main driver of its value is supply and demand. As more people want the asset, the value increases and when the opposite is true, the price will go the other way.
I think Warren Buffett sums up this point exceptionally well when he says, “If you buy something like bitcoin or some cryptocurrency, you don’t have anything that is producing anything. You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more.” To me, this isn’t a strong enough basis to make decisions with my hard earned cash upon but to each their own.
Reason #2: You’re Investing To Satisfy Your FOMO
Have you ever felt like an outsider? Maybe it’s that time in elementary school where all the cool kids wouldn’t let you join their game or in high school when you were the only one in your class not invited to the year end party. I know of these examples because they happened to me and I can appreciate the terrible feeling that comes with the sentiment that you’re missing out on something great. However, unlike my situation where the only thing I lost was some self-esteem, many people are losing their life-savings trying to be a part of the “in-crowd” amongst other crypto-investors. And why are they putting themselves in this position? I think it’s due to two reasons.
The first is that we are constantly exposed to success stories of those who were lucky enough to get in early on a new cryptocurrency and strike it rich. I know you’ve seen the headlines before of that 20-something that turned his $50 investment into a million and because of your exposure to these stories, you too want your piece of the crypto-pie.
The second reason that I feel as though people are scratching their crypto-itch and are succumbing to FOMO is that they see this form of the investment as the only one that will provide them the financial returns they desire in the timeframe they desire. I think that most investors understand that investing in proven companies for the long-term is the most reliable way to go about building wealth. Unfortunately, many investors are not super fond of the whole “long-term” part of this strategy, especially when they are seeing people their age becoming rich overnight. This is why they want to expedite their path to riches by taking on more risk and investing in cryptocurrencies that may allow them to scale up their net worth quicker than more traditional investments.
In my opinion, investing based on the fear of missing out is never a fruitful endeavour because it relies more on emotion than logic and if this is the position that you’re investing from then it may be worth reconsidering.
Reason #3: You Don’t Do Well With Volatility
I don’t know about you but the only ups and downs I enjoy are on rollercoasters and not those where my hard-earned money is on the line. Well, when it comes to cryptocurrencies, volatility is just part of its nature. There’s no better example of this than the 2020 performance of Bitcoin. At its low in 2020, Bitcoin was trading at less than $5,000 USD per coin. Over the course of the year and into the new year, this cryptocurrency saw it’s value skyrocket to over $40,000USD, an increase in value of over 8 times. Sure, this is the volatility that you’d love if you bought in at the low however the value of this asset didn’t just continue to rise from here. Just two weeks after reaching its peak, its value dropped by almost 25% back down to just over $30,000 USD per coin. This is the type of volatility that keeps the heart medication business going and is proof that what goes up must come down.
Now, while this volatility may not bother some investors, I would argue that it will affect the emotions of most. The reality is that the majority of investors investing in this asset class are investing with money they can’t afford to lose hence their emotions will be all over the place when changes in value like the ones I just mentioned take place.
Reason #4: Your Holdings Can Be Hacked, Stolen or Lost
When I think about my money being stolen, I think of someone swiping my wallet at the gym or pick-pocketing me while on vacation. These are the good old days of theft. Nowadays, with more and more transactions taking place online, there is a legitimate threat of the theft of your money and this threat certainly exists with cryptocurrencies.
For example, in 2019, $40 million was stolen from a popular cryptocurrency exchange called Binance. In another case, Canada's largest crypto exchange QuadrigaCX lost $190 million in cryptocurrency when the owner allegedly died as he was the only one with knowledge of the password to a storage wallet. Therefore, while getting your hands on cryptocurrency may be tough, holding onto it may prove to be even more challenging!
Reason #5: You Don’t Understand The Cryptocurrency Technology
If you ask most cryptocurrency investors what they actually know about how the technology behind their favourite coins work, they will probably mumble the words “block-chain” “decentralized” and if you’re lucky “cryptography”. In short, they don’t know anywhere close to enough to be making educated investment decisions. Now, this level of unawareness doesn’t just exist in the crypto-investing world. There are just as many people, if not more, investing in stocks that they know nothing about and this behaviour makes Uncle Warren mad as he’s always said that you should never invest in a business you cannot understand.
Warren Buffet makes another salient point when it comes to stock market investing that I think can also be applied to the world of cryptocurrency investors. He says, “If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.”
What he’s ultimately saying is that unless you are willing to put in the time to understand the business you’re about to get into then you’re better off taking a simpler approach. Therefore, unless you are about to get your PHD in cryptocurrencies then I think it’s wise to pass on this form of investment.
Reason #6: Their Future Applications Are Still Uncertain
There’s no doubting the fact that cryptocurrencies have become more widely adopted by businesses and financial institutions in the last few years. While this is an argument that many crypto-fans use to support their buying decisions, it’s not one that myself, or many other crypto-skeptics have come full circle on.
First of all, I’ve yet to see any stores I regularly shop at accept this form of payment which means that the use of cryptocurrencies as payment amongst the masses is still a long ways away. I mean, my seniors at work still don’t believe in the idea of working from home which is a testament to the fact that adopting new ways of doings things traditionally doesn’t happen overnight. Now, I am not saying that cryptocurrencies will never become mainstream because I don’t think anyone has the answer to that question but there is another factor holding back its use in more normal settings. As you may be aware, many of these cryptocurrencies exist in a limited supply which means that once all the currency from a coin is mined that the only way you can get a share of it is from transacting with someone else. However, statistics show that around 40% of cryptocurrency investors are long-term holders which means that only 60% of this limited supply is available for use in the larger market. This causes a bottleneck for its wider-spread adoption and is one reason you may second guess investing in this form of digital currency.
Reason #7: You Don’t Have Your Other Financial Priorities In Order
Let’s say that you’ve checked the boxes on all of the other reasons why you should avoid investing in cryptocurrency. You’ve taken the time to understand the technology behind the cryptocurrency you want to invest in, you have found a way to store it securely and perhaps the coin you want to buy is now being widely accepted across the world. This means you should dump your life-savings into that new alt-coin you’ve had your eye on right? Well, not to fast!
While it can make sense to apportion a small amount of your total investments into higher risk assets like cryptocurrencies, this should only be done when you have all of your other financial obligations taken care of. And what would those be? Well, for starters, do you have an emergency fund with 6 months to a year’s worth of living expenses set aside? What about your retirement account? Have you contributed enough to ensure you don’t have to work until you die? Or maybe you have credit card debt that is lingering while charging you a steep 19% interest. Unlike cryptocurrencies, attending to these financial pillars have proven benefits. Having an emergency fund means reducing your financial stress, investing for retirement assures your future nest egg and paying down high-interest debt is a guaranteed return. Can crypto do the same? I’ll let you answer that question!