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Personal Finance

Should you invest in cryptocurrency?

Here’s the quick answer: Don’t invest in cryptocurrency, but do buy into cryptocurrency

Here’s the long answer…

I don’t think I need to introduce what cryptocurrency is to anyone. It’s been the hit buzz word for the last few years and even more so in the past year. Stories of unknowing average joes hitting the jackpot with cryptocurrencies. Teenagers trading bitcoins in their room turning millionaires overnight and other unbelievably amazing stories feeding the money dreams of countless onlookers.

I’m going to be honest here. I dabbled in bitcoins a few years ago when it was still at $200 per coin. (Sometime around 2015) At that time, I didn’t educate myself and I jumped right in thinking I had nothing to lose. It wasn’t a lot of money, I had no other use for that amount and it was just a wild chance I took.

I quickly sold my 2 coins once it reached around $400 a year later. Fast forward to 2017, and the internet was going wild with headlines of bitcoin hitting $1000 usd. This started the hysteria of everyone talking about it. It also sparked my interest again. And at $1000+, it was time to educate myself instead of blindly throwing money at it like last time.

It would more than double by May 2017… just my luck.

I started by understanding the infrastructure bitcoin as well as all other cryptocurrencies runs on. Blockchain technology. In layman terms, blockchain technology is the use of multiple nodules to store and organize data. The purpose of this functioning is the only reason for it’s ability to be decentralise, and of course cut out the middle man. Every cryptocurrency runs on this concept of data management to work.

That being said, it means the data being managed could essentially be anything of your choosing. Bitcoin is a currency for the exchange of goods and services, Ethereum is a token currency for the use of software running on the Ether, Ripple is the token to transfer money. The concept is the same, but each cryptocurrency is used within specified boundaries.

So now you know the basic idea of blockchain technology, you need to wrap your head around how these cryptocurrencies are evaluated to determine their value.

The basic answer is exactly the same way the market determines the value of other commodities and currency of exchange. A more detailed answer is a mixture of market trust as well as technological limitations. What I mean by this is the public’s perception of the value is a big factor in determining the price of a cryptocurrency. A positive perception will naturally have the cryptocurrency being adopted more and causing the demand for it to increase, vice versa.

Credit to the wonderful crypto trading website coindesk

If a cryptocurrency had an infinite supply then it would have virtually no value to it, because value is determined by how much it’s sought after, as well as the level of scarcity. Not many people understand the limitations of supply to a digital currency, but it does exist. Electricity to run the blockchain and the computers needed to mine and create more are real resources with real value pegged to them. These factors create the technological limitations of supplying a cryptocurrency to meet demand.

The above makes the price of a cryptocurrency rise and drop. And this is what you care about if you’re planning on buying or trading cryptocurrencies.

Now that you have a good idea about that, it time to talk about whether cryptocurrency is a good investment or not.

I’m going to say it’s not. Not currently anyway.

I wouldn’t classify cryptocurrency as an investment. Instead, more accurately its a very hyped up speculation. The reason for this is because most people who are buying cryptocurrency are not actually using them. The majority of people are not utilising the crypto for it’s actual use, but simply holding and storing them. Most people see crypto as nothing more than a get rich quick scheme. And that’s a big problem if you’re using an investment standpoint to look at the reliability of cryptocurrencies, because the longevity of a cryptocurrency and like any other currency is it’s level of adoption. That means the degree it’s actually being used for it’s intended purpose. Not bought and sold, but used.

Here’s a list howmuch.net made showing all the major bitcoin crashes. You can some happen at a frightening speed!

Another big problem that makes cryptocurrencies speculative instead of a solid investment is the ease for prices to change at any slight news. Cryptocurrencies are less than a decades old since Satoshi published the white paper in 2009. It’s extremely new. It’s only arguably become a household known term since 2017 with the constant headlines.

What all of this means is, people don’ t understand it and many people are blindly buying into it. In fact, I would say more people don’t understand it than there are people who do. This is a big problem, because you end up with a market that can scare easily due to ignorance.

An easily scared market is a turbulent market that can be easily influenced.

If a market is so easily influenced, price fluctuations become hard to predict.

No good investor would call cryptocurrency an investment because of it’s unpredictability.

However, saying all that I still think it’s worth buying some for the long long term. I really mean the long term, I’m talking about a few decades at least. The reason for this is because I don’t see the idea of cryptocurrency ever going away. Once an idea is planted into the minds of the public, it will never die, and cryptocurrency has definitely planted itself firmly in the minds of the public. And since it’s here to stay, the real question is when will prices reflect a more accurate value for crypto so they are more stable and predictable.

That means, I wouldn’t buy crypto using anymore than what I can spare. Money I have no use for and no intention of needing in the next few decades. I wouldn’t exactly advocate buying into bitcoin at it’s current price ($10,000 odd as of the time I’m writing this). But bitcoin is definitely the cryptocurrency reserve, so buying bitcoin would be comparatively safer than all others.

I would also say do some research on other smaller cryptocurrencies and find the ones that are:

  • Scalable – The blockchain technology they use is easily scalable to meet demand
  • Secure – The data on the blockchain is safe from hacks and leaks
  • The use is practical – The cryptocurrency has a practical use for realistic adoption

And that’s it guys.

Prices will continue to fluctuate wildly, so don’t go in thinking you can make a quick buck and become the next crypto millionaire. Instead, it’s more realistic to understand cryptocurrency is here to stay but the market needs time to mature for you to invest intelligently. For now, you should just speculate with whatever amount of money you don’t mind losing entirely.

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