Is It Too Late to Invest in Cryptocurrencies?
With the recent rise in the value of cryptocurrencies during the pandemic, you may feel an increase in FOMOs if you don’t already have them. But are you really missing out, or is cryptocurrency an overblown gamble? Well, the answer really depends on your investment strategy and your risk appetite. Here’s a look to see if it is worth buying cryptocurrency.
What is cryptocurrency?
There are thousands of cryptocurrencies, but right now the largest are Bitcoin, Ethereum and Dogecoin. Cryptocurrency is a digital currency that is secured on a decentralized network of computers, allowing peer-to-peer transactions to take place without government manipulation or interference. Currency is created through an intricate software process known as data mining , which limits the supply, and each coin is unique and nearly impossible to counterfeit.
Why do people buy cryptocurrency?
When it was invented, cryptocurrency was supposed to replace physical money, and it is true that today you can definitely buy things with cryptocurrency, like an NFT or a Tesla car. However, many people buy cryptocurrency for other reasons:
- This is a hedge against inflation : if you think the government will end up devaluing the dollar by printing too much money, cryptocurrency as a “store of value” can be an attractive hedge, especially if the cryptocurrency has a fixed amount, as is the case with Bitcoin (capped at 21 million coins )
- Portfolio diversification : If you think that bond yields are currently too low and stock prices are overpriced, you can invest some of your money in cryptocurrency.
- This is a long-term bet on widespread acceptance : although the value of the cryptocurrency is volatile, over time it attracts more and more interest from investors. Who knows how much it will be valued, say, in 2040.
- Incredible recoil from leaps in inertia: If you time it right or you’re incredibly lucky.
However, the big drawback is volatility. Double-digit fluctuations in value are not uncommon and you can easily lose all of your money at once. So, you want to make sure that crypto really makes sense in your overall investment strategy, especially in terms of your risk tolerance . For example, if you are a passive investor with limited income, investing most of your savings in crypto is probably not a good idea.
However, trading on momentum swings has made people very rich , but it is essentially a gamble if you don’t have specific knowledge or understanding of cryptocurrency as an intangible asset (indeed, a third of crypto investors admit that they don’t know what they are doing ) …
If you have an appetite for high-risk investments and are willing to lose that money, many financial planners will recommend a small fraction of the cryptocurrency, usually no more than 1-5% of your total investment .
Is it too late to buy cryptocurrency?
No one knows exactly what the ceiling will be for any speculative investment, and cryptocurrency is no exception. It is impossible to say that it is “too late” to invest, as the currency may continue to rise in value or bottom out at any time.
Bottom line
Cryptocurrency can be a profitable investment if you are willing to take on significant risks and are willing to lose it all. Before buying, ask yourself if you really understand how it works and if it fits with your long-term investment strategy.