While many people view cryptocurrency as an investment, most financial analysts still see it as speculation. Others feel cryptocurrency is a bubble, similar to the dotcom bubble of yesteryear. The main reason for the dispute is the high volatility that cryptocurrencies, in general, have experienced since their beginning. This volatility has given both investors and analysts a great deal of unease.
Yet, throughout 2018, major cryptocurrencies, including Bitcoin, have shown a stable price trend. In general, we have not seen the dramatic highs and lows we saw in 2017. This does not mean, however, that we won’t see drastic fluctuations in the future. But are cryptocurrencies ready to finally become a safe bet?
Increasingly, more and more investors are making a portion of their investments in Bitcoin. This suggests that a growing number of people see a potential reward in cryptocurrencies. This does not mean the risk is low. Often high risk is more tempting because the payoffs are better. At the end of the day, you never want to invest more money than you have the ability to lose.
In its current state, you need to find the right balance between low-risk and high-risk investments. Some investors are more comfortable with risk than others, so you probably know which category you fall into. Despite the lower volatility that some cryptocurrencies seemed to have developed, all cryptocurrencies are considered high-risk investments. This is largely because of uncertainty. It is entirely possible that Bitcoin, Ethereum, and the ilk will continue their current trends, but these cryptocurrencies are all still fairly new investment options and their performance is not consistent enough to predict what the future is going to hold for this asset class.
Thus, you do not want to put all your money into cryptocurrencies. Balance your investments out with some low-risk assets that you can reliably see returns on. It really starts with figuring out how much you are willing to lose and determining what tolerance you have for risk.
Consider the Market as a Whole
Price swings are important, but you also want to look at the cryptocurrency market on a larger scale. If you want to invest in Bitcoin, you have to look at the other cryptocurrencies. Many of the tokens are interconnected in one way or another. You also have to consider what the market will look like 6 months from now or even five years from now. With long-term investments, the current price isn’t as important because you will be holding onto the tokens for a while. This is where it becomes tricky.
If you look at the current market fluctuations, they do not look like a big deal when compared to the market in 2017. In June, for example, Bitcoin saw its ten-day deviation average fall to 270. At one point, Bitcoin had a ten-day deviation of 3,000. That is a huge difference.
Stability and volatility are the only things you have to worry about. Because cryptocurrencies are such a new asset class, many governments have not developed clear policies to govern them yet. Whether we’re talking about trading rules, taxation, or legality, there is still a lot of uncertainty or gray areas. This means investing in cryptocurrencies will likely be riskier than investing in an established asset class since the regulatory framework could be a lot different in a year than it is now. Regulation changes could help you or they could hurt you, but this type of thing is hard to predict.
Another issue is longevity. There are over 2,000 cryptocurrencies right now. This number will only continue to grow. Some will die out. Some will persevere. While you can safely assume Bitcoin will be around for a long time to come, less established cryptocurrencies are inherently riskier. You could end up investing in something that won’t even exist a year from now. You can’t always predict what will have staying power. We see many cryptocurrencies that attract a lot of attention early on and still end up failing.
Consumer protection is also important. You have insurances and safeguards in place when you use traditional financial institutions like banks and brokers. With cryptocurrency exchanges, these protections don’t exist on a large scale. Consider what would happen if the exchange you use suddenly becomes insolvent. You could end up losing everything in a second. Cryptocurrencies are still being targeted by cybercriminals, which is another issue. If your credit card is stolen or hacked, you will be inconvenienced for sure, but you would likely see all or most of your money returned to you. If your cryptocurrency exchange account is hacked, you would never see those assets again. You can mitigate the risks here by not storing your cryptocurrency within an exchange, but it is still something to focus on.
A final thing to consider is market manipulation. While there isn’t solid proof, many people believe that the cryptocurrency market suffers from abuse. Insider trading and illegal cooperation are thought to exist on various levels. This really affects the sanctity of the cryptocurrency market. Things like pump and dump schemes are also thought to be becoming more prevalent. You also have to worry about scams, such as twitter-bots and fake ICOs. These issues might not be as widespread as some believe, but if this sort of negative activity is going on on a regular basis, it should make you think twice before investing large sums into cryptocurrency.
On the other hand, once the regulatory framework tightens up, this type of activity will become less common. Cryptocurrency might be an investment that pays off, but there is still a lot of uncertainty. So be careful about how much you decide to risk.