Why investing in Cryptocurrencies is a bad idea if you’re not Financially Educated

Trading

January 28, 2021

Bitcoin and the cryptocurrency business have a good outlook for 2021, despite the continuing uncertainty of geopolitical expectations, the maturation of ecosystems, and the entry of new players. This is perhaps the conclusion several analysts arrive at. They are also of the opinion that this year, the price of 1 Bitcoin will reach US$200,000. A figure that would put Bitcoin in a very good position to be a store of value.

One of the reasons that Bitcoin prices started soaring sky-high is because of the halving of Bitcoins being mined. This happens every 210,000 Blocks, which is approximately 4 years. The last halving happened in 2020, which means that 1,800 Bitcoins will no longer be issued daily, but cut short to only 900 Bitcoins. That, in addition to institutional investors who have been FOMOing in to hedge their funds against inflation, has pushed Bitcoin prices up to new all-time highs.

Institutional Investors

The cryptocurrency market has recently seen a big crowd of institutional investors coming in and buying cryptocurrencies. These big players have started to recognize the potential that cryptocurrencies offer and are trying to “get in early” before it’s too late.

For a regular retail investor, Bitcoin maybe a little too expensive to get in early. But to these big firms like investment banks and hedge funds, Bitcoin, Ethereum, and other cryptocurrencies are a great way to hedge their funds against. And that is going to be crucial for the world economy in the next few years.

Most people are in the dark about what exactly is happening to our money each and every day. Some people still believe that our currencies are backed by Gold. However, this is not true. The Gold Standard was discontinued back in 1971.

So, what is are currencies backed by? The answer to that is simple. It’s a “promise.”

Fiat Currencies

The money that we use today is actually not money at all. Our currencies are called Fiat Currencies. Fiat is a Latin word that means “by decree.” Currency holds value because the Government orders it to. It is a legal tender and is not backed by any underlying asset.

All of this may not sound like much to an average person, but the implications are quite dramatic. When currency was backed by Gold, it was pretty much guarded against inflation. If the government wanted to print more money, they would have to get equal amounts of Gold to back it up.

However, when currency is backed by the government, they can print as many notes as they want and this causes inflation. The steady decline of the US Dollar is a very good example of why this is so important. When a currency loses value, it loses its purchasing power. To put this into perspective, the $100 you earn today will be “worth” less over time. If you were able to buy 10 items with your money today, you can only buy maybe 8 items next year, with the same money.

This makes Bitcoin and other cryptocurrencies perfect when you want to hedge your funds for the future.

Growing market

There more than 8,327 virtual currencies listed on CoinGecko, including Bitcoin, Ethereum, Ripple, Cardano, Polkadot, and Uniswap, among others. They have continued to make big gains despite some uncertainty in the market. Many regulatory bodies and evangelists of traditional finance have spoken against cryptocurrencies, calling them “speculative assets.”

For people who have been in the crypto space for some time, this FUD spread by the “centralists” and the authorities may not be much of a concern. However, for investors who are new to the market, this can be quite bad indeed.

Newer investors may not be used to the high volatility that cryptocurrencies have. Since the prices of cryptocurrencies depend on supply and demand, such a FUD would make people panic sell their crypto, and the prices will start dumping. Another bad scenario is when newer investors buy recently listed coins, they know nothing about.

Most of the new coins fail to amount to anything. Some do succeed but show a pump and dump pattern in the initial days. These coins pump quite a bit first then suddenly start dumping and then stabilize. It might take them days, months, or even years to give the holders any good returns on investments. Some coins, however, do perform well but it’s kind of like finding a needle in a haystack if you don’t know what you are doing.

With that said, this is not something that anyone can control because that’s how most of the markets work. For people to be in profit, others have to be at a loss.

In the case of Bitcoins, although a return of 9,000,000% has already been presented for those who invested in 2009 – the year in which Bitcoin came out – these gains are no longer seen in the picture. Of course, the market is likely to see progress and there is a high chance that Bitcoin prices will reach 6 figures in 2021. But these gains will not benefit everyone.

The reason for this is that Bitcoin is already too expensive for most people. Most people invest in Bitcoin for the money, not for the technology. They dream of life-changing wealth. For many of them, if they had the money to buy a couple of Bitcoins, they wouldn’t need cryptocurrencies to live a decent life.

So, should you invest in cryptocurrencies?

Before making any investment decisions, it is essential to know the history of the business, the pros, and the cons. Along with that, the risks arising from cryptocurrencies should also be taken into account. As the saying goes in the world of cryptocurrency investment, “you should never invest more than you can afford to lose.”

Author Bio

My interest in Blockchain technology and crypto started when I was an undergrad. It has since then transformed into something much bigger for me. I believe that Blockchain is undoubtedly the future of technology as we know it, and have been trying to share as much knowledge as I humanly can with people.