Become a better investor
Lesson in Course: Crypto (advanced, 5min )
All investing involves taking risk. What do we need to know to protect ourselves when investing in crypto?
Cryptocurrency as an asset class is still in very early stages. Since the utility and value of the crypto are evolving, wild price fluctuations are common. After all, investing in crypto now is similar to investing in the very early days of Facebook—there's a chance it can turn into a tech juggernaut, but there's also a chance it can go the Myspace route.
To address the uncertainty, let's consider some of the biggest risks facing crypto.
Every government around the world has different policies toward the adoption of crypto, allowed use, and taxation of gains made from investment and trading.
Even as government positions form, the inconsistencies between regulators and crypto's legal status create concerns about widespread adoption. Some jurisdictions classify crypto as an asset while others see it as a currency, leading to different tax treatments depending on where we live. Regardless of what lawmakers decide, crypto's growing appeal is making it harder to dismiss.
The association of crypto with criminals is an ongoing concern.
The decentralized nature allows cybercriminals and terrorist organizations to receive ransom while staying anonymous. For this reason, some countries put restrictions on rights to acquire, own, hold, sell, or use crypto. Being tied to crime presents significant headwinds for the general use of crypto until anti-crime technology is developed.
If we decide to use our own crypto wallets and trade on decentralized exchanges, we will be responsible for the security of our private keys and seed phrases. If we forget them or they get stolen, our coins are likely lost forever.
Cryptocurrencies are still highly speculative, and prices for most coins are not stable.
The prices of crypto move dramatically daily, often triggered by news headlines or celebrity tweets. Many folks buy crypto based on the hope that the price will increase rather than on any intrinsic value. For many cryptocurrencies, the majority of the coins have never been used for buying things. This can create an emotional rollercoaster, making it hard to stay a rational investor.
There are liquidity issues with smaller/lesser used cryptocurrencies on decentralized exchanges. With fewer folks in these networks, it makes it harder to buy and sell coins. This could lead to bigger losses if there is an abrupt drop in value or an inability to swap to another coin.
A couple videos raising some additional concerns about the speculation and fanaticism in Bitcoin.
From the first peak in 2018:
From the second boom in 2021:
If we return to our example of Facebook, a crypto-enthusiast is betting that investing early could have a bigger pay off later. Now that we understand the risks we are walking into, if we want to put some money aside to shoot for the moon, the next steps will guide us on how to get started.