Investing in cryptocurrencies is a hot trend right now. There is an easy way to buy not only Bitcoin, but also many other cryptocurrencies that are in the news.
However, before you get carried away with investing in cryptocurrencies, it’s important to take a step back and consider your situation. Just because something looks exciting doesn’t mean it’s a good idea.
Here are some reasons to think twice before investing in cryptocurrencies.
1. Historically volatile
Virtual currency prices have historically been volatile, rising and falling rapidly. Just check the price chart of each cryptocurrency. Even for a well-known currency like Bitcoin, large daily fluctuations are common.
Other virtual currencies are also subject to large fluctuations. Ethereum hit a price above $4,000 in May 2021. By July 2021, the price had fallen to just under $1,800. On December 10, 2021, the price returned to $4,000, below the November 2021 all-time high of $4,858.52. Smaller currencies like Dogecoin could see even more dramatic fluctuations.
If you’re looking for something with relatively stable prices, cryptocurrencies aren’t there yet.
2. Valuing Cryptocurrencies Can Be Difficult
When valuing a stock, you can look at various characteristics of a company, such as its management, balance sheet, and earnings. You can form an opinion on whether a product or service offered will be successful in the long term or graph the long-term historical value of various stocks and stock indexes.
Other assets, such as goods or real estate, may also be easier to value. Some of these assets are tangible and tangible.
Virtual currencies, on the other hand, are more difficult to value. Cryptocurrencies are untouchable and don’t have as long a history as many other asset classes. Determining a meaningful value can be difficult, so comparing it to other asset classes can be difficult.
3. Bad for the Environment
The growing interest in cryptocurrencies has led many people to use their computing devices to mine various coins. However, The New Yorker reported that Bitcoin is bad for the environment because it uses a lot of electricity in the process, and many of the power plants that provide that power run on fossil fuels.
If you are interested in green investing, keep in mind that some cryptocurrencies are not as efficient as others. If you want to avoid coins that rely heavily on fossil fuels, consider carefully which coins you support with your dollars.
If this topic is very important to you, you may want to consider how you can invest in renewable energy instead.
4. Taxes are really complicated
Filing taxes is probably complicated enough without understanding how to pay taxes earned on virtual currency.
How you are ultimately taxed depends in part on how you receive your cryptocurrency. When you buy and hold coins with fiat currency, they are often treated as capital assets, so you need to determine whether you will have to pay short-term or long-term capital gains taxes after you sell them.
However, if you receive virtual currency as payment for a service (for example, I received 1 Bitcoin for writing an article in 2011), this will be considered income, and you will receive the normal amount based on the value of the coin on that day. It may be taxed as income. you received it. This can complicate matters later. You should always consult a tax advisor before investing in cryptocurrencies.
5. We may be in a bubble that’s about to burst
There are concerns that we may be in a bubble with cryptocurrencies, as prices have risen rapidly in recent months. Cryptocurrencies have had their ups and downs, and the recent rise in many cryptocurrencies may be indicative of this.
If the price rises this high, some investors may want to start taking profits. When that happens, they sell their coins at a higher price. However, all of these sales lead to lower prices. If prices fall enough, there will be no buyers for cryptocurrencies, and investors who join later may incur large losses due to the crash.
6. Fiat currency could function on blockchain
While many enthusiasts point out that blockchain is a public ledger and a secure way to transfer money, the reality is that fiat currency can function on blockchain. Nothing prevents it from working on the chain. Fiat currency is a currency issued by a government or its central bank, such as the US dollar.
Some Fed officials have proposed creating a digital dollar. This means putting the US currency on the blockchain and allowing transactions to be performed using dollar tokens. China is currently working on digitizing its currency, and other countries may decide to follow suit.
After all, cryptocurrencies are not particularly unique when it comes to paying for items. Fiat currencies may also follow suit.
7. Cryptocurrency is not really mainstream yet
Despite the enthusiasm for cryptocurrencies, cryptocurrencies are not really mainstream yet. You need to find someone who is willing to accept your chosen cryptocurrency when you pay or convert your crypto tokens to fiat currency to complete a transaction. It is also important to note that many reports indicate that a relatively small number of people control the majority of Bitcoin wealth.
Cryptocurrency is not yet widely adopted as a means of payment and is not considered a mainstream investment (often classified as speculation), so it is likely that it will become a viable mainstream asset class in the future. It’s difficult to say whether.
8. There is a risk of fraud and theft
Although some cryptocurrencies are legal, there is also a risk of fraud and theft. Cryptocurrencies are so popular that there are investment programs surrounding these currencies as well. It’s bad enough that the Securities and Exchange Commission regularly issues warnings to investors about cryptocurrency-related scams. A famous example of a crypto Ponzi scheme is the BitConnect boom, which ended in early 2018 with over $2 billion in fraud.
Additionally, if someone were to break into your cryptocurrency wallet, they could steal your coins, and even if they were able to break into your online wallet or another wallet, you would have no recourse. There’s no room for that.
9. Lack of Regulation
So far, there is no significant regulation in the cryptocurrency market. It’s truly the Wild West. There are many cryptocurrencies and crypto exchanges, and virtually anyone can offer coins without the scrutiny that publicly traded companies are subjected to.
Although the regulatory environment may change, virtual currencies are not yet protected by SIPC insurance. Therefore, if the company managing your crypto assets goes bankrupt, you may have no way to get your money back.
10. You don’t have a solid portfolio yet
You may not have a solid investment portfolio yet, so you buy into something like cryptocurrencies, which are new asset classes like this. may not make sense. When creating your portfolio’s asset allocation, you can limit alternative assets to 10-20% of your portfolio’s total value.
Others may be more comfortable spending a smaller percentage on alternatives. For example, I like to keep alternative investments at about 8-10% of my portfolio. This includes all my options including cryptocurrencies.
If you haven’t already built a solid core portfolio of more traditional assets, it may make sense to add stocks before adding riskier alternative assets like cryptocurrencies.
11. You invest too much of your portfolio in cryptocurrencies.
If you want to add another cryptocurrency to your portfolio, take a step back and consider how much of your portfolio is already invested in cryptocurrencies. For example, about 5% of my portfolio consists of various cryptocurrencies. It is unlikely that you will invest in another cryptocurrency unless you sell something first to maintain a satisfactory asset allocation.
If you invest too much of your portfolio in cryptocurrencies, you risk losing more than you can afford if the bubble bursts or price fluctuations catch up.
12. Not supported by banking systems
So far, cryptocurrencies are not yet fully supported by banking systems. This means that you need to leave these regulated channels to conduct crypto-based transactions. While some exchanges are issuing credit cards that offer cryptocurrency perks or debit cards that allow you to access your coins, the reality is that banking systems are not yet in place.
Although some banks use underlying blockchain technology for payments, these payments are not necessarily made using common cryptocurrencies. Instead, the underlying technology will be used to improve your own banking ecosystem.
13. The market is full of invented currencies
While some cryptocurrencies such as Bitcoin and Ethereum have become popular, many others are still being invented. In fact, as of December 2021, more than 8,000 cryptocurrencies are listed on the cryptocurrency price tracking website CoinMarketCap.
Therefore, it is difficult to say which currency will become popular. One of the surprising facts about cryptocurrencies is that some, like Dogecoin, started out as a joke but then skyrocketed in price and then fell. It can be difficult to determine which cryptocurrencies will be successful and have staying power, and you could end up losing money before it’s over.