Caution Advised: Investing All Your Money In Crypto

Investing in cryptocurrency has become increasingly popular, especially among young people, women, and minority groups. However, the question of whether to put all your money into crypto is a complex one. On the one hand, crypto offers the chance of massive returns on investment due to its volatility. On the other hand, that same volatility means that you could also lose practically everything you invest very quickly.

Financial advisors are divided on whether investors should keep their money in crypto, especially following the collapse of major exchange FTX. While some advisors suggest that crypto could be a good investment for those with a large enough portfolio to include alternative asset classes, others recommend against investing in crypto at all due to the high risk of loss. Ultimately, the decision to invest in crypto depends on the individual's risk tolerance and financial situation.

Crypto's extreme volatility

Cryptos Extreme Volatility

Volatility in financial markets refers to changes in the price of an asset. Extreme volatility occurs when an asset's price changes rapidly within a short time. Cryptocurrency is an incredibly volatile investment. For example, in one day, Bitcoin's value dropped by 30%. Crypto volatility is in a league of its own compared to mainstream markets. There are skyrocketing peaks and depressive troughs in crypto prices that occur at a much quicker and more extreme pace than in mainstream markets.

The high volatility of cryptocurrencies is due to a few factors. Firstly, crypto markets are more sensitive to signals and changes as they have liquidity and price discovery from the start. Secondly, crypto prices are based on speculation and educated guesswork, making their value less grounded and more sensitive to slight changes in investors' expectations or perceptions. Thirdly, crypto markets lack a robust ecosystem of institutional investors and large trading firms, resulting in less liquidity than traditional financial markets. This heightened volatility combined with a lack of liquidity can create a dangerous combination as they feed off each other.

The extreme volatility of cryptocurrencies has both positive and negative implications. On the positive side, it creates opportunities for profit. Traders can buy low and sell high, or "short" an asset they expect to decrease in price. However, extreme volatility is often associated with market chaos, uncertainty, and loss. When markets swing between extreme highs and lows, investors and traders may place more bets, predicting continued swings, which further increases price volatility. This can lead to situations like the 2008 Financial Crisis, where the Dow Jones Industrial Average (DJIA) collapsed by over 777 points in a single day.

The extreme volatility of cryptocurrencies can be a stressful experience for investors, especially when crypto makes up a significant portion of their portfolio. It can be challenging to stomach the ups and downs of crypto prices when they are not just hypothetical or a small part of your investments. Additionally, the volatile nature of crypto can make it difficult to make informed decisions about when to sell or hold, even if your investments turn a profit.

In conclusion, the extreme volatility of cryptocurrencies is a double-edged sword. It provides opportunities for significant gains but also carries the risk of substantial losses. Investing in crypto can be a bumpy ride, and it is essential to understand the risks and potential impact on your financial well-being before deciding to allocate your money to this asset class.

Safe storage options

There are several options for storing your cryptocurrency safely. The best method for you will depend on your needs and concerns about security. Here are some of the most common storage options:

Crypto Exchanges

Crypto exchanges, such as Coinbase, Binance, and Kraken, provide free hot wallets with little to no setup required. These wallets are convenient and support a wide range of assets, but they are susceptible to hacks and theft. When choosing an exchange, look for strong security measures, a good track record, and two-factor authentication.

Hot Wallets

Hot wallets are connected to the internet and can be accessed easily for transactions. They are typically available as desktop or mobile apps, or web-based. While hot wallets are convenient, they carry a higher risk of being hacked. It is important to follow strict security measures and regularly back up your wallet to protect your crypto assets.

Cold Wallets

Cold wallets, also known as hardware wallets, are physical devices that store your crypto assets offline. They are considered one of the safest options for long-term crypto storage as they protect against online attacks and unauthorized access. Examples of hardware wallets include Ledger Nano X and Trezor Model T. When choosing a cold wallet, look for a reputable brand with strong security features.

Paper Wallets

Paper wallets are a simple and inexpensive way to store your crypto assets. They involve printing out your public and private keys, usually with QR codes, and storing them in a safe place. Paper wallets eliminate the risk of online hacking, but they are susceptible to physical damage, loss, or theft. When creating a paper wallet, use a secure generator and store it in a safe, waterproof, and fireproof location.

Custodial Wallets

Custodial wallets are managed by a third party, such as a crypto exchange, who holds the private keys for you. These wallets are convenient and require less work on the user's part, but they give up some control and may not be as secure as self-custody wallets.

Non-Custodial Wallets

Non-custodial wallets, also known as self-custody wallets, give users full ownership of their private keys. These wallets can be either hot or cold and offer more control and security compared to custodial wallets.

When choosing a storage option, consider factors such as the amount of crypto you hold, your technical expertise, the level of security you need, and your preferred level of convenience and accessibility. It is also important to regularly update your software, enable two-factor authentication, and back up your wallet and private keys to multiple secure locations.

Crypto's mainstream adoption

Investing all your money in crypto is a risky move. Cryptocurrencies are highly volatile, and you could lose practically everything you invested very quickly. For example, if you had invested in 1 Bitcoin at the start of 2020, its value would have fluctuated from $7,195 to $63,577 (up 784%) in April 2021, then down to $29,972 (down 53%) in July 2021, and so on.

However, the crypto market has seen tremendous growth in the past couple of years, with a resurgence of mainstream interest in Bitcoin, smart contract platforms, NFTs, and DeFi. This has been accompanied by institutional and political acknowledgement, with El Salvador even adopting Bitcoin as legal tender.

Bitcoin in Every Portfolio

Retail investors have had a head start in the crypto market, but this might not last much longer. Big money from institutional investors will likely enter the market once regulatory proceedings are in place, making crypto investments safer. This could significantly shift the price of Bitcoin and other cryptocurrencies, leading to a more expensive but less volatile asset.

Cryptocurrency as Common Currency

The core function of cryptocurrencies as a currency can sometimes be forgotten. Mainstream adoption will likely lead to a situation where it is common to use crypto to pay for goods and services. There may be a variety of blockchains serving this purpose, and third parties will offer consumer-friendly means to facilitate such transactions.

NFTs, Web3 and the Metaverse

NFTs have been a significant attention-grabber, linking crypto to areas like illustration and music. They introduce new kinds of utility, such as verifiable ownership of unique digital tokens. Web3 will provide an online experience where users connect to sites and apps through their crypto wallets and transact using blockchains, retaining ownership of their content. This environment, where users navigate as individuals rather than subordinates, is what some call the metaverse.

A Culture of Decentralization

Decentralization is at the core of crypto, and it should permeate and become the favored way of thinking. Decentralized assets, currencies, and the web will set this in motion. However, if changes lead to newer forms of centralization, crypto will not have fulfilled its aims.

In summary, while crypto has not yet gone fully mainstream, there are clear signs that it is heading in that direction. When it does, we might no longer talk about crypto explicitly, as it will be embedded everywhere, operating smoothly and out of sight, with multiple unique disciplines.

Regulatory risks

The regulatory environment for cryptocurrencies is also in flux. Governments and regulatory bodies have pushed to track crypto transactions, strip encryption protections, and regulate major exchanges, which could remove a core benefit of the technology that boosts its usage and price. In the US, the Securities and Exchange Commission (SEC) has been considering a raft of new regulations, including whether to classify widely-traded assets as securities. Such a classification may make it prohibitively expensive or unlawful for investors to purchase crypto on the open market.

The lack of regulatory clarity also extends to tax rules. In the US, the IRS has defined cryptocurrencies as property rather than currencies, meaning individual investors are subject to capital gains tax laws when reporting crypto profits and expenses on their annual tax returns. However, the requirements for reporting crypto holdings are still unclear, and the situation is further complicated by the fact that crypto trading frequently involves holding crypto in a foreign account.

The bottom line is that regulatory risks are a significant concern for crypto investors, and the evolving nature of the regulatory environment makes it difficult to predict how these risks will play out in the future.

Crypto's potential as a global currency

Investing all your money in crypto is not recommended due to the high volatility of the market. However, cryptocurrency does have the potential to become a global currency.

Bitcoin, the most well-known cryptocurrency, is often pitched as a possible contender to become the next global reserve currency. It has gained widespread acceptance and adoption in the global economy, with some governments even accepting it as legal tender. The decentralised nature of Bitcoin means that no single country or central authority can manipulate the currency to its advantage. Additionally, the transparency and security of transactions, ensured by blockchain technology, are also advantages.

However, there are several challenges and drawbacks to the idea of a cryptocurrency becoming a global reserve currency. Regulatory uncertainty, scalability issues and volatility are all factors that could hinder Bitcoin's future as a global reserve currency. The lack of central control also means there is no authority to ensure things run smoothly or to back the value of the currency.

The emergence of Bitcoin and other cryptocurrencies has sparked a debate about the future of global reserve currencies as the world becomes increasingly digital and decentralised. While it is uncertain whether Bitcoin will become a global reserve currency, its rise challenges the dominance of traditional currencies and offers the potential for a more equitable and decentralised financial system.

Frequently asked questions