The Crypto Waiting Game: Let Your Investments Sit And Grow

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. Bitcoin is the most widely used cryptocurrency. Cryptocurrencies are generally used to pay for services or as speculative investments. They are powered by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what.

The price of cryptocurrencies can be extremely volatile, and the industry is filled with uncertainty. There are also tax consequences to buying and selling cryptocurrencies. Despite the risks, some people have made large profits by investing in crypto.

If you are thinking about investing in cryptocurrency, it is important to do your research and understand the risks involved. It is also crucial to have a long-term investment plan and not get caught up in the short-term volatility of the market. Additionally, it is generally recommended to only invest money that you are willing to lose, as the crypto market can be unpredictable.

Investing in crypto is a mistake for most

Investing in cryptocurrencies is a risky venture, and for most people, it is a mistake. While it is true that some people have made substantial profits by investing in crypto, the majority of investors would have been better off avoiding it. In this article, we will explore the reasons why investing in crypto is a mistake for most people and provide guidance on how to avoid common pitfalls.

Common Mistakes

One of the biggest mistakes people make when investing in crypto is a lack of basic knowledge about cryptocurrencies and the underlying blockchain technology. It is important to understand how crypto works, the fees involved, and the security risks before investing. Another mistake is short-term thinking. Crypto should be viewed as a long-term investment, and trying to get rich quick is a sure way to lose money. Keeping crypto in online wallets is also risky, as they are more vulnerable to hacks and scams. It is much safer to store crypto in an offline hardware wallet.

Risks and Disadvantages

There are numerous risks and disadvantages associated with investing in crypto. The highly volatile nature of crypto prices means that investors can lose significant amounts of money if they buy at the wrong time or fail to time the market correctly. Regulatory risks are also a concern, as the legal status of cryptocurrencies is still evolving, and a sudden crackdown could cause a market crash. Counterparty risks, management risks, programming risks, and market manipulation are other significant issues that investors should be aware of.

When Not to Invest

If you are in debt or do not have sufficient savings to cover your expenses for 3-6 months, you should avoid investing in crypto. It is important to have a solid financial foundation before taking on the risks associated with crypto investing.

While crypto investing can be lucrative for some, it is a mistake for most people due to the high risks and volatility involved. It is crucial to have a long-term investment strategy, diverse portfolio, and adequate financial stability before considering crypto as an investment option.

Crypto is not a safe investment

Volatility and Risk

Cryptocurrency is a highly volatile and unpredictable asset. For example, Bitcoin reached an all-time high of around $68,000 per coin in November 2021 before plummeting to less than $19,000 just seven months later. This volatility is due in part to the speculative nature of the asset, with its value largely dependent on market sentiment and news.

The extreme price swings in cryptocurrency mean that investors are assuming a high level of risk when buying and selling digital assets. Financial advisors often caution against investing more than you are prepared to lose in crypto.

Regulatory Landscape

The regulatory landscape for cryptocurrency is also constantly evolving, and investors need to stay updated on new rules and regulations. Crypto trading platforms are not regulated in the same way as mainstream exchanges, and security measures can vary widely. The lack of regulatory oversight also leaves investors vulnerable to fraud, as seen by the surge in cryptocurrency fraud in 2022.

Additionally, the decentralised nature of cryptocurrency means that it is not considered legal tender and is not backed by any central authority or government. This lack of regulation and protection is a significant source of risk for investors.

Storage and Security

The safety of cryptocurrency is also closely tied to how it is stored. When crypto is stored on an exchange, it is held in a "custodial wallet," where the exchange controls the keys to your account. However, as seen with the collapse of FTX, exchanges are not always safe, and investors may struggle to recover their money in the event of bankruptcy.

A safer alternative is to store crypto in hardware wallets, which keeps the assets offline and reduces the risk of hacks. However, this method requires investors to keep track of the device and its password, with a loss of either potentially resulting in lost access to their crypto assets.

Criminal Activity and Environmental Impact

The decentralised and anonymous nature of cryptocurrency has also made it a popular tool for criminal activities such as money laundering, illicit purchases, and ransomware.

Additionally, the energy-intensive process of mining cryptocurrencies has led to concerns about the environmental impact of the industry.

While cryptocurrency offers new investment opportunities, it is not a safe investment due to its high volatility, regulatory uncertainty, storage and security issues, association with criminal activities, and environmental impact. Investors need to carefully consider the risks and perform thorough due diligence before investing in crypto.

Crypto is risky due to its volatility

Volatility in financial markets refers to how much the price of an asset has increased and/or decreased over a period of time. The more volatile and unpredictable an asset is, the riskier it is considered to be as an investment. Crypto is a relatively new asset class, and as such, it is highly volatile and therefore riskier than traditional asset classes.

Crypto Volatility vs Traditional Markets

Crypto market volatility is in a league of its own. Skyrocketing rises and aggressive drops occur at an extreme pace in crypto compared to prices of assets in more mainstream markets. Bitcoin (BTC), for example, has witnessed over eight 50% corrections in its 15 years of existence. However, it has managed to recover from each correction over the course of a full cycle to make new all-time highs.

Factors Affecting Crypto Volatility

The crypto market is still in its infancy and is considered an outlier versus traditional assets like stocks or commodities. Growing acceptance and maturity of the market go hand in hand. Until investors gain more certainty in crypto's long-term future utility and regulatory standing, price discovery will continue to be a major driver of crypto volatility.

The relatively small size of the crypto market means there's less liquidity and depth to accommodate larger traders. The total crypto market cap is a fraction of the size of the total U.S. stock market. Crypto liquidity is fractured across many different exchanges and trading venues, making it difficult for large players to enter or leave the market without affecting prices and moving the market.

Supply and Demand Dynamics

The distribution between supply and demand plays a major role in the volatility and price movements of any asset. This is particularly nuanced in the crypto space due to the unique supply dynamics of many different digital assets. Bitcoin, for instance, has a supply cap of 21 million coins. The limited supply often creates conditions where sudden increased demand can put even greater upward pressure on prices, increasing volatility.

Investor Sentiment

The immaturity of the overall crypto market means that positive or negative views can spread like a contagion. Investor sentiment is a significant driver of crypto volatility, and the psychology of the crypto investor, typically an individual/retail investor, is less informed and more impressionable compared to more seasoned traditional investors.

Regulation

The crypto market is not comprehensively nor clearly regulated by any government bodies globally, like traditional financial markets. The lack of clear regulation can cause uncertainty and impact crypto prices. The unique digital and decentralised characteristics of cryptocurrencies present major challenges for regulators.

24/7 Trading

Unlike traditional markets that trade between set hours, the crypto market doesn't close. Coupled with the lack of regulation, this means there are no circuit breakers like in traditional markets. Circuit breakers are interventions by exchanges to dampen volatility caused by panic selling or destructive events. With no training wheels or guard rails in place, crypto's free market dynamics are susceptible to high volatility.

The crypto market is still an infant asset class; relatively underdeveloped, immature, and highly volatile. This volatility is a feature and a right of passage of crypto's high growth phase, presenting both challenges and opportunities for traders and investors alike. As the asset class matures, many of the factors that drive volatility will subside.

Crypto has an unproven rate of return

Cryptocurrency is a highly speculative investment. Its value is based purely on speculation and demand, and there is no way to calculate returns as you would with growth stock mutual funds.

Volatility

Cryptocurrency is volatile, and its value can fluctuate wildly. This makes it a risky investment, as there is a high chance of losing money. The price is dependent on supply and demand, and if demand falls, the price will drop.

Lack of Regulation

The lack of regulation in the crypto market means there is no pattern to the rise and fall of its value. This makes it difficult to create a long-term investing plan and calculate returns.

Few Regulations

The few regulations that do exist are often unclear and vary from country to country. This adds to the volatility and makes the crypto market vulnerable to sudden regulatory crackdowns, which can cause a market-wide price drop.

Other Risks

There are also risks of user error, such as losing your password or sending crypto to the wrong address. Additionally, crypto exchanges and wallets are vulnerable to hacking, and there is a risk of fraud or theft.

Bubble

The crypto market is prone to bubbles, which always pop. This can result in significant losses for investors, as seen in the crypto crash of 2022, when the market lost over $2 trillion in value.

Alternative Investments

Instead of investing in crypto, it is generally recommended to invest in traditional financial instruments, such as growth stock mutual funds, which have a long-term average annual rate of return between 10-12%.

Crypto makes theft and fraud easier

Crypto has become an increasingly popular tool for criminals to carry out theft and fraud. Criminals can steal cryptocurrency directly or use a scheme to trick people into handing it over.

The rise of the crypto economy, decentralised finance, and record cryptocurrency prices in 2021 have provided criminals with lucrative opportunities. In 2021, crypto criminals directly stole a record $3.2 billion worth of cryptocurrency, according to Chainalysis. That's a fivefold increase from 2020. However, schemes continue to overshadow outright theft, enabling scammers to lure $7.8 billion worth of cryptocurrency from unsuspecting victims.

The decentralised nature of cryptocurrencies means that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. This also means that, unlike with traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent. By some estimates, about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.

Cryptocurrency is also often used for criminal activities. It has become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. Cryptocurrencies have also become a favourite of hackers who use them for ransomware activities.

Frequently asked questions