Crypto: A Risky Investment Choice For Your Money

Investing in cryptocurrencies is a hot trend right now, but it's not for everyone. While it's possible to make a lot of money by investing in crypto, it's also very possible to lose it all. Here are some reasons why crypto may not be a good investment.

First, cryptocurrency is a highly volatile and risky investment. The price of crypto can swing wildly within a day or even minutes, making it difficult to predict and trade. Second, crypto is difficult to value. Unlike stocks, where you can look at a company's financials, or commodities, which are often tangible, crypto doesn't have a long history and it's challenging to determine its intrinsic value.

Another concern is the potential for fraud and theft. Cryptocurrency exchanges are vulnerable to hacking and other criminal activities, and if someone gains access to your crypto wallet, there is often no recourse to get your money back. Additionally, the lack of regulation in the crypto market means that investors may not have the same protections as they would with traditional investments.

Furthermore, crypto is not widely accepted as a form of payment and is yet to become truly mainstream. This means that its success hinges on how widely adopted it becomes, and there is a risk that its value may decline if it doesn't gain broader acceptance.

Lastly, crypto is not supported by the banking system and is not backed by any governments or regulatory bodies. This means that investors are on their own if something goes wrong, and it's not clear how crypto will fit into the traditional financial system in the future.

Crypto is historically volatile

Cryptocurrency is a highly volatile asset class, with prices fluctuating widely and quickly. This volatility is due to the young age of the asset class and the market. For example, in 2017, Bitcoin's price rallied to nearly $20,000 before crashing to $3,122 in a single day, losing a third of its value. In 2018, it dropped even further to under $7,000. Ethereum has also experienced significant price swings, reaching over $4,000 in May 2021, dropping to $1,800 in July, and then rising back to $4,000 in December of the same year.

The extreme volatility of cryptocurrencies makes them a risky investment. While there is the potential for large gains, there is also the possibility of substantial losses. For instance, if the bubble bursts or price volatility increases, investors could lose a significant portion of their investment, or even their entire investment.

The volatility of cryptocurrencies is also due to the fact that their success hinges on how widely adopted they become. Currently, cryptocurrency is not widely accepted as a form of payment, and it is not considered a mainstream investment. As a result, the value of cryptocurrencies could wane over time if they do not gain broader acceptance.

Additionally, the value of cryptocurrencies can be difficult to determine, as they are not backed by any tangible assets or government regulation. The value is based solely on the perception of those trading it, making it an incredibly risky investment if the market decides it is no longer valuable.

Due to the high level of volatility, investing in cryptocurrencies may not be suitable for those who are risk-averse or who do not have a robust investment portfolio. It is important for investors to carefully consider their risk tolerance and conduct thorough research before investing in cryptocurrencies.

It's difficult to value crypto

When it comes to investing, being able to accurately value an asset is crucial. However, cryptocurrencies like Bitcoin present unique challenges in this regard, making it difficult to determine their intrinsic value. Here are some reasons why valuing crypto can be a complex task:

Lack of Tangibility

Cryptocurrencies are intangible digital assets. Unlike traditional investments such as stocks, bonds, or commodities, you cannot physically touch or see crypto. This lack of tangibility makes it harder to assign a concrete value to crypto assets.

Short History

Crypto is a relatively new asset class. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. This short history means there is limited data and historical performance to analyse when trying to determine its value. Traditional investments, on the other hand, often have decades or even centuries of data to draw upon.

Volatility

The price of cryptocurrencies is known for its high volatility. Wild price swings, sometimes occurring within minutes, are common in the crypto market. This volatility makes it challenging to establish a stable value for crypto assets. While volatility can also exist in other asset classes, the magnitude and speed of price movements in crypto are often much greater.

Difficulty in Fundamental Analysis

Fundamental analysis is a common approach to valuing traditional investments. It involves examining various factors such as a company's financial statements, industry trends, and market conditions. However, with crypto, there are no financial statements or management teams to analyse. While there are some fundamental factors to consider, such as network adoption, transaction volume, and development activity, it is a very different process from valuing stocks or other more established investments.

Uncertain Future

The future of crypto is highly uncertain. On the one hand, some believe it will revolutionize the financial system and become widely adopted. On the other hand, there are concerns about regulatory crackdowns, fraud, and the potential for bubbles to burst. This uncertainty makes it challenging to predict the long-term value and viability of crypto assets.

Limited Comparables

Valuing crypto can be difficult due to the lack of comparable assets. Crypto is often compared to gold or fiat currencies, but these comparisons have limitations. Crypto doesn't have the same long history or widespread acceptance as gold, and fiat currencies are backed by governments and central banks, which most crypto lacks.

Crypto is bad for the environment

Cryptocurrency mining consumes huge amounts of energy, and its carbon footprint is comparable to that of small countries. The process of mining Bitcoin, the most popular cryptocurrency, involves solving complex mathematical equations, which requires a lot of energy. This energy is typically generated by burning fossil fuels, resulting in significant carbon emissions. According to estimates, the Bitcoin network consumes about 151 terawatt-hours (TWh) of electricity annually, which is more than the energy consumption of entire countries like Ukraine, Venezuela, and the Philippines.

The environmental impact of cryptocurrency mining goes beyond just carbon emissions. It also has significant water and land footprints. The process requires a lot of water—during 2020-2021, the global Bitcoin mining network's water footprint was similar to the amount of water needed to fill over 660,000 Olympic-sized swimming pools. This is enough to meet the domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of worldwide Bitcoin mining activities during this period was 1.4 times the area of Los Angeles.

The energy-intensive nature of cryptocurrency mining has led to concerns about its impact on the environment, especially at a time when reducing carbon emissions is crucial. The process requires a lot of electricity, which is often generated by burning fossil fuels. In 2020-2021, about 67% of the electricity consumed for Bitcoin mining was produced from fossil fuels, with coal being the primary source, accounting for 45% of the energy mix. This has resulted in increased carbon emissions and contributed to climate change.

The issue is further exacerbated by the competitive nature of blockchain mining, where miners invest significant resources in an attempt to be the first to solve the complex equations and earn the reward. As speed is critical, miners often utilize the most readily available energy sources, which are often fossil fuels. Some miners have even paid to revitalize dying fossil fuel plants to get faster access to electricity. This further contributes to the environmental impact of cryptocurrency mining, as these plants would have otherwise been retired, reducing overall carbon emissions.

The environmental impact of cryptocurrency mining has not gone unnoticed, and there is a growing debate around it. Some argue that it offers a new, energy-hungry market that will encourage renewable energy projects and revolutionize the energy grid. However, the current reality is that cryptocurrency mining has a significant environmental impact, and the industry needs to take steps to mitigate it.

Crypto taxes are complicated

The Internal Revenue Service (IRS) treats cryptocurrencies as property, like a house or car, and not as a currency. This means that a taxpayer who receives cryptocurrency in payment for goods or services must pay taxes according to the cryptocurrency's "fair market value" when received. This is a complex process as it requires meticulous record-keeping and the ability to precisely identify when each portion of cryptocurrency was purchased or received.

The volatile nature of the cryptocurrency market, with significant fluctuations in value, further complicates the process of determining the "fair market value". For example, suppose a taxpayer owns two full bitcoins, with one-and-a-half bought in a bear market and the remaining half acquired during the subsequent bull market. Calculating the "fair market value" of those two bitcoins requires precise knowledge of when each portion was purchased and the corresponding market value at that time.

Additionally, the decentralised nature of cryptocurrencies, which are often held in multiple wallets or exchanges, adds to the complexity of record-keeping. This is in contrast to traditional investments, where financial institutions provide transaction data to the IRS, making it easier to track gains and losses. Cryptocurrency investors are responsible for maintaining complete historical records of their digital financial assets, which can be challenging given the dynamic nature of the market.

The lack of standardisation in the classification of cryptocurrencies also contributes to the complexity of crypto taxes. While the IRS has provided some guidance, such as treating cryptocurrencies as property, there are still many grey areas. For example, it is unclear when crypto mining becomes a business rather than a hobby, or how to handle taxation when a U.S. resident stakes cryptocurrency via an offshore server. These uncertainties create challenges for taxpayers trying to comply with the law and can deter even those with good intentions.

To address these complexities, crypto investors can seek guidance from experts familiar with the evolving landscape of crypto taxes. Software tools and platforms, such as CoinTracker and CoinLedger, have also emerged to help investors track their investments and navigate the tax implications. While these resources can provide valuable assistance, the overall complexity of crypto taxes remains a significant challenge for investors, requiring careful consideration and a proactive approach to ensure compliance with tax regulations.

Crypto is susceptible to fraud and theft

• Crypto exchanges are more vulnerable to being hacked and becoming targets of other criminal activity than stock exchanges.
• Safely storing cryptocurrencies is more difficult than owning stocks or bonds.
• Crypto is decentralised and based on blockchain technology, which means it is not backed by a government. If something happens to your wallet or your cryptocurrency funds, the government has no obligation to step in and help get your money back.
• Crypto is often used for quick payments, to avoid transaction fees that traditional banks charge, or because it offers some anonymity. This makes it an attractive target for criminals.
• Criminals are always finding new ways to steal your money using cryptocurrency. Common scams include demanding payment in cryptocurrency, guaranteeing profits or big returns, and impersonating businesses, government agencies, or a love interest.
• There is little regulation of the crypto industry.

Frequently asked questions