Cryptocurrency: A Risky Investment Bet You Should Avoid

Investing in cryptocurrency is a risky business. It's highly volatile, difficult to value, bad for the environment, and complicated when it comes to taxes. It's also unregulated, vulnerable to fraud and theft, and not backed by tangible assets. On top of that, there's no guarantee that the crypto project you invest in will succeed, and even if it does, there's a chance that regulators may crack down on the entire crypto industry.

Cryptocurrencies are historically volatile

Cryptocurrency prices are historically volatile, rising and falling quickly. Even the most well-known currencies like Bitcoin are subject to wide swings from day to day. For example, in 2022, Bitcoin fell more than 75% from its all-time high. In a single day, its value dropped by 30%. In 2016, the price of Bitcoin rose by 125%, and in 2017, it rose again by more than 2,000%.

Other cryptocurrencies also experience wide swings. Ethereum saw a price above $4,000 in May 2021, but by July of the same year, the price had dropped to just under $1,800. Smaller currencies, like Dogecoin, might see even more dramatic swings.

The volatility of cryptocurrencies is often compared to that of mainstream markets, but the two are in different leagues. Cryptocurrencies lack the robust ecosystem of institutional investors and large trading firms that traditional financial markets have. This lack of liquidity, combined with heightened volatility, can be a dangerous combination.

There are several reasons why cryptocurrencies are so volatile. Firstly, like most commodities, assets, investments, or other products, their prices depend heavily on supply and demand. As an asset, cryptocurrency is quickly adopted by investors and traders, so speculation about price movements plays a critical part in its value at any given moment. Media outlets, influencers, and industry moguls can easily influence investor concerns, leading to price fluctuations.

Secondly, the price of cryptocurrencies is based entirely on speculation, which is essentially educated guesswork. Without anything intrinsically valuable backing up the currency, its market value is highly sensitive to slight changes in investors' expectations or perceptions.

Thirdly, the regulatory environment for cryptocurrencies is still evolving, and there is a lack of basic consumer protections. For example, crypto exchanges don't have circuit breakers, which automatically pause trading when prices dive too quickly. Crypto markets also trade 24/7, so dramatic dips can happen at any time.

Lastly, the movements in cryptocurrency prices seem random and do not follow any fixed pattern. This makes it difficult for investors to keep track of the fundamentals and predict future price movements.

Due to the volatility of cryptocurrencies, investors should proceed with caution and only invest what they can afford to lose.

They are difficult to value

Why Investing in Cryptocurrency is a Bad Idea: They Are Difficult to Value

Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. However, this lack of central authority also makes them difficult to value, as they are not backed by physical assets or government decree.

Supply and Demand

The value of cryptocurrency is determined by supply and demand, just like any other commodity. If demand increases faster than supply, the price goes up. Cryptocurrencies gain value when demand rises higher than supply. For example, if a cryptocurrency unveils a new utility that draws new users to the platform, the value of that cryptocurrency will increase.

Lack of Central Authority

Cryptocurrencies are not backed by tangible assets or government decree, which means their value is based purely on speculation. Traditional currencies such as gold and silver had value because they were considered precious metals, while fiat currencies derive their value from the power of the government. Cryptocurrencies, on the other hand, are based on decentralised systems that do not have a single point of failure, which makes it difficult to predict their value.

Volatility

The price of cryptocurrencies can be extremely volatile, with wide swings from day to day. This makes it difficult to come up with a consistent valuation method and to predict future prices.

Limited History

Cryptocurrencies are a relatively new phenomenon and do not have a long history like many other asset classes. This lack of historical data makes it challenging to identify patterns and make informed investment decisions.

Difficulty in Comparison

The unique characteristics of cryptocurrencies, such as their decentralised nature and lack of physical backing, make it difficult to compare them to other asset classes. This makes it tricky to determine a value that makes sense in relation to more traditional investments.

In conclusion, investing in cryptocurrency carries a high level of risk due to the difficulty in valuing these assets. The lack of central authority, volatility, limited history, and difficulty in comparison to other investments all contribute to the challenge of assigning a value to cryptocurrencies. As such, individuals considering investing in cryptocurrencies should proceed with caution and be aware of the potential for significant losses.

Crypto is bad for the environment

Cryptocurrency is bad for the environment, and here's why.

Cryptocurrency mining uses a lot of electricity. For example, Bitcoin mining consumed 173.42 Terawatt hours of electricity during 2020-2021, which would rank 27th in the world in terms of energy consumption if Bitcoin were a country. This heavy reliance on electricity has a significant carbon footprint, with an estimated 85.89 million tons of CO2 emitted during the 2020-2021 period. To offset this, billions of trees would need to be planted, covering an area almost equal to the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

The problem is further exacerbated by the fact that many of the power plants supplying this electricity are run using fossil fuels. For instance, coal accounted for 45% of Bitcoin's energy supply mix during the 2020-2021 period, followed by natural gas at 21%. This means that cryptocurrency mining is contributing to the use of non-renewable energy sources and the associated negative environmental impacts.

It's not just the carbon footprint that's an issue. Cryptocurrency mining also has significant water and land footprints. The water footprint of Bitcoin mining during 2020-2021 was equivalent to the amount of water needed to fill over 660,000 Olympic-sized swimming pools, and the land footprint was 1.4 times the area of Los Angeles.

The environmental impact of cryptocurrency mining is so significant that it has caught the attention of scientists and policymakers alike. A study by United Nations scientists found that the environmental impacts of Bitcoin mining are comparable to the gold rush, with major consequences for climate, water, and land. This has led to calls for urgent regulatory intervention and technological breakthroughs to mitigate the negative impacts of the rapidly growing digital currency sector.

In summary, cryptocurrency is bad for the environment due to its heavy reliance on electricity, often generated by fossil fuels, and the resulting significant carbon, water, and land footprints. The environmental impacts of cryptocurrency mining are likely to persist unless regulatory and technological interventions are implemented to improve the efficiency of the global financial system and reduce its harm to the environment.

Cryptocurrencies are prone to fraud and theft

Cryptocurrency wallets can be hacked, and the currency stolen. Criminals can also set up fake wallets and phony exchanges to dupe investors. The anonymous nature of cryptocurrencies means that once the currency is gone, there is little chance of recovery.

There are also many scams and Ponzi schemes that prey on those looking to invest in cryptocurrencies. These often take the form of Initial Coin Offerings (ICOs), where the perpetrators inflate the price of a new cryptocurrency and then abandon the project, selling off their own shares and leaving investors with nothing. The lack of regulatory measures and the pseudonymity of transactions make it difficult to identify and take legal action against these scammers.

Another common scam is the "pig butchering" or "pig slaughtering" scam, where the victim is gradually lured into making increasing contributions to a fraudulent cryptocurrency scheme. This scam originated in China and has proliferated in Southeast Asia amid the COVID-19 pandemic.

The Securities and Exchange Commission (SEC) regularly issues investor alerts about fraud surrounding cryptocurrencies. One famous example of a crypto Ponzi scheme was the Bitconnect craze that ended with over $2 billion in fraud at the beginning of 2018.

There is a lack of regulation

Investing in cryptocurrencies is risky, and one of the main reasons for this is the lack of regulation in the market. The crypto market is often described as the ""Wild West", owing to its largely unregulated nature. This lack of regulation is a key factor in the slow uptake of cryptocurrencies by mainstream investors and financial institutions.

The crypto market is susceptible to fraud and theft, and without regulation, consumers are vulnerable to these risks. Smart contracts, for example, can include code that diverts funds in crypto transactions, resulting in theft. The lack of regulatory clarity also threatens to slow down innovation in digital payment options, cutting off consumers and businesses from new conveniences.

The regulatory environment for cryptocurrencies is inconsistent and fragmented. While some countries have enacted total bans on cryptocurrencies, others have targeted specific derivatives or promotions. This inconsistency makes it difficult for investors to navigate the market with confidence.

The call for regulation is not about determining what is illegal, but rather about applying existing regulations to digital assets and determining which agencies are responsible for policing bad actors. Regulatory authorities need to act quickly to manage the risks associated with crypto, while also being careful not to stifle innovation.

The lack of regulation in the crypto market is a significant concern for potential investors. It exposes them to unnecessary risks and makes it difficult to assess the fundamentals of cryptocurrencies. As a result, many orthodox financial planners advise their clients to stay away from cryptocurrencies altogether.

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