These days, investing in a cryptocurrency is a lot similar to investing in a start-up. Because of how innovation works, most of the current projects likely won’t be around in the next five years.
Cryptocurrencies remain highly speculative assets, and you would need a high-risk tolerance before you expose yourself to them. This is why you should always do your homework before investing in any asset. If you’re going into cryptocurrencies, it’s good practice to read everything you can find about them, including the challenges that the cryptocurrency and the market may face. You should not be tempted to jump in for fear of missing out. It may be a great investment opportunity, but a bit of upside usually comes hand in hand with a lot of risks.
Nowadays, people looking to invest in Bitcoin or other cryptocurrencies are emulating the behaviour of real estate investors back in 2008. Investors are borrowing large amounts of money to be able to invest in Bitcoin. Because people are taking on debt to invest in something speculative, it’s a sign for regulators that a bubble is forming. And from these bubbles usually come the worst crashes and depressions.
There is a considerable risk of using borrowed money to invest in a speculative asset that regularly experiences price falls. You can end up in more significant debt than you first began with.
Additionally, most cryptocurrencies are not insured by any regulatory commission, although some digital wallet services are starting to offer insurance to manage risk to some degree. Just how much protection they can provide is yet to be seen, though.
And then comes the volatility that the cryptocurrency market is well known for. The price swings they experience can come to a 50% drop in value in a single day. This event would have caused trading down if it happened to the New York Stock Exchange. The dramatic price drops are part of the reason why regulatory agencies have suspended trading in securities of crypto-related companies.
But many experts say that it would only take a matter of time before governments and monetary authorities take an interest in taking control of cryptocurrency networks. Despite what most people believe, though, cryptocurrencies being taken over by the government might not be so bad. After all, there are some aspects in a decentralised economy (like payment system and money supply) that will eventually need the management of a governing body in order for it to work.
Without any intervention, cryptocurrencies become unprotected against inflation, deflation, and possible recessions. If a cryptocurrency is unable to change its money supply, then it runs the risk of instability. You wouldn’t want the value of your money in the bank to suddenly be cut in half overnight. A decentralised money supply may seem like it can give absolute freedom, but when your money changes value today, you can’t exactly call it freedom.
At the moment, though, the technology that we use for payment systems is still too outdated for us to adopt cryptocurrencies as the norm for payments. Experts believe that eventually, governments will adopt a distributed ledger technology and use it as the backbone for a new payment system that can account for the usage of cryptocurrencies. For example, the Bank of England is currently researching how to adopt ledger technologies, while Singapore has reportedly already made the switch. Even the International Monetary Fund is looking into it.
Some experts tout digital currency as the way forward for the world of finance. If you agree with that sentiment, cryptocurrencies are an excellent start to help you future-proof your portfolio.
There is no doubt that the cryptocurrency market and the technology that it has pioneered is here to stay. But it may look very different in the next five to ten years. It would be wise to keep this in mind so that you can avoid falling for all the hype around newly established cryptos.