The Risks of Cryptocurrency in Terms of Investing
Here are some things to think about before buying cryptocurrencies like Bitcoin. This quick list will help you clear away the hype and consider risks.
NOTE: This isn’t a “don’t buy Bitcoin page.” This is a sober look at some risks of buying and investing in bitcoin.
- Jamie Dimon isn’t just being salty when he warns of cryptos, he is also giving responsible dad advice (with him being a parent and being the CEO of a sort of paternal-to-the-world institution). That is, one should be prepared for this “not to end well” (due to factors we will reiterate below). Not ending well could be BTC settles in at $2,500 from $6,000 for years, it could be strict rules in major countries, it could be a problem over forks and coding errors, it could be news related, it could be better tech, etc. Bitcoin is a really solid asset, but there are many things that could go wrong, and thus some level of caution is sensible.
- The coin market is speculative. Not just ICOs and Alts, but Bitcoin, Ether, Litcoin, etc. All of it (except maybe Tether and coins meant not to be speculated on).
- Bitcoin has fundamental value (as do other cryptos), but that doesn’t specifically justify a given price; Coins aren’t traded based on any sort of fundamental metric (they are essentially valued based on pure supply and demand). Block chain, the ability it takes to mine, the ability to be used as payment anywhere in the world, a limited supply (minus the forks), the agreement that they have value. These things give crypto worth. However, making the argument for a given price on a given day, that is a whole other story. I justify BTC’s price any day… but like, that was true in 2012, 2014, 2016, and 2017. In words, one can always justify the price.
- The coin market’s low-ish volume and and lack of regulation makes it near impossible to avoid market manipulation (specifically spoofing). Sometimes a price hike is pure excitement, sometimes a drop is well reasoned and based on a current events… but sometimes it is that there aren’t a ton of buyers and sellers and some big players are literally pumping and dumping coins (either via the market or via news outlets; when done in the markets in a certain way its called “spoofing”… there is a ton of spoofing in crypto because there is no Dodd Frank protecting against it like there in more regulated finance). No coin avoids being toyed with. That doesn’t meant the demand and value isn’t real in crypto, but that does mean sometimes the excitement and fear is partly manufactured. No one regulates coins, so only volume can really combat this (or regulations on exchanges… which is like, what Russia and China are doing by centralizing exchanges).
- Governments and banks are likely going to embrace crypto… but like, embrace it tightly in their hands as they regulate and tax it. Optimists will tell you that the world’s coin community will go set up shop on John Gault island with Julian Assange and live in a socialist utopia and libertarian utopia where everyone gets or earns a pony according to their tastes and thus finally be free from the tyranny of governments… but realists will recommend you brace for the inevitable (and already somewhat present) regulation. Satoshi was right in this respect, growing coins too fast, too much attention, that isn’t great for coins. A slow and steady pace and reasonable rules is likely the only viable path forward for cryptocurrency.
- It is near impossible to tell which coin will be the winner in the long-run. You can be right about crypto, but wrong about the coin. If you diversify, you could pick one right coin and a few wrong ones (which will hurt your gains); Or, you could be wrong about crypto, and that will hurt your gains. Being right and going long and buying low and selling high is actually not super easy to pull off.
- Taxes can be murky. One last risk of sorts is taxes. If your generate short term capital gains, and then lose money invested one year in the next, you could be in a situation where you owe money you don’t have. Everyone who invests in Bitcoin should know the basics of Bitcoin and taxes.
The Bottomline: Assuming you keep your coins in an offline wallet, you don’t have much to worry about as far as the tech goes. The problems with Bitcoin are more about governments and markets than the technology itself. The reality is, people get a bit manic over cryptocurrency. Makes sense, the rapid growth in value of an asset will do that to the best of us. However, that mania is like, the type of behavior that is the marker of an economic bubble. Pair that with the other risks of cryptocurrencies like Bitcoin and there is real reason to be wary when you invest. Be bullish, shoot for the moon, and enjoy… but don’t be naive and ignore the risks (by for example going long with your life savings without putting stops in).