Cryptocurrencies are an interesting investment option. Stories of investors increasing their investment massively entice investors to gamble on cryptocurrencies, but there are also stories of massive losses. Bitcoin is up 200% this year, but the currency also dropped over 80% last year.
Bitcoins, like all tokens, are a high-risk investment under current market conditions on any trading platform.
Why?
1. Fluctuations Are Common
Bitcoin is a risky investment that rose to near $20,000 a coin before losing 80% of its value and then rising over 200% in 2019. The cryptocurrency rises and falls rapidly, and as an investment, this may mean that all of your initial investment is wiped out quickly.
The steep fluctuations make cryptocurrency a volatile investment option. For someone that may want to invest in their future or retirement, cryptocurrency may not be the best option.
2. Emotions Fuel Trading
Cryptocurrencies are not tied to physical assets, so they are volatile in nature. Prices can jump or fall quickly on the emotions of investors. Retail investors are known to trade on emotions, so as long as cryptocurrencies are not tied to a basket of assets, these emotions will dictate trading trends.
3. Lack of Regulation and Oversight
Cryptocurrencies are strong because they lack centralization, but this lack of centralization has also led to a lack of regulation and oversight. The Securities and Exchange Commission (SEC) has openly stated that there’s little they can do if fraud occurs.
Since many of these investments occur overseas and the currency is designed to be anonymous, recovering your investment from fraud can be impossible.
4. People Don’t Understand How It Works
Warren Buffett recommends choosing investments that you know and understand. You need to know how an investment works, and a lot of people have no clue how cryptocurrencies work. One study found that 80% of people have no idea where to even purchase virtual tokens.
Some 44% of people didn’t know what cryptocurrencies are.
You need to be willing to do your research to understand how these currencies work, why regulation may be bad and also where you should purchase virtual currencies. If you don’t understand cryptocurrencies, they’ll always remain a high-risk investment for you.
But cryptocurrencies do have the potential to provide substantial returns, or you can lose 80% of your investment value as many investors experienced in 2018 with bitcoin.
