Financial professionals keep saying people shouldn’t rely on crypto investment. But why is crypto a lousy investment? Why can’t you rely on it?
About Crytocurrency
Cryptocurrency is an unregulated, decentralized form of currency that operates in a digital environment. One can use cryptocurrency as payment for goods and services or investment purposes. Banks or other institutions do not back cryptocurrencies but rely on a peer-to-peer network to issue payments and validate transactions.
The price of cryptocurrencies is determined solely by supply and demand; there’s no central bank to adjust the money supply (e.g., quantitative easing). Bitcoin was the first cryptocurrency ever created, released in 2009, followed by numerous other cryptocurrencies, including Ethereum, Ripple XRP Token, Litecoin, and, more recently, Binance Coin (BNB).
Top Reasons Why Cryptocurrency Is a Bad Investment
Crypto may seem like an attractive option for investors looking for some income from their traditional assets – after all, who doesn’t like making money while they sleep? – but there are several reasons why crypto is a bad investment.
Extremely Volatile
The first reason cryptocurrency is a lousy investment is incredibly volatile. The value of Bitcoin, for example, went from around $1,000 in early 2017 to nearly $20,000 by the end of the year, only to crash back down to approximately $3,500 by mid-2018. For anyone who didn’t cash out at the peak of the bubble, that’s a 90% loss within a short time. Even if you had cashed out at the top, you still would have seen your investment lose almost half its value within six months. Of course, those who held on to it have done well, but no way of knowing if it will double in the next five years or go down 90%.
The volatility of cryptocurrencies in the crypto market makes them a precarious investment. So if you’re thinking about investing in crypto, prepare to lose all of your money.
Lack Of Regulation
Another reason crypto is a bad investment is that any government or financial institution does not regulate it. Unfortunately, this lack of regulation means no protection for investors if something goes wrong. For example, if someone hacks a crypto exchange, there’s no guarantee that you’ll get your money back.
Similarly, there’s no regulatory body to oversee the trading of cryptocurrencies and risky assets; hence prices are highly manipulated. This was famously the case with Mt. Gox, once the largest Bitcoin exchange, which had to declare bankruptcy after losing 850,000 Bitcoins (worth around $460 million) to hackers.
Defrauding and scamming of investors by so-called “initial coin offerings” (ICOs), there is a stake in a new cryptocurrency project in exchange for their investment. Unfortunately, many of these ICOs turn out to be scams, with the promoters disappearing with the money and leaving investors empty-handed.
It’s also worth noting that even if a cryptocurrency is legitimate, there’s no guarantee it will be successful. There are currently more than 1,600 cryptocurrencies, and many are sure to fail.
Limited Usefulness
Another problem with cryptocurrencies is that they have limited usefulness. Unlike fiat currencies, which one can use to buy goods and services worldwide, you can only use most cryptocurrencies on a limited number of platforms. For example, one can use Bitcoin can only on a few hundred websites, and even then, many of those sites only accept it for a limited number of transactions.
This limited use means that there’s no real reason to hold on to a cryptocurrency other than the hope that it will appreciate.
High Cost of Entry
Another issue with cryptocurrencies is the high cost of entry. To buy even a small amount of Bitcoin or digital money, you need to invest hundreds or thousands of dollars or be technically savvy. This high cost of entry to buy bitcoin makes it difficult for most people to invest in cryptocurrencies.
It also means that those who invest are more likely to be wealthy individuals or institutions, which increases the risk of price manipulation.
Zero Cashflow Generation In Stock Market
Another reason crypto is a bad investment for crypto investors is that it doesn’t generate cash flow. This is in contrast to stocks, which pay dividends, and real estate, which generates rental income.
Without cash flow, investors have to rely solely on the asset’s appreciation to make a return on their investment. Unfortunately, this makes crypto a very speculative investment, so it’s often compared to gambling.
For this reason, you should avoid investing in cryptocurrencies unless you’re prepared to lose all of your money, or maybe you could do it in a regulatory environment.
Fiat Currencies Could Work On Blockchain
Cryptocurrencies have no fundamentals backing them. There is no tethering to anything real. A company might issue a cryptocurrency, but that doesn’t mean it has any intrinsic value or has only a small percentage.
The same goes for fiat currencies like the US dollar or the Euro. These currencies are not backed by anything either. They are simply pieces of paper with numbers printed on them.
However, fiat currencies do have some advantages over cryptocurrencies—first, the central bank issue these currencies, which can help to stabilize their value. Second, fiat currencies buy goods and services, which gives them some cash flow on their digital assets.
Blockchain technology could create a new fiat currency backed by asset classes like gold or oil.
Complicated Taxes On Cryptocurrency Earnings
Cryptocurrencies are also subject to complicated taxes. In the US, for example, capital gains tax applies to any asset that appreciates. So if you buy a cryptocurrency for $1,000 and it goes up to $10,000, you’ll need to pay capital gains tax on your earnings.
This can be a significant burden for investors, who may need to hire an accountant to help them file their taxes. Unfortunately, this is also similar to other countries.
Cryptocurrency Is Difficult To Value
The final reason crypto is a bad investment since it’s difficult to value. There’s no intrinsic value to a cryptocurrency, unlike stocks and real estate, which can be valued based on earnings and rental income, which has high-interest rates.
This lack of a valuation method means that there’s no way to know if you’re paying too much for a cryptocurrency or if it will even be worth anything in the future.
Conclusion
There are several reasons why investing heavily in cryptocurrencies is bad for most people. They’re incredibly volatile, lack regulation, and don’t generate any cash flow. They also have limited usefulness in real life. For these reasons, you should avoid investing in cryptocurrencies unless you’re prepared to lose significant value. But generally, there are several pros and cons of cryptocurrencies, so approach them carefully as it may make sense for you to invest some money.
