Bitcoin and cryptocurrency have been dominating market conversations in recent months, with people either jumping on the bandwagon or standing on the sidelines wondering, "Am I missing out?" However, is this "new money" trend just another "here today, gone tomorrow" investing opportunity?
Cryptocurrencies are a relatively new investment vehicle, having only been around a few years, so making well-informed decisions on whether to invest can be challenging at first glance. However, if you look closely, there are signs that show it might be too good to be true.
Factors Behind the Bitcoin Craze
Bitcoin has only been around for about 12 years, but it has already garnered a reputation as an investment craze. The cryptocurrency first came on the scene in 2009. It wasn’t worth much; in 2010, its value just 8 cents (opens in new tab). Now, 12 years later, it is valued at over $32,000 each (as of late June), translating to a compound annual growth rate of over 200%. (opens in new tab) What’s more, bitcoin was recently trading over $60,000 each, (opens in new tab) and high spikes in value are not uncommon for the currency.
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Some people speculate that Bitcoin's growth is due to a worldwide shortage of money, looming economic problems or the fact that there is no way for governments to track transactions. Others claim that its popularity is driven by the mass actions of people who fear missing out on what might be this generation's most significant wealth opportunity.
Regardless of why they have become so popular, you must understand your reasons for investing in cryptocurrency before you pour money into this asset class. Be sure to consider the factors that suggest bitcoin and cryptocurrency may be another fad investment.
Bitcoin Will Not Replace Paper Currency
There is a notion many people buy into that Bitcoin and cryptocurrency at large will replace paper currency. However, they are inherently different from paper currency. For one, there will only ever be 21 million bitcoins in the world, meaning that its supply is finite.
Another reason why bitcoin can never replace paper currency is the volatile nature. Its fluctuation in value is largely, if not completely, influenced by social media buzz. Celebrities such as Elon Musk (opens in new tab) have tweeted about bitcoin, sending its value soaring or falling within a business day. That sort of volatility and instability is simply not something characteristic of a currency that could feasibly replace paper currency. During a recent survey by Bank of America, 74% of the respondents (opens in new tab) with a value of $500 billion assets under management said that Bitcoin is a bubble poised to pop.
Cryptocurrency Lacks Regulation
Cryptocurrency and Bitcoin are not regulated by the government, banks or any other central authority. It also means there are no consumer protections on cryptocurrency transactions. If you send your bitcoin or any cryptocurrency to a scammer today, you will never see it again. They can take all your money because they don't have a central authority to stop them.
Bitcoin and cryptocurrency technology have no regulatory bodies that monitor the currency for fraud or other illegal activity. As such, it's open season on bitcoin transactions. It's the perfect environment for scammers looking to make some money from unsuspecting individuals who have little understanding of the severity of their actions. Since October 2020, cryptocurrency scams have soared 1,000% (opens in new tab).
Previous Trends Indicate It's a Fad
In 2000, there was a rush to invest in tech stocks and real estate. The dot-com bubble burst in 2001, and many people lost everything. During this period, many of the "successful" investors made money by shorting stocks or buying foreclosed homes.
Similar to cryptocurrency now, there is a sense of FOMO (fear of missing out). Signs can be seen all over advertising the sale of bitcoin, and it’s a hot topic on social media and online forums, but ultimately, we’ve seen this buzz before. Many are going to make hurried buying decisions without considering the long-term implications.
It's a Speculation Investment
Most people are getting into the cryptocurrency market because of the buzz surrounding it. Media outlets and celebrities are praising Bitcoin, and because of this, many people are following suit. They're not investing for any particular reason, rather, they want to get in on the hype.
The problem is that people see cryptocurrency as a true investment rather than a speculatory one. Speculation occurs when a person buys something with limited knowledge or information about its value or what they individually stand to gain or lose through the purchase. Instead, they are following the appeal of the masses.
Investing, on the other hand, takes a deeper understanding of an asset and its value. It's what people do with stocks or real estate to earn money over time. Investing for the long term also means understanding how and why each investment is working for you.
Currently, a cryptocurrency investment is more closely related to gambling or betting than investing, and for most, it is not a solid or long-term investment plan.
The Bottom line ...
Always invest with the right mindset. Don't hurriedly invest in cryptocurrency because everyone else is doing it. Instead, think about your motives:
- Do you want to make money in the short term or over the long term?
- What is your time horizon for this investment?
- How much do you know about the asset class and Bitcoin specifically, including its risks and rewards?
- Do you have any personal experience with blockchain technology outside of investing?
- What is your risk tolerance?
As you answer these questions, you'll realize that much of what fuels the Bitcoin craze has no long-term foundation. In the long run, this bubble is poised to pop.
If you want to invest in Bitcoin, don't do it out of FOMO, but take your time to attain the necessary knowledge. Consider talking to your financial adviser for advice to help determine where it fits into your portfolio. Also, have an open mind and know when to get out of the market before losing all your investment.
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