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. 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%. What’s more, bitcoin was recently trading over $60,000 each, and high spikes in value are not uncommon for the currency.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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 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 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%.
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.
-
Dow Soars 600 Points as Trump Retreats: Stock Market TodayAnother up and down day ends on high notes for investors, traders, speculators and Greenland.
-
12 Tax Strategies Every Self-Employed Worker Needs in 2026Your Business Navigating the seas of self-employment can be rough. We've got answers to common questions so you can have smoother sailing.
-
7 Hybrid Adviser Services, ReviewedThese hybrid adviser services aim for a sweet spot that combines digital investing with a human touch.
-
This Overlooked Diversification Tool Can Build Resilience Into Your PortfolioMunicipal bonds can provide a steady income and stability that's separate from federal shifts and global economic headwinds.
-
What Will Happen to Your Business When You Retire? How to Exit Successfully and Thrive in RetirementStepping away from work is extra challenging when you're a business owner, and a successful retirement requires planning that looks beyond the financials.
-
Beyond the Bar: Your 5-Step Guide to Discovering Whether a Lawyer Is ShadyResearch shows you can't rely on some state bar websites to vet a lawyer you're considering hiring. Here's how to check out a lawyer before you hire.
-
6 Practical Steps to Help Keep Your Student Focused on College Rather Than the Financial StrainToo many students drop out due to financial strain. This plan can help families plan for the costs and get timely aid that sees students through to graduation.
-
Are You the Doer or the Visionary of Your Advisory Practice? Here's How You Can Make the Leap to Chief Vision OfficerThe key is to transition from a tactical "doer" to a strategic "chief vision officer" by building the teams, processes and brand so your practice can grow.
-
You've Heard It Before, But This Investment Advice Still Pays Off"Time in the market beats timing the market" — been there, done that, right? But don't write off the underlying advice. There's a reason it's a popular saying.
-
Are Clients Asking About Adding Crypto to Their Retirement Plans? This Is How Advisers Can Approach This New 401(k) FrontierAdvisers need to establish clear frameworks to address client interest, navigate risks like volatility, and ensure they meet their fiduciary responsibilities.
-
3 Niche Oil and Gas Investments for Next-Gen Wealth BuildersLesser-known segments of the oil and gas sector present unique opportunities for next-gen investors and family offices, as long as they're vetted thoroughly.
