The Risk & Obsession with Cryptocurrency
Anyone who knew about Bitcoin seven years ago and didn’t do anything is surely kicking themselves. If you invested just $10 in December 2011, your holdings would be worth roughly $55,000 today. (If you’re counting that’s 5500% growth. How’s your 6–8% IRA looking now?)
That sounds great! Everyone should start pouring their life’s savings into cryptocurrency, right?
Well, let’s slow down a bit… What is Bitcoin?
Understanding Cryptocurrency
Understanding Bitcoin and cryptocurrency really starts with understanding that currency isn’t real. We’re often led to believe that all currency is backed up by gold and precious metals somewhere hidden away. That’s not always true.
An issue with online currency is double spending, a fraudulent technique of spending the same amount twice. With other digital currencies and online spending, there is a third party involved to control this. Currency goes from party 1 to party 3 where it is held until being released to party 2.
Cryptocurrency is a peer-to-peer electronic cash system. Instead of having a third party, it is entirely decentralized with no central servers and no controlling authority. Without a third party keeping a ledger of balances and transactions, there needs to be a way to monitor and avoid double spending. In cryptocurrency, every participant does this job via the Blockchain, which is a public ledger of all transactions to happen on that network, available to everyone.
In a cryptocurrency network, miners solve a cryptographic puzzle. They take transactions and can mark them as legitimate. Once those transactions are confirmed, they are spread across the network so everyone knows and the miner gets compensated via cryptocurrency.
Dot Com
Let’s take a trip back to the 90s. Amazon.com was founded in 1994 and kicked off the internet bubble.
Not a decade later, in March 2000, NASDAQ Composite index peaked at 5132.
Within a few weeks, the stock market lost 10% of its value. Companies with billions at IPO (initial public offering) were worth nothing in a matter of months.
How did this happen?
Investors assumed a company operating online would be worth millions — it was the new trend! How could anything go wrong?
They got so excited about the potential gains of finding the next huge dotcom, they forgot basics of investing. There were two main factors that fueled their errors:
1. Investors used metrics ignoring cash flow
2. Investors significantly overvalued stocks
“The world’s largest bank, HSBC Holdings, conducted research on the P/E ratios of newer, tech-savvy companies. According to their findings, these newer companies were overvalued by 40%. In fact, the only way these stocks could have been properly valued would be if their revenues grew by 80% a year for five years. However, this would probably have been an impossible standard for any company to meet, given that even Microsoft only averaged a little over 50% a year.” -Money Crashers
You can avoid getting burned by a burst
Remember:
1. Popularity does not equal profit
2. Focus on sound business models
Back to Cryptocurrency
Anything you invest in is going to come with a risk. Stocks can crash as can the housing market. Your money will always be the safest in a savings account, but it isn’t working for you there.
Right now, you can come out ahead by playing your cards right with cryptocurrency. There’s also a chance it will burst, and everything will plummet in a month.
So, what should you do?
1. Research. As with any purchase & any investing you do you should put a lot of time into researching the markets and the networks before jumping the gun.
2. Take it slow. Start slowly while you’re still learning. Don’t dump your life savings into Bitcoin right off the bat.
3. Diversify. Like with stocks, it’s key to not invest all your fund into one currency. Try to find a group of currencies and spread out your funds.
4. Cash out. You have to be ready to cash out when it hits a high and then jump back in on a low or reinvest in another currency.
5. Prepare for loss. You’re pretty much guaranteed to lose money at some point going in to this. It might be a lot or it might be laughable. There isn’t always something you can do to avoid it.
Wrap Up
In addition to sounding cool, cryptocurrency could make you a ton of money if you go about it the right way. As we’ve seen in the past, though, there’s also a chance the bubble could burst, and everything plummets within a week. Pay attention to trends and do your research before investing and never invest more than you’re willing to lose.
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