Bitcoin and other cryptocurrencies are booming right now. Maybe they don’t always offer the best return on your investment on some days, but there’s enough media hype surrounding this new type of currency that it’s almost impossible to not hear about it. Cryptocurrencies are not for everyone. Should you invest in cryptocurrencies? Here are three reasons why you might want to sit this craze out.
There’s Bitcoin, which is typically worth anywhere between $12,000 and $20,000 per unit in current markets. And others, including Litecoin, Ethereum, and Ripple. As you can see, there are plenty of options for investors to consider, using the popular trading platform Coinbase.
But, are cryptocurrencies really worth investing in? It seems like everyone these days is trying to get rich off of Bitcoin, but countless people are losing money while a lucky few make millions in the cryptocurrency market. Given how confusing, volatile, and wildly unregulated most cryptocurrencies are currently, here are three reasons why you should avoid investing in cryptocurrencies, despite the potentially high rewards.
Why You Shouldn’t Invest in Cryptocurrencies
The Market is Too Volatile
In December 2017, the value of Bitcoin dropped by a third in just one day. Can you imagine if other investments in your portfolio were this volatile? It wouldn’t even be worth taking on the risk of invest in Bitcoin and cryptocurrencies at that point!
Unfortunately, for new investors, the volatility is likely to remain a huge problem for cryptocurrencies. The news changes all the time. One day, cryptocurrencies are crashing, with 10-30% decreases in value in the span of 12-48 hours, while on other days, some cryptocurrencies skyrocket in value.
Perhaps there’s a reason why Warren Buffet refuses to invest in cryptocurrencies. These types of currencies are predominantly unregulated by federal governments or even global markets. This means even the slightest change to this situation, such as a country announcing they will start regulating cryptocurrency exchanges or a major corporation announcing they’ll start accepting one type of cryptocurrency from customers, leads to massive changes in the currency’s value, for better or worse.
While you might want to add a small portion of cryptocurrencies to your portfolio, be sure to complement these high-risk investments with several safe investments like bonds to cushion your portfolio against the wild rises and falls in cryptocurrency trading.
There are Too Many Options
There are hundreds of different cryptocurrencies currently in existence. Some are worth thousands of dollars, while others are worth mere pennies. The problem with cryptocurrencies is that they’re not issued by central banks, backed by federal governments. Instead, they’re created by tech-savvy investors or completely unknown individuals who claim they wanted a “currency of the future” that wouldn’t be subject to the same physical constraints as cash and fickle monetary policies of federal reserves and banks.
While this sounds like a good idea in theory, in practice it’s much more complicated. For instance, just about anyone with the know-how and technology can create a cryptocurrency. For example, Jackson Palmer’s creation of Dogecoin, a “joke cryptocurrency” based on the Internet meme of a Shiba Inu dog. It has now reached a market value of $2 billion total.
Just because some lucky folks, like this kid who invested birthday cash into Bitcoin when he was 12 years old, are getting unbelievably rich off of cryptocurrency trading shouldn’t be seen as “proof” of the wonders of crypto investments. There are too many “altcoins” on the market at the moment. There are too many factors influencing the value of cryptocurrencies, and too many investors pouring money into ICOs (“initial coin offerings”) without any legitimate value or clear future for these types of currencies.
You might be missing an opportunity to get rich quick to invest in cryptocurrencies by sticking to stocks, bonds, and mutual funds. But, at least you won’t risk losing most of your money if cryptocurrencies plummet in value as more governments attempt to regulate trading.
Cryptocurrency Mining is Bad for the Environment
Mining Bitcoin and other cryptocurrencies demands an extraordinary amount of electricity. In 2017, Bitcoin miners were using up more electricity than entire countries in some cases, solely because mining practices demand ever-increasing amounts of computational processing power. What this means is that the energy footprint of cryptocurrency mining operations is growing at a rapid rate. Unless they switch to cleaner sources of energy, they’ll continue hurting the environment and driving up the costs of electricity for other consumers along the way.
While the monetary value of socially and environmentally conscious investing is debatable, those who genuinely care about protecting the environment should avoid investing in energy-devouring ventures like cryptocurrencies. Even if you’re just trading virtual currencies, your participation in the market still plays a role in increasing demand for more cryptocurrency mining.
Final Thoughts on Cryptocurrency Investing
Cryptocurrencies are not for everyone. We don’t know if Bitcoin will be worth $50,000 in a couple years or maybe worth just $5. Why risk the stability of your investment portfolio when there are still plenty of other, less volatile options available?
Until the markets stabilize, try to limit your cryptocurrency investments to a minimal portion of your overall portfolio to protect yourself from potential crashes in the future.