Cryptocurrency and the blockchain technology that underpins it may be in the process of revolutionizing our global monetary system and the way we do business. Amid tremendous uncertainty about the future, market volatility and dramatic monetary policy, there has been increased institutional interest in the myriad cryptocurrencies on the market over the last several months.
Crypto is often described as this generation’s dot com boom. With so many stories of crypto millionaires, it is little wonder that first-time investors are eager to get in and make their fortune. But crypto is not like investing in fortune 500 companies. Here are 5 reasons why crypto investing is not for beginners.
Crypto is Forex
Buying and selling cryptocurrencies is highly similar to buying and selling any other global currency. While crypto is not a tangible fiat currency like pound sterling or the U.S. dollar, it is subject to many of the same highly complex and variable micro and macroeconomic forces. Forex is widely recognized as one of the most difficult and complex assets to trade.
While all forex traders and investors have to start somewhere, and you are always going to be a beginner investor when you first start out, jumping into the forex market, more so than other markets, is almost a guaranteed way to lose money.
Crypto is Volatile
Investing in and trying to speculate on cryptocurrencies involves dealing with a lot of volatility. The short term and even daily price swings of cryptocurrencies can be extreme. They are subject to intense uncertainty and often a lack of information. One unfavourable announcement can cause dramatic market swings. In 2017 alone, for instance, Bitcoin fluctuated between $900 and $20,000 per coin.
Getting into crypto as a beginner investor, if you are not used to the stress of the markets and have never taken a loss, could crush your spirits. This is even more so the case with cryptocurrencies because of the high price of entry. One Bitcoin, for instance, is worth tens of thousands of dollars. That is a lot of capital to put up, regardless of how much money you can bear to lose.
Cryptocurrency Markets are Unregulated
Most asset markets are regulated by federal authorities. Debt is rated based on, among other things, the ability of the debt issuer to pay and their credit history. If you were to buy a debt issuance from a big company like Walmart or Apple, the debt would be rated by reputable rating agencies, and you would know what kind of product you were getting.
With cryptocurrencies, those sorts of assurances don’t exist. It is entirely “buyer beware” and it is often the least experienced buyers who end up taking the biggest hits.
Cryptocurrencies are Uninsured and Unsecured
Cryptocurrencies offer very little consumer protection. The FDIC (in the United States) and other federal insurance agencies are unlikely to insure cryptocurrencies any time in the near future. If you hold a brokerage account at a major bank or exchange in most developed countries and your funds are stolen or the bank becomes insolvent, they are insured up to a certain amount.
With cryptocurrencies on the other hand, what is lost is lost forever. Some crypto exchanges have been hacked with millions in coins stolen. Anyone with investments on those exchanges was left high and dry with no recourse.
Purely Digital Means Technical Difficulties
Crypto is an entirely digital asset. It is not like buying something tangible like gold bullion, or a barrel of oil, or even stock in a real company. There is nothing physical to take possession of with crypto, which is one of the most difficult concepts to grasp for beginners.
What’s more, the purely digital nature of the asset means that there are often technical difficulties that pose real problems to trading and investing. When there is a lot of market activity, the exchanges get bogged down and can be slow. Sometimes you are unable to withdraw your tokens and coins if an exchange gets too backed up. You can lose out on sale opportunities simply because the exchange wasn’t functioning properly.
Conclusion
As with any risky investment, you should only ever put up what you can stand to lose. You should never put the college fund, the second mortgage or the retirement into something like crypto, or any currency for that matter. Successfully navigating the crypto markets requires both quantitative and qualitative skills that most new investors simply don’t have. As we mentioned at the outset, all investors have to start somewhere, but crypto should be something you work towards, not your first step.