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Cryptocurrencies are having a moment. Youâve probably heard a thing or two about Bitcoin and Ethereum. Namely, their prices seem to be skyrocketing (or plummeting, depending on the day). Thereâs more to the story, and as the investing cliche goes: Donât buy what you donât know. So letâs find out more.
What Is Cryptocurrency?
Cryptography has to do with coding to keep data secure, and cryptocurrency is a digital or virtual asset that uses cryptography as a security measure. For that reason, itâs hard to counterfeit. Bitcoin is one of the first cryptocurrencies to hit the scene. It was launched in 2009 by âSatoshi Nakamotoâ, a pseudonym that could be a person or a group (it was open source and peer to peer). The thing is, thereâs no central agency (like the government) that issues or regulates these cryptocurrencies.
Which is why itâs been such an attractive option for shady business activities, such as money laundering. You can buy and sell it just like any other investment, from company stock to Beanie Babies. But while companies have IPOs, or initial public offerings, cryptocurrencies have ICOs, initial coin offerings, and any entity can launch it as an investment. The Atlantic illustrates the problem with not having a central authority regulating these currencies:
Last month, the technology developer Gnosis sold $12.5 million worth of âGNO,â its in-house digital currency, in 12 minutes. The April 24 sale, intended to fund development of an advanced prediction market, got admiring coverage from Forbes and The Wall Street Journal. On the same day, in an exurb of Mumbai, a company called OneCoin was in the midst of a sales pitch for its own digital currency when financial enforcement officers raided the meeting, jailing 18 OneCoin representatives and ultimately seizing more than $2 million in investor funds. Multiple national authorities have now described OneCoin, which pitched itself as the next Bitcoin, as a Ponzi scheme; by the time of the Mumbai bust, it had already moved at least $350 million in allegedly scammed fundsâŠAs they put it, âICOs are catnip for scammersâ because there are no checks and balances the way there are with IPOs. So if youâre going to invest in a coin, which is an iffy enough move as it is, you certainly want to make sure itâs not just any random cryptocurrency that could just be a scam.
So what about tokens like Bitcoin or Ethereum, which are popular, widely covered options? (And that are actually used as currency.) Are they smart investments?
Is Cryptocurrency a Good Investment?
Some people say investing is like playing the lottery. Thatâs not entirely accurate, though. Long-term, broad investing, the kind that will help you build a nest egg over time, is very different from speculative, active trading, which is a lot more like gambling. Cryptocurrency, a volatile, unpredictable investment, falls into that category.
With active trading, youâre taking a guess at how a specific investment (or investments) will trade on a short-term basis. The goal isnât to simply keep up with the stock market like it is with long-term investing; the goal is to make a bunch of money and get rich quickly. And you know, some Bitcoin and Ethereum investors did get rich quickly! Seems like a good deal, right? But the thing is, the price of these cryptocurrencies often swings from one extreme to another. (In one day in June, the price of Ethereum plummeted from $US319 to $US0.10!)
Plus, any time the value of something skyrockets too quickly, a bubble often follows, and thatâs exactly what Forbes contributor Clem Chambers predicts:
âCrytocurrencies, of which bitcoin is the leader, will fall back in value and more than the fat drop bitcoin has already had.â
Not to mention, thereâs also the old investing adage: âBuy low and sell high.â If you bought Ethereum right now, youâre buying high. If you still need reasons to avoid it, though, the Motley Fool makes a good case for keeping digital currency out of your portfolio: Your investment options are limited, there arenât any safety protocols, and most of us donât really completely understand how they work. âMost people have no clue how Bitcoin or Ethereum work, or understand how theyâre challenging monetary theory. Thatâs a dangerous formula for volatility and potential money loss,â writer Sean Williams says.
The bottom line: Get rich quick schemes rarely work out well. Sure, people occasionally win the lottery, but for most of us, investing shouldnât feel like playing the lottery. It should be a long game, allowing you to gradually build wealth over time with much less risk.
How to Buy Cryptocurrency
That said, if youâre going to invest in cryptocurrencies anyway (maybe you donât want to replace your entire retirement portfolio, you just want a small taste), weâve written an article on how to go about it:
Inc.comâs Brian Evans also recommends BTC Markets for Australians looking to trade Ethereum, Bitcoin or Litecoin.
These websites will also let you sell your coins when youâre ready. If you have extra cash to invest on hand, it might be an interesting experiment. Iâve dabbled in day trading myself, just to understand it better, and while I earned a decent return in a short amount of time, I also lost a lot of money after that. Over time, it all evened itself out. Some short-term investors have much better luck; others have much worse luck. The point is, you donât want to put most of your money to work this way.
You might get lucky with these new, shiny investments, but in reality, wealth building is pretty boring: Buy some broad, diverse funds and hold onto them over the years. It isnât quite as sexy as cryptocurrency, but itâs probably a safer bet for your hard-earned cash.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.