The previous articles covered the stock investment strategy and diversification into bonds and real estate. This article will cover another diversification opportunity: crypto.
Nowadays, with Bitcoin ($BTC) at an all-time high and close to $100k, crypto is also peaking in popularity.
Cryptocurrencies are rarely used for payments. They are held as investments, and the holders (or “hodlers” as they refer to themselves) rely on the value increase.
Unlike stocks, where you own a slice of a company that sells products and generates profits, or with treasury bonds, where the government guarantees the principal and the yield, in crypto, the value of an asset is exclusively dictated by the whims of the market; it does not rely on any underlying value.
In his bestseller Sapiens, Yuval Noah Harari explains how money holds no intrinsic value (you can’t eat it; it doesn’t put clothes on your back). Still, its value comes from the shared belief of humans that assign a precise value to it.
Similarly, Bitcoin holders share the common belief that it holds the value traded on the market. Depending on their change in belief, at any point, it can go up or down 10x; if you look at the historical data, you’ll see that it did go up to $18k, then down to $3k, then up to $60k, then down to $13k, and now finally to $100k.
The fantasy of being there in 2009, buying Bitcoin at $0.10, selling it today at almost $100k, and becoming a billionaire is precisely that: a fantasy.
It’s technically impossible in a saturated market like today’s for Bitcoin or any other coin to go up one million percent.
So, understand that it’s a speculative investment and be ready to lose whatever you decide to invest. Like sports betting, you can quickly make 2x or 3x of your “investment,” but you can just as quickly lose it all.
In addition to Bitcoin, there are several other mainstream cryptocurrencies and thousands of smaller Altcoins. The scams happen daily among smaller coins, and losing 100% of your investment is very likely.
Cryptocurrency is a zero-sum game: anything you win comes from someone else’s present or future loss. Most often, experienced and well-funded traders take the winning side of transactions, and small, inexperienced investors pay for those profits through their losses.
Blockchain, the technology cryptocurrencies rely on, is fantastic, and its applications in the market have considerable potential. Still, the cryptocurrency market is filled with greed more than the passion for technology and decentralization.
In conclusion, remember that crypto investing is a gamble. With limited experience, you’re likely to be on the losing end. Only invest what you’re prepared to lose.