What I Think About Investing in Cryptocurrencies
How quickly things can change. Before entering 2022, it seemed like all the cool kids were into cryptocurrencies. Even some of our favorite celebrities - movie stars and hip athletes from Snoop Dogg, Tom Brady, Mark Cuban to Elon Musk were presenting them as the next big thing.
But the crypto markets have had a very rough year. They have been marked by inflation worries, uncertainty, and brutal sell-offs.
After peaking at a new all-time of $68,789 in November 2021, the price of Bitcoin dropped as low as $17,708 in June 2022. As of Aug. 28, Bitcoin is down over 52% year-to-date (YTD). It’s currently trading at $19,981- down from $41,911 on Jan. 3, 2022.
So, what can we say about cryptocurrencies these days? Are they now “undervalued?” Who knows! How do you price something if there’s no obvious way of measuring its value? Is it a good time to buy since they have been trampled?
These are great questions. Crypto is built on a groundbreaking technology, and users can exchange it for some goods and services, but its value in the end is based purely on supply and demand.
If demand goes to zero, so will the price.
Crypto doesn’t pay interest, it’s not backed by a central monetary authority, and you can’t make valuable products out of it like jewelry.
Its value derives entirely from what people believe it’s worth. Is Bitcoin worth $10,000, $100,000, $1,000,000? No one can confidently say.
So, wondering whether now is a good time to buy is the wrong approach to crypto. Hoping for value at a certain price is pointless. The value is what you are willing to pay for it, nothing else.
Many well-known celebrities and big-wig Wall Streeters have been chastising folk for not being hip enough to embrace cryptocurrencies more fully. Encouraging a notion that you’ll miss the trend if you don’t act now may be fine in the fashion world, but it’s usually rotten investment advice.
Surprisingly, Fidelity announced that it was offering its 401(k) plan sponsors the option to allow participants to invest up to 20% of their retirement contributions in Bitcoin. Wow, I see this as a bold move and wonder how many plan sponsors will take Fidelity up on its offer.
When investors are pushed into activities they don’t fully understand, that are untested, or that exceed their risk capacities, very bad things follow.
However, this is not to say crypto has no future. Many supporters may well be right that cryptocurrencies are a powerful innovation that will permanently alter how business is done, but it certainly doesn’t always follow that an important innovation makes a great investment.
But until that future is more clearly in view, and at least include some regulations, investors should treat an investment in crypto as they would a day at the casino.
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