Tips on investing in the age of Bitcoin and other cryptocurrencies
Photo by Chris Liverani
Investing has once again become a hot topic as Bitcoin’s recent burst in popularity has been popping up in the news and on social media. Even Square’s Cash App allows you to purchase percentages of Bitcoin. Many people have very quickly made a ton of money from their investments in Bitcoin, and this leaves many others wondering how they can get in on the wealth.
Here's the thing: I think it's unwise to invest in Bitcoin or other cryptocurrencies. Bitcoin has had such a volatile past. A couple years ago, the value started rapidly going up and continued to soar as its popularity increased. But this sort of sharp uptick is known as a “bubble.” Usually, with a rapid increase like this, the “bubble” inflates and then “bursts,” and prices drop to a more realistic level.
Even within the past few months, there have been significant dips in Bitcoin value. In December, Bitcoin peaked at around $19,000 for one coin and dropped below $7,000 two months later. It has remained ever inconsistent.
Beyond the market, there are political and technological factors at play as well. The idea of uncentralized cryptocurrency poses a threat to any national currency and traditional banking system, so it's likely we will see it outlawed in many nations as a means of protecting the banking industry. Even if they're not outlawed, there will surely be regulations put into place that'll pose a threat to the value of cryptocurrency.
Any cryptocurrency is at risk for being outdone by a more efficient, better-encrypted one, and many already exist. It’s just a question of if and when they will become more popular.
Once another form of cryptocurrency becomes more popular, Bitcoin will inevitably drop in value even further. Bitcoin became headline news recently because of its rapid growth over the last few years, but by the time the news broke, it was too late. The popularity came after people got rich, but many have lost money by investing in things after they've already blown up.
This practice goes against the basic rule of “buy low, sell high.” Bitcoin’s growth has slowed and is no longer steady, and its risk factor has been rising.
You can read more about Bitcoin’s price rankings here.
Fortunately, there are many other, better options for investing. People generally invest in stocks and bonds. Bonds are government-issued and pretty much guaranteed (granted that nothing crazy happens before it comes to maturity). But they have only a small return.
Buying stocks is the most popular way of investing, and it's not a bad idea. Investing in the stock market at a young age can really set you up for some solid returns later in life.
Mutual funds are also a great way to go. These are professionally-run investment programs that are diversified to reduce risk for those involved. Investment firms will take your money and pool it with other people's money into a portfolio of various investments, and then they manage it for you. Mutual funds are a great way to build some earnings with significantly less stress than investing on your own.
The stock market has gotten a bad reputation, thanks to movies about market crashes and devastating financial loss that make for great dramatic plot setup. It is true: plenty of people have lost a great deal of money through poor investments and many others have lost faith in the stock market altogether.
But investing wisely can be done, and it can be done with finesse if you follow these rules:
1) The most common advice you will get with stocks is "buy low, sell high." It's because it works.
If you buy stock after it has already boomed and is leveling off, you aren’t going to see much return. Also, if your stocks plummet, it is usually best to just ride it out and not panic. In 2008 many people panicked and lost retirement savings because they sold their shares for cheap. Others waited it out are back to where they started. Some people even made money.
2) It’s best to think long-term with investing.
Short term trades are risky as it's really just a gamble. This is referred to as “day-trading.” The ultimate goal is to reduce the amount of risk.
3) A great way to reduce risk is to diversify your portfolio.
Your portfolio is all of your investments. To diversify means to invest in different industries, so that if one industry has a crisis, your other stocks will most likely be safe. For example, if you invest in both a car manufacturer and a fast food chain and one of them goes south, it's likely that the the other will remain steady.
3) Do not invest more than you can afford to lose.
This applies as your investment grows. People who lose everything in market crashes were unfortunately treating the market as their savings account. Keep your investments and savings separate. Many people will sell only a few shares of their stock as it grows beyond their initial investment or whatever level they set for themselves. This enables you to maintain an investment and see some shorter-term returns.
The best approach is a basic one. Do your research to find solid, growing companies with good financial positions, invest in different industries and then leave it alone. You cannot make predictions with the market, but you can make wise decisions to reduce risk and grow your investments.
There's a lot to be said for being wise and making plans for your future. Investing with savvy and an informed plan of action is a great way to start.
