What is cryptocurrency?
As a Money Coach, I am often asked this question. People want to know if it's a good idea to invest in cryptocurrency. A year ago, I would have been unable to explain what cryptocurrency is. It is hard to understand how cryptocurrency works. And I am not going to attempt to do this here. There is a lot of information on the web that you can refer to for a better understanding. In this blog, my goal is to provide some insights on how to view cryptocurrency and help you decide whether it is something you should consider for wealth building.
The wild ride
You may already know that cryptocurrency has gone through an amazing ride over the past year. Let's take bitcoin as an example. At the start of the pandemic, in mid-march 2020, a bitcoin was worth $6,500 (in Canadian currency). By December 2020, it was worth $36,000 and reached an all-time high of $79,000 in April 2021. And recently, as I am writing this in June 2021, its value is hovering around $50,000. So, if you had invested, say $1,000 at the start of the pandemic, it would be worth $7,500 today (and would have been worth as high as $12,000 two months ago). This kind of investment is not for the faint-hearted. The volatility is unlike any normal asset.
What makes cryptocurrency different from other assets?
Let's compare it to a grocery item such as eggs. Currently, you can buy a dozen eggs for around $3. Hypothetically, if the price of a dozen eggs goes up to $20, we would probably buy fewer eggs or stop eating eggs altogether. However, when the price goes up for assets like cryptocurrency, instead of the demand for it decreasing, the opposite often happens. That is, more people get interested in it. Surprisingly, the price continues to climb, and it seems that there is no ceiling. Yet, when the perception of this asset becomes negative because of some bad news in the media, its value can plummet at an incredible rate, as we have seen recently.
Cryptocurrency investors usually have a different outlook on life. Most of them are ready to lose all the money that they invest, and at the same time, they have an indomitable hope that they can become quickly rich. They are the younger generation who believe in a future when governments will have less control over financial markets. On the other hand, they can also be mature investors who have extra cash chasing non-traditional investment opportunities.
Financial institutions that make this product available are the beneficiaries of the increased interest in cryptocurrency. Remember, there is a transaction fee for purchasing or selling cryptocurrency. And so, the more volatility in the market, the more the financial institutions benefit. This applies to other investments as well. The small investor only wins when they buy and hold assets that increase in value over the long term. So, if you decide to invest in cryptocurrency, first, you have to believe in its long-term potential. If you buy and sell quickly on a whim due to listening to good or bad news in the media, you are sure to lose a lot of money in doing so.
What to make of it?
The question is: "Will cryptocurrency still be around in 5, 10, 25 years?" If you believe the answer to that question is yes, then you are a prime candidate to invest a portion of your net worth in this vehicle. Otherwise, I would recommend staying away from it. As your Money Coach, I would suggest you find out more about it, to form your own opinion and not to ignore it altogether. As a prudent investor, I would advise you to consider the risk of investing in this vehicle. If you invest in it, keep it to a low percentage of your asset allocation and be ready to stomach huge losses as this is a possibility. However, the upside is incredible.
As always, if you have any questions, please let me know. I would be happy to help you change your financial future today.