Investing | Article

Should You Be Tempted By The Rush To Invest In Cryptocurrency?

by Bakhtiar HB | 17 Feb 2021 | 4 mins read

It’s no wonder that with Bitcoin’s meteoric rise towards a value of US$50,000 per Bitcoin, the slew of prospective investors continues to grow at an even higher rate.

The stories of investors who got in at a few dollars per coin and are now millionaires continue to grow and tempt the masses into wanting to throw their life savings to chase the same dream.

What should you know before assigning some of your portfolio to cryptocurrency? What is the value of a Bitcoin and are there other cryptocurrencies that may follow the same parabolic rise? Let’s try and answer these questions.

What Is Cryptocurrency?

One of the first things that you should consider before making any investment is to know what you’re getting yourself into.

The world of blockchain (the concept behind cryptocurrency) is still in its infancy and has potentially world-changing technology driving it.

Cryptocurrency is a digital medium of exchange that is encrypted and is decentralised, meaning that unlike the dollar or other forms of regular currency, it is not managed by any one authority.

Bitcoin was the very first form of cryptocurrency and was described by its creator Satoshi Nakamoto as “an electronic payment system based on cryptographic proof instead of trust.”

The blockchain technology behind cryptocurrency has grown to be used in many different forms, branching out from the initial vision as described by Nakamoto.

What Is The Value of Bitcoin And Other Cryptocurrencies?

Bitcoin and cryptocurrencies have value because people believe that it has value.

That isn’t something to worry about, though – you could say gold only has value today because centuries ago people decided that this shiny metal had value.

Both Bitcoin and gold have finite supplies and are seen as a store of wealth. Therefore over time, the value of both should rise as long as people continue to see them as valuable.

When we speak of other cryptocurrencies, the thousands of projects out there have varying values due to factors such as scarcity (how many coins are produced and in circulation); the perceived value of the project; and the scale of the community involved in the cryptocurrency.

A quick browse of the top 100 rank of cryptocurrencies by market cap and you can view different cryptocurrencies and see where some of their value is derived from.

Some provide solutions to money remittance, some are decentralised finance solutions and others are using blockchain technology to provide innovative solutions to some of today’s problems.

Doing your own research into the types of cryptocurrency and where their potential value is definitely something all prospective investors should look into.

Are Cryptocurrencies A Good Investment?

The value of cryptocurrencies may rise over time but it is still uncertain whether the rise is linked to speculation rather than tangible output.

Take the example of Bitcoin, its amazing rise to almost US$50,000 at the time of writing has not been without a number of ups and downs.

Bitcoin traded at close to US$20,000 in 2017 before dropping to US$3,000 just a year later. That rise from $3,000 in 2018 to $50,000 today was spectacular but it is important to consider that the price could drop just as quickly.

Due to the high risk and high reward of cryptocurrency investments, it would be wise to only allocate a small proportion of your portfolio to these investments due to the great volatility involved. Spending a large proportion on your savings on something that could tank over 80% in a year could set you back financially for many years.

What Else Do I Need to Know?

Rushing into high risk investments should be done with extreme caution and care. For every story you read about someone who has turned hundreds of dollars into hundreds of thousands, there are three more stories of individuals who have lost it all.

Online forums, discussion groups and spaces are a great place to start to learn about the journeys of cryptocurrency investors. They are also great spaces to gather opinions on the next possible smart bets on coins that may make a great leap in value.

This echo of caution was laid out in a statement by AMBD in 2017 during the height of the crypto rush. The old adage that you should only invest money that you can afford to lose is especially true when it comes to cryptocurrency as that great next investment could turn ugly without proper care and guidance.