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Investing in cryptocurrency has been all the rage during the last few years. Investing in Bitcoin and other cryptocurrencies have made a lot of people into millionaires and a few into billionaires. The Bitcoin and cryptocurrency boom reached its peak in late 2017 when Bitcoin reached USD20 000. Bitcoin has since lost almost 75% of its value and is now worth about USD 6500. A lot of other cryptocurrencies have seen similar falls, and some smaller currencies have been wiped out completely.
The Bitcoin craze has faded a little bit due to the drop in value during 2018, but there is still a lot of people hyping Bitcoin and other cryptocurrencies as the future. As the best investment, you can make. They think that cryptocurrencies will become an essential part of the international financial system and that Bitcoin will be worth USD 100 000 in a few years.
In this article, we will look at what you should consider before you invest in cryptocurrencies.
What are cryptocurrencies?
Cryptocurrencies are “virtual” currencies that are traded without any central trading platform. All trades are instead inscribed in the blockchain. The blockchain can be described as an advanced ledger that keeps track of all bitcoins and who owns them. The ledger does not contain your name or any personal information. It only contains information about which cryptowallet the coins belong to. You can own and trade with cryptocurrencies entirely anonymously. It can be very hard to track cryptocurrencies transaction, and it is possible to tumble the money to make transactions untraceable.
There are several hundred different cryptocurrencies that you can trade.
Trading and investing in cryptocurrencies is exceptionally high risk. You can, as the last year has shown us, earn or lose a lot of money in a short amount of time. The cryptocurrency markets are a lot more volatile than the stock market or the FOREX market.
Cryptocurrencies might continue to increase in value and reach new record heights. There is also a case to be made that they remain overvalued and will lose a lot or all of their value in the future. It is impossible to know who is right. Only you can decide whether you think it is worth taking the risk to invest in cryptocurrencies. My personal opinion that the risk/reward ratio at present is too low to invest in most cryptocurrencies, but you might not come to the same conclusion that I do.
If you do choose to invest in cryptocurrencies, you should only invest money that you can afford to lose. Do not invest more than that. You do risk losing your money if you invest in cryptocurrencies. Never borrow money to invest in cryptocurrencies.
How to purchase cryptocurrencies?
You can buy cryptocurrency on one of many markets that allow you to change money to and from different cryptocurrencies. The best way to find out where you can buy the cryptocurrency you want to buy is to google “name of the cryptocurrency + exchange”. This will provide you with a list of different exchanges that you can use. One example of a popular exchange is cex.io. A company based in London. Cex.io has been active since 2013. An eternity in the cryptocurrency industry.
It is important to remember that the true value of all cryptocurrencies is 0. They are not tied to any asset and do not have any backer who guarantee the value of the cryptocurrency. The same could be said about FIAT currencies, but there is one crucial difference between Fiat Currencies and cryptocurrencies. Fiat currencies are backed by a central bank and the economy of the country who use the currency in question. A Fiat currency is very unlikely to lose its value if the economy of the nation is doing decently well. The only time we see a FIAt currency lose “all” of its value is when the economy in a country is in complete shambles. An example of this is Venezuela in 2018 where the currency is losing in value quickly, and the inflation is expected to reach 1 000 000 %. It took decades of economic malpractice to get to this point. A cryptocurrency does not have this backing and can lose in value a lot faster. A cryptocurrency can lose all of its value in a few days.
The value of bitcoin and other cryptocurrencies is completely based on faith. Faith that the cryptocurrency will be an essential part of the financial system in the future. Faith that it will be worth a lot in the future. All cryptocurrencies server minimal function today and most currencies are overvalued based on current market conditions. They are traded at a future value.
You should never pay a future value for an asset. You should always strive to pay current or below current value. You never know what the future might bring.