Is Crypto Too Risky? 12 Experts Weigh In
To dabble or not to dabble in cryptos, that is the question on a lot of crypto-curious people’s minds lately. While experts are split on the matter, there’s a recurring theme: proceed with caution, know your risk tolerance and the health of your finances.
Let’s examine their arguments:
Yes, but Beware of FOMO
One of the biggest warnings when it comes to start investing in cryptos is to be aware of their extreme volatility and whether you are able financially and emotionally to stomach the wild swings.
“Crazy profits have been made just about as much as losses in the industry. As a crypto expert, I wouldn’t advise anyone, least of all someone looking to dabble in the industry to sink their life’s savings in crypto,” says Patrick Moore, of CryptoWhat, a site dedicated to providing news and education about the crypto space. “The risk is still quite high: 10% of 5% of your investments would be great, but not all of it.”
In addition, some experts argue that cryptos may not be a good fit for you if your investment portfolio or mental health can’t manage it.
“Cryptocurrency is currently all the rage, but keep in mind that it is still in its infancy. Investing in something new comes with its own set of obstacles, so be ready. If you want to participate, do your research beforehand and start with a small investment,” says Tanya Zhang, co-founder of Nimble Made.
The sentiment is echoed by Jared Tendler, mental game coach and author of “The Mental Game of Trading,’ who tells GOBankingRates that one interesting aspect behind the rising interest in cryptos is the impact of trading psychology, and how it is starting to affect the market in unprecedented ways.
“People need to understand how Fear of Missing Out can impact their decision making. “It’s important to learn to isolate elements like FOMO that might force them to jump into positions outside of their strategy,” Tendler says.
He adds that for inexperienced investors/traders, it’s important to understand the Dunning-Kruger Effect, which is the tendency of “poorly skilled performers to overestimate their abilities.”
“In the crypto market, that means inexperienced investors/traders become overconfident because they’re unaware of how little they know and are therefore unable to recognize their own incompetence. That makes them very susceptible to loss in the context of other more experienced investors/traders,” he adds.
Finally, some experts warn that while you can allocate crypto in the portion of your aggressive investment, investors should know it’s still not a conventional way to invest your money.
“Of course, always remember, investing in any asset, especially crypto, means only using money that you’re certain you can lose,” says Ben Reynolds, CEO of Sure Dividend. “Investors should also consider other facts, such as lack of regulation and technical issues that could prevent you from accessing your money.”
No. Crypto is too Unstable for the Average Investor
Some financial experts, on the other hand, are strongly crypto-opposed, citing concerns of hype and speculation.
Jake Hill, CEO of DebtHammer, who self-labels as an “outspoken critic of cryptocurrency,” says that “as a concept, I find them to be steeped in fake advertising, essentially playing off of peoples’ fears and valid concerns,” he says. “Dogecoin, for example, is being pushed up near the $1 mark. But all of that is artificial inflation. It could crash tomorrow and people who were suckered into it could lose everything.”
Hill also points out that he feels that something “that can be influenced by a single tweet from a billionaire is not a wise investment decision.”
Additional experts liken crypto trading to gambling, because of the lack of pattern in their rise and fall in value.
“I would not recommend dabbling in crypto,” says Michael Shea, financial advisor at Applied Capital. “There has been a lot of hype and speculation around the currency. This has brought a lot of attention to it and driven up prices in recent years. The problem is that you’re not buying an income producing asset. There is not a future income stream you are purchasing like when you’re buying a business.”
“People value an investment in a company based on its projected future cash flows. The current stock price reflects this information which changes from day to day. In crypto you’re buying a currency that may or may not have sustainable value due to the lack of income and lack of regulation. There are still too many unknown risks associated with it which makes it too risky of an investment in my opinion,” he adds.
And some prefer traditional investing, via stocks, 401(k), IRAs, money market funds and index funds, for example, as they just consider crypto too risky, or too unstable.
“My advice would be just don’t do it unless you are willing to lose your entire commitment. Don’t even think about it. The major disadvantage in speculating in Bitcoin or any other cryptocurrency is that Bitcoin has no intrinsic (real) value. One cannot invest in BTC, one can only speculate in BTC,” says Robert R. Johnson, Professor, Heider College of Business, Creighton University. “For the vast majority of investors, the KISS mantra — keep It simple, stupid — should guide their investment philosophy. The idea behind index investing is “if you can’t beat ’em, join ’em.” Investors simply can’t afford to make oversized bets on individual securities. Investing in a broadly diversified basket of securities is a prudent strategy.”
Adam Garcia, founder of The Stock Dork, says he is not in favor of investing in crypto because they’re as “hot-tempered as a 12-year-old.”
“You never know what you’ll get each day. Cryptocurrencies have tremendous ups and downs in their value. There’s no doubting that some are really popular at the moment, but we’re not sure how long they’ll last. The price reduces when someone sneezes! Investing in cryptocurrencies is, to put it mildly, risky,” he adds.
Yes. Crypto is Something Everyone Who Can Should Invest In
For the crypto-converts, reasons to start investing in crypto are legion, namely the fact that they can be used as a hedge against inflation, that they provide an independence from traditional banking systems, and of course, their potential huge rewards.
“Everyone should be looking at a small venture into crypto. Crypto is not only an emerging technology but an emerging asset class. Bitcoin has been the largest appreciating asset in the last 10 years and the tokenization technology will affect many other, if not all markets in the future. Future markets will tokenize their stocks, shares, oil contracts, commodity futures all based on the same tech as Bitcoin. There could even be Bitcoin trading pairs similar to what we see with the U.S. dollar as a reserve currency,” says Jeff Hancock, CEO of coinpass.com.
“Having even a small disposable amount of capital in one’s portfolio for crypto exposure will ensure an investor isn’t left behind when the market starts to grow further. With increasing regulation for crypto businesses global, more market participants are set to enter into space in 2022-2025,” he adds.
Connor Brown, founder of the website After School Finance, says it’s smart to invest in crypto, but only once you’ve taken care of your other investments first.
“So, max out your 401K and your IRA and then dabble in a bit of crypto. But you should only invest in crypto with the understanding it is very volatile and overall a risky investment. Of course, like all high-risk investments, it does have the potential for high rewards. As long as you’re responsible with other investments, there’s no reason to not give crypto a try. You can consider it an investment experiment that just might pay off big,” Brown says.
Finally, the increasingly fast adoption of cryptos is akin to the way the internet was, and they represent the money of the future, some experts say.
“Cryptocurrencies are becoming more and more integrated into our society with each passing day. Traditional fiat currencies are becoming obsolete since they are incapable of providing the final solution to the world’s issues. An international transaction can take many days to arrive,” says Jason Mitchell, CTO of crypto website Smart Billions.
“In most circumstances, using fiat currencies means paying more taxes and worrying more. All of these issues will, however, be alleviated with the rise of cryptocurrencies. Cryptocurrencies are the money of the future because they provide the most practical solutions that everyone needs.”
In the end…
Andrej Ilisin, founder of Smart Billions, says that when it comes to dabbling in crypto it’s important to remember four things:
1. Volatility is to be expected, don’t panic at the first sign of trouble
2. Never borrow money to buy crypto
3. Build up an emergency fund of 3-6 months expenses before buying any cryptocurrency. At this stage where its real-world uses are limited (although quickly expanding), its most common use is still as an investment option. As with any investment it isn’t guaranteed, so having a safety net is key.
4. Do your research before buying and know how to keep your tokens safe.
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