Buying cryptocurrencies is all the rage these days. Bitcoin, Ethereum, Litecoin, Cardano, Dogecoin, Stellar … the list of cryptocurrencies is endless. Well, not quite endless, but according to Investopedia.com, there are more than 4,000 to choose from.
Should you invest in them? You have to decide for yourself, but here are three reasons to avoid buying cryptos.
One reason to not invest in cryptocurrencies is that they have virtually no history. The lack of a track history means that we don’t have much data to peruse when considering cryptocurrencies. Other possible investments have a lot more data to help us make a decision.
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For example, gold has been bought and sold for hundreds of years, and the historical price per ounce can be easily found with a bit of research. Stocks have been traded on the New York Stock Exchange since 1792. People have also been investing in real estate and rare paintings, watches and coins for seemingly forever.
I’m not saying it would be wise to invest in any or all of those things, but the point is, if you wanted to know how an investment in any of those assets has performed in the last 200 years or so, it would be very easy to do so.
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In contrast, Bitcoin, the first cryptocurrency, was created in 2009. Litecoin was launched in 2011, and Ethereum has only been around since 2015.
A long track record for an investment doesn’t necessarily mean it will perform the same way in the future, but it gives us more data to consider, and it demonstrates that people have valued the particular asset for a long time.
Bitcoin has been hot for the last 12 years. Will it remain popular? There’s no way of knowing at this point.
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Another reason to avoid investing in cryptocurrencies is that they can be bought and sold anonymously. This ability makes cryptos, and Bitcoin in particular, the currency of choice for criminals.
Because of this, every government in the world is a bit wary of cryptos, and rightly so. Infecting the computers of businesses with ransomware is quickly becoming a favorite technique of criminals to make a bunch of money quickly. The hacker group that recently shut down Colonial Pipeline on the East Coast made $5 million doing just that.
As of right now, cryptos are legal in most of the world, though countries such as China, Russia, Vietnam and Ecuador have banned them. If criminals continue to use Bitcoin to fund their activities, you can expect a lot more countries to ban or severely restrict and regulate cryptocurrencies. This would have a detrimental effect on their value.
A third reason to avoid investing in cryptocurrencies is they have no real or tangible assets. In short, these cryptocurrencies are worth what they are worth just because enough people are buying them at that price.
When you buy Bitcoin, you have simply exchanged a certain amount of one currency (the dollar) for a certain amount of a digital currency (Bitcoin). So now you own some Bitcoin. But there’s not really anything backing up the value of the Bitcoin you just purchased. It’s only worth what it’s worth because the current supply and demand have produced that price.
On the other hand, when you buy stock in a company, you actually own part of that company. For instance, if you buy some Apple stock, you own a tiny piece of Apple’s assets and profits.
If you’re interested in investing in something a bit more proven and reliable, I recommend you research mutual funds. Your investment might not go up 500% like Dogecoin did a few weeks ago, but there are quite a few mutual funds that have returned 8-10% to investors for years.
Mutual funds aren’t nearly as exciting as cryptocurrencies, but they are a lot safer. You won’t have to worry about losing all your money, and over time, you should do very well.
Now, if you still want to invest in cryptocurrencies, that’s fine, but be careful. Only buy cryptos with money you can afford to lose.
Hopefully, you pick the right crypto, and it skyrockets. Good luck!
Dave Kinzer is a music teacher and a financial coach in Springfield. Contact him at www.davekinzer.com. His column will appear here every other Wednesday.