Many arguments are floating around, maybe making you ask; why shouldn’t you invest in crypto? This article will look at some of the most common ones and explore the reasons behind the arguments. So, if you’re on the fence regarding investing in crypto or want to learn more about the risks associated with crypto investments, keep reading!
Many arguments are floating around about why you shouldn’t invest in cryptocurrency. This article will look at some of the most common ones and explore the reasons behind the arguments. So, if you’re on the fence regarding investing in crypto or want to learn more about the risks associated with crypto investments, keep reading!
How Do The Cryptocurrency Markets Work?
Before diving into why you shouldn’t invest in crypto, let’s first look at how the cryptocurrency market works. Cryptocurrencies are virtual assets that use cryptography to keep transactions secure and validate the creation of new coins.
The decentralized nature of crypto makes it secure from government and financial institutions’ regulations. Digital currencies are bought and sold on centralized and decentralized crypto exchanges or through peer-to-peer transactions.
Cryptocurrencies like Bitcoin and Ethereum are created through a mining process that requires specialized computer hardware and consumes large amounts of energy. But today, many cryptocurrencies, for example, Egld from Elrond network, don’t require mining as they work on the “proof of stake” model.
Main Reasons To Not Invest In Crypto
Expect High Volatility
While long-term gains on digital currencies such as Bitcoin and Ethereum have rewarded those who stayed in them for the long run, many people also suffer from severe sell-offs. Drawdowns of as much as 40% from peak prices are not uncommon in the cryptocurrency industry. Still, even a half-sized pullback can put the average investor in a bad position.
Even major cryptocurrencies like BTC and ETH have their prices cut down by 80% or more at some point after their all-time highs. That makes cryptos a highly volatile asset.
They’re Not Backed by Anything Tangible
Unlike stocks and bonds, which are backed by companies and governments, cryptocurrencies are not backed by anything tangible. They’re essentially just digital tokens with no backup. That makes them highly volatile and susceptible to huge price swings being the reason for people to lose money.
They’re Used For Illegal Activities
Because cryptocurrencies are decentralized and not subject to government regulation, they’re often used for illegal activities, such as money laundering and drug trafficking. Such a reputation has made many people skeptical of investing in them.
It’s Difficult to Evaluate or Value
Traditional valuation models don’t work well for cryptocurrencies because there are no earnings, dividends, or revenue streams to analyze. While some people have looked at things like the price-to-sales ratio or the network value-to-transactions ratio as a way to value cryptocurrencies, these metrics are still in their infancy and have not been proven to be accurate predictors of future price movements.
Publicly traded companies have to report profit and loss, and investors can determine what the shares are worth. Crypto prices are arbitrary and are based on crowd best guesses at all times.
It’s Still a New And Unproven Technology
Cryptocurrencies are built on blockchain technology, a decentralized, distributed ledger that records transaction data. Blockchain is still in its early stages of development. It has some limitations, such as scalability issues, that need to be addressed before it can be widely adopted.
While there are a lot of projects built on blockchain technology, many of them are still in their early stages and have yet to be proven. That means there is a higher risk of failure for blockchain-based projects, which could lead to investors losing their money.
Stock Market vs. Crypto Market
The stock market is a regulated and centralized market where shares of public companies are bought and sold. The crypto market is a decentralized market where cryptocurrencies are bought and sold.
The stock market is subject to government regulation, while the crypto market is not. The stock market is also a more mature market with a longer history than the crypto market.
Risks of Investing in Crypto
One of the biggest risks of investing in digital currency is price manipulation. Because the crypto market is decentralized and not subject to government regulation, it is easier for bad actors to manipulate prices. For example, bad actors can create fake news or sell large amounts of a cryptocurrency to drive down prices and then repurchase it at a lower price, pocketing the difference. This type of price manipulation is called wash trading and can be challenging to detect.
Another risk of investing in cryptocurrency is the possibility of hacking. Cryptocurrencies are stored in digital wallets and exchanges, which are vulnerable to hacking. Suppose a hacker can gain access to a digital wallet or exchange. In that case, they can steal the cryptocurrencies stored there. In some cases, such as the Mt. Gox hack, hackers have stolen billions of dollars worth of cryptocurrency.
Lack of Regulation
Another risk of investing in cryptocurrency is the lack of regulation. As the crypto market is decentralized and not subject to government regulation, protecting investors from fraud or theft is more challenging. For example, there is no guarantee that digital currency exchange will not go out of business or be hacked. If that happens, all the digital assets will be gone with no possibility of help from the authorities.
Advantages Of Investing In Cryptocurrency
Cryptocurrencies can be sent or received anywhere in the world, 24 hours a day, 365 days a year. There are no holidays or borders.
- Most cryptocurrencies have a limited supply, so their prices are not affected by inflation.
- Market data from the past 5 yrs shows that crypto investments have higher returns than traditional investments.
- Buying and Selling cryptocurrency is easy.
- Higher interest rates through staking.
- The central bank can’t control it.
Cryptocurrency And Tax
Cryptocurrencies are treated as property for tax purposes in many countries. Capital gains taxes will apply to any profits from buying and selling cryptocurrencies. For example, if you buy a cryptocurrency for $1,000 and sell it later for $2,000, you will be liable for capital gains tax on the $1,000 profit.
Suppose you are a crypto investor or thinking of investing in crypto. In that case, it is always necessary to consult with a tax advisor to ensure that you follow the correct tax laws in your country.
Although cryptocurrency can be risky, there are also many potential benefits to investing in cryptocurrency. Before making any financial decisions, it is essential to do your own research, know the risk and seek professional financial advice.
Should I Invest In Bitcoin?
Bitcoin is the most well-known and largest cryptocurrency by market capitalization. However, it is also one of the riskiest investments. Bitcoin prices are highly volatile and have been known to swing by large amounts in a short period. Also, it is hard to make crypto payments with bitcoin. Therefore investing in bitcoin or not is ultimately your decision, and we suggest to DYOR or get the help of a financial advisor.
Do Banks Support Cryptocurrency?
Banks are starting to support cryptocurrency as it becomes more mainstream. However, banks still face many challenges in dealing with digital currency. For example, banks have to deal with cryptocurrency’s volatile price, making it challenging to price goods and services in crypto. In addition, banks also have to comply with anti-money laundering regulations, which can be difficult when dealing with a decentralized currency.
But almost all the central banks are against cryptocurrency. For example, the People’s Bank of China has banned cryptocurrency exchanges and initial coin offerings. The Reserve Bank of India has also warned against investing in digital currency.
What Is The Difference Between A Blockchain And A Cryptocurrency?
A blockchain is a decentralized database that stores information about transactions. A cryptocurrency is a digital asset that uses cryptography to secure transactions and control the creation of new units. You don’t need a bank account to hold cryptocurrency.
Why Should You Stay Away From Cryptocurrency?
Several risks are associated with investing in cryptocurrencies, such as price manipulation, hacking, and fraud. In addition, the crypto market is still relatively new and unproven. Therefore, it is essential to know these risks before putting money in crypto assets.
Is Crypto A Safe Investment?
No investment is ever truly safe, but some are riskier than others. Cryptocurrency is a particularly volatile and risky investment with a high potential for loss. Suppose you want to invest in digital assets like bitcoin. In that case, DYOR is always recommended to invest what you can afford to lose.
How To Reduce The Risks Of Investing In Cryptocurrency
Despite the risks, there are ways to minimize them. One way is to invest only a small amount of money into cryptocurrency. That way, if the digital currency’s price goes down, you will not lose much money. Another way to reduce the risk is to invest in various digital currencies. Doing so diversifies your investment and reduces the risk of losing all your money if the price of one digital currency goes down. Finally, it is essential to do your research before investing in any cryptocurrency. Read about the team behind the project and roadmap and understand the risks involved.
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