There’s excitement in the air! Everyone’s talking about the “cryptocurrency boom.”
The pitches to get you involved are breathtaking. A recent blog by Strategic Tech Investor put it this way: Search through your coat pockets… behind the sofa cushions… the glove compartment of your car. Because all it takes is some spare change to capitalize on the stock opportunity of a lifetime: Cryptocurrencies.
Before you start looking “behind your sofa cushions”, let’s separate sense from nonsense.
High means high reward
With some minor exceptions not relevant here, the possibility of outsized returns always means outsized risk. The bigger the potential payoff, the larger the risk.
Cryptocurrencies are very high-risk investments.
Predictions are useless
The only honest response to an inquiry about the direction of the price of Cryptocurrencies (and stocks) is: I don’t know, and no one else does either.
They could continue their upward trajectory or totally tank. Here’s what we do know:
Their current price is a fair price. They’re not over our undervalued. Every day, people are buying and selling these currencies. The buyers think they still can “get in the action. The sellers believe it’s time to cash in.
What will determine future prices is tomorrow’s news, like government regulation, fraud, a major hack, and an imbalance between buyers and sellers, causing a lack of liquidity.
No one knows tomorrow’s news. Ignore all predictions.
Investing vs. speculating
Investors are primarily concerned with ensuring they have enough money to maintain quality of life in retirement. These investors will be well served by ignoring speculative investments like cryptocurrencies. They should invest in a globally diversified portfolio of low management fee index funds, in a suitable asset allocation.
Speculation involves taking a high risk in the hope of generating an outsized return, with the realization that all money invested could be lost.
Investing in Cryptocurrencies is clearly speculation.
Resource of the Week
Financial author, Larry Swedroe, does an excellent job of discussing the risk of investing in Bitcoin and other cryptocurrencies.
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