I recently watched a very informative documentary "Banking on Bitcoin" on Netflix, I highly recommend watching it before considering an investment in cryptocurrency. Additionally, I recommend researching stories of those who recently lost money in cryptocurrency, don't just rely on the glory stories of those who have done well.
What is Cryptocurrency ?
Cryptocurrency. What is it? Where does it come from? Is it going to be the new money? Should you have Bitcoins? If not Bitcoin, maybe: Ethereum, Bitcoin Cash, Ripple, Litecoin, Zcash, Dash, Monero or one of the other 1,100 different varieties? I recommend treating cryptocurrencies as what they are: investments. Very risky investments, that are used as a technologically secure form of currency. I do, however, believe in the blockchain technology. Blockchain is the backbone of cryptocurrency. It appears to be here to stay and will continue to be a viable part of technology, payments, cyber security and much more.
Why am I not sold on the Cryptocurrency?
If we take a look at history, the United States has used pounds, shillings, pence, silver coins and gold coins as forms of currency. There was a time when each of the thirteen colonies had different notes and denominations that varied in value. Imagine a dollar in Massachusetts only being worth seventy-cents in Pennsylvania! By the time of the Revolutionary war, Congress issued Continental currency. Fast forward to the Civil War the United States both had Continental Currency and Confederate Currency in circulation. Congress eventually ruled the Confederate notes were worthless and debts could only be paid in gold or silver. From1900 until 1970, the gold standard backed all US dollars and in 1971 it was removed.
Moral of the story: it’s a long and tenuous road to establishing a currency. Every major currency on the planet has a middleman or government monitoring supply and demand. Will removing the Federal Reserve, IMF, World Bank, and other government regulators from the process be viable long term? Can a capitalist economy thrive with a limited supply of money? These are all questions that are yet to be answered. Anyone who chooses to invest in cryptocurrency at this stage is taking advantage of a social and financial experiment on epic proportions.
What is the Tulip Bubble of Holland ?
It’s also helpful to note that large amounts of crypto-currency are owned by a few individuals. If those individuals were to ever sell their holdings it would be detrimental to the value of the currency held by the many. Are you familiar with the Tulip Bubble of Holland ?
In the 1600's Tulip Bulb became a highly sought-after commodity, with one bulb going for the equivalent of an entire estate. Many investors got so excited that they sold everything they had to get in on the deal. But, like any craze, tulip mania came to an end. As more people started to grow tulips and prices began to lower, investors raced to sell, resulting in an economic depression that still serves as a warning today. Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. As it happens in many speculative bubbles, some prudent people decided to sell. A domino effect of progressively lower and lower prices took place as everyone tried to sell while not many were buying. The price began to dive, causing people to panic and sell regardless of losses.
In other words, a lot of people lost a lot of money. You can replace "tulips" with Enron, Worldcom, WAMU, Lehman Brothers, Pets.com and many others. It's inevitable that some of the cryptocurrencies will be added to the list in due time. A graveyard already exists for a few names: Spacebit, Dogecoin, Gem, Paycoin and Dao. A hacker exploited Dao in 2016, shortly after the largest crowdfunding capital raise in history of $168 million! Over $50 million was lost and the price of the cryptocurrency spiraled out of control.
Things To Consider Prior Cryptocurrency Investment
If you are thinking about investing in cryptocurrency first I recommend making sure your other financial affairs are in order. Do you have an adequate cash reserve? Are you taking advantage of your employer provided retirement plans? Have you paid off your consumer debt? If you have already checked all the appropriate financial planning boxes and still want to gamble on Bitcoin, consider investing no more than you’d be willing to put on the Roulette table in Vegas. Limit yourself to no more than 1-2% of your overall investment portfolio and take a long term approach, investing small amounts systematically over time.
If cryptocurrencies grow in popularity and find a place in our global economy, prices should stabilize. Will that price be higher or lower than today’s price? Only the future will tell.
*This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. As of the time of this article Money Script Wealth Management PLLC does not have an investment in any cryptocurrencies.