Bitcoin has taken the nation by storm, attracting major companies to the digital currency and meme traders who trade based on current internet trends. While some financial advisors are urging their clients to invest, others are more cautious.
Although crypto will likely become more prominent in the future, right now it remains a risky investment, because it is too unstable and marred by many uncertainties.
Crypto was developed as a payment method that bypassed traditional banking systems. New crypto is created by mining it, a process in which computers solve difficult math problems. There are thousands of varieties of crypto, but Bitcoin is dominant, taking nearly half the market share.
One issue with cryptocurrency is that certain coins have an unlimited supply, meaning that given an infinite amount of time, an infinite amount of crypto could be mined. This has led to inflation in the crypto markets, the same thing that can happen to physical currency.
This issue alone is not enough to warrant a hold or sell rating, but one that is more troubling is that cryptocurrencies are being propelled by meme trading. This style of trading is named after an online community of traders who have rallied around “stonks” like GameStop and AMC Entertainment Holdings, and have propped up companies of little value through the Reddit page r/wallstreetbets.
When meme traders zero in on a company, they rapidly invest to drive up the price of the stock. Then, when the stock appears to have reached a peak, the investors rapidly sell their holdings in a process known as a “pump and dump”. This type of trading is harmful to the markets and can lead to substantial losses for both large firms and individual traders. Investing in cryptocurrency is becoming increasingly risky as meme traders become more adept at it.
Another factor to consider before investing is how quickly crypto values can rise and fall. When Elon Musk tweeted about the cryptocurrency Dogecoin, the price fluctuated wildly. This is a bad sign for cryptocurrency coins because if negative news comes out about them, their prices could plunge, and the investment would be lost.
Some entities are bullish on crypto as an investment, including the government of El Salvador, which adopted Bitcoin as a national currency. The move showed that cryptocurrencies will likely enjoy widespread use in the future, but it also highlighted some of the risks involved with investing at this early stage.
When El Salvador first began using Bitcoin, the government had to take its e-wallet offline for several hours when the server was overloaded, revealing a fault in the system. Crypto is only good when it can be used, and if the servers are overloading it can’t be used. In the future, this problem may be resolved, but until then, crypto is still an unreliable and dangerous investment.
Another major problem with crypto platforms was revealed when one mistakenly gave almost $90 million worth of various crypto coins to users during a routine update at the end of September. The error was caused by a bug in the computer code and sent workers scrambling to recover the lost coins.
Both these incidents show that this technology is too new and undependable to be a safe investment. Stocks and options, for example, present many investment opportunities with far less risk and almost the same reward.
For now, investors should stay away from crypto, but in the future, it will become a viable investment. Technology is improving rapidly, and culture is changing. One day cash might be a thing of the past and crypto the king of currency, but that day is not yet here.