Bitcoin is and has always been a risky investment. Here’s what could go wrong.
The Top 10 Risks Of Bitcoin Investing (And How To Avoid Them)
If you want to know more about how to invest in Bitcoin, you’re not alone. We polled 247 investment professionals in the American financial industry to find out the top 10 risks of this nascent technology, and the results were largely in agreement. Here’s what you should know about investing in cryptocurrency, with the help of investment professionals at this past August’s Digital Financial Summit.
1. There is a high probability that your bitcoin investment will be worth more in a few years than it is now. This depends on a number of factors: the demand for bitcoin and for its core blockchain technology (that’s how the wealth is distributed when you cash in a bitcoin); the amount of digital cash in circulation; and the general direction of the value of bitcoin and the value of the blockchain technology. Unfortunately, when you start investing in bitcoin, you are risking a large amount of cash in a short amount of time. To hedge your cash in case the bitcoin investment doesn’t pan out, you’ll need to be ready to buy this digital currency over and over.
2. It’s best to invest in what you know. Currently, the cryptocurrency sector is experiencing a cryptocurrency bubble and many investors are jumping into cryptocurrencies in the hopes of gaining quick gains, taking on an outsized position that they will soon regret. In addition to everything else, cryptocurrency companies are experimenting with novelty and high risk approaches, which makes investing in these companies a risky proposition. Instead, investors should stick to bitcoin-related companies that they know and are familiar with. Business Insider wrote an article with additional advice on choosing carefully who to invest in.
3. Marijuana stocks will not make you rich. Marijuana company stocks have seen a dramatic rise over the past few years due to legalization in Colorado, Oregon, Washington, and other states. Many investors purchased these companies for fun or to take advantage of the rising popularity of marijuana. However, those investors seem to have missed the point. Bloomberg explains why these marijuana stocks may not be the investments you want to make: “Big banks have figured out how to facilitate financing in the marijuana trade, but also discover a vulnerability.” After becoming too big to fail, banks are starting to think twice about underwriting marijuana deals, which could potentially have significant business implications.
4. Don’t invest in cryptocurrencies without someone with even a minimal level of expertise in them. By and large, cryptocurrency investments are risky and investors should seek guidance from an experienced professional to ensure they make the right decision. On top of that, you will want to watch your cryptocurrency investments closely for signs of manipulation or fraud. For example, cryptocurrency trading platforms like Bitcoin to Go allow you to purchase cryptocurrencies on the cheap. This person-to-person trading structure increases the risk of manipulation or fraud.
5. Don’t get greedy if you’re successful. Entrepreneurs can make serious money with bitcoin, but it’s not for everyone. In addition to the dangers of cryptocurrency investing, many people (myself included) try to overconfidently jump into a new digital currency in order to “invest in what others are afraid to touch.” While there’s certainly room for more cryptocurrency investment, some players are playing in a smaller area. In order to maximize gains, you must take calculated risks.
6. When investing in digital currencies, be careful of investing directly. In most instances, cryptocurrency can be purchased either through online exchanges that sell directly to the public, or through digital wallets installed in your phone. You can find them directly on the Apple Store and Google Play Store, among other places. Because the purchase price will reflect a number of factors, a direct investment in digital currencies is probably the safest way to get in on the new cryptocurrency craze.
7. Diversification is your friend. When investing in the cryptocurrency sector, it’s critical to diversify your position with your investment portfolio. Take precautions in how much money you place in cryptocurrencies and make sure to diversify with several digital currencies.
8. The FBI and SEC aren’t concerned about investing in cryptocurrency. After Wikileaks’s infamous publication of five million files, including information about high-level U.S. government contracts and employees, and U.S. companies’ connections to private industry, the federal government moved quickly to curb and regulate the questionable practice of cryptocurrency trading. To date, both the FBI and the SEC aren’t taking any action when it comes to cryptocurrencies and investing in digital currencies.