The Bitcoin hunch exhibits why folks ought to make investments with warning
Hermione Granger | Moment | Getty Images
Bitcoin has been on a wild ride for the past few weeks, reaching record highs and wiping hundreds of billions of dollars off the cryptocurrency market days later.
The volatility shows why curious investors should take a break before putting any money into the cryptocurrency.
Bitcoin had an epic run in early 2021. The asset hit a record high of $ 41,973 on Jan. 12, according to Coin Metrics, but fell about 15% just days later, clearing the cryptocurrency market in just under $ 200 billion in 24 hours.
Over the next week, it regained some of its losses, rising to nearly $ 40,000 before reversing its course again. On Thursday, the cryptocurrency was down about 8%, bringing the asset’s two-day losses to more than 10%. Additionally, the price of Bitcoin fell below $ 32,000 for the first time since Jan. 11.
The slump wiped another $ 100 billion from the entire cryptocurrency market within 48 hours.
The extreme up and down movements are relatively common with Bitcoin and are expected to continue.
“The only thing I can expect for sure is volatility,” said David Yermack, professor of finance at New York University’s Stern School of Business. “It has been a risky investment for people from day one.”
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Bitcoin has seen both astronomical growth and large sell-offs in various places in between over the past decade. Although many bulls point to past performance as a sign that the cryptocurrency will continue to rise in the future, it couldn’t happen, according to Yermack.
“It’s a purely speculative asset,” he said, adding that while bitcoin is growing in popularity, it is still not seen as a mainstream investment, meaning many have little information about the asset.
“You should never invest in something you don’t understand,” said Yermack.
Invest only what you want to lose
Financial experts generally advise that people looking to invest in Bitcoin allocate a small portion of their portfolio that they could lose entirely. The UK Financial Conduct Authority has just issued a similar warning.
“People should only really invest what they are willing to lose,” said Daniel Polotsky, CEO of CoinFlip, one of the largest Bitcoin ATM companies in the US
People on the verge of retirement, those in need of the money they want to invest in the short term, or people who want to trade frequently for profit, may want to reconsider Bitcoin as an asset for those goals, he said.
“Maybe there are ways to make money because it’s so volatile, but it can be addicting very quickly to start trading back and forth,” he said. “And most of the people who do that lose money.”
People should only really invest what they are willing to lose.
If you want to allocate part of your portfolio to a speculative asset like Bitcoin, be disciplined and set rules for buying and selling, said David Sacco, an economics professor at the University of New Haven.
“You can gain experience and not blow yourself up,” he said.
According to Yermack, there are also potential ways to invest in the idea of cryptocurrency without putting money directly into an asset as volatile as Bitcoin. This could mean investing in big tech companies like IBM or media companies with their own digital currencies like Facebook that use blockchain.
Additionally, Coinbase, the largest U.S. cryptocurrency exchange, recently filed for an IPO so it could be available to retailers in the future.
Buy long term
Of course, there are plenty of cops who see Bitcoin skyrocketing in value in the future if adoption continues and more large institutional investors buy cryptocurrency.
For those determined to hold onto Bitcoin for the long term, the recent sell-off isn’t a huge problem.
“This is definitely to be expected,” said Polotsky, adding that he expects Bitcoin to continue to rise in the future and sees the recent decline as a potential buying opportunity.
“I think we saw some profitable investors liquidating today, but if you’re a bitcoin bull and have a long-standing preference, you know corrections are normal,” said Harry Alford, co-founder of Humble Ventures. Squawk on the Street “Monday.
He was not impressed with the recent sell-off, he added, and believes that cryptocurrency can lead to financial freedom for black Americans or other groups. “We’ll see how much skepticism turns into curiosity,” he said.
Those looking to invest in Bitcoin should assess where they stand with other personal financial and investment goals to determine if they have extra money to invest in a risky asset.
If you do, it’s okay to put some money in bitcoin and buy it on a day it doesn’t work, said Anjali Jariwala, certified financial planner and CPA and founder of Fit Advisors in Torrance, California.
“Throw in some money and somehow let it stay in and flavor for a while,” she said. “Just so you don’t have to make decisions every time there are price fluctuations that happen every few days at that point.”
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