Suspecting It’s A Bubble Won’t Save You
Many investors know what a bubble is: It’s what happens when an asset’s price far exceeds its real value.
And many smart people have expressed concern that bitcoin is a bubble. Still, many have invested in the currency with little caution despite their suspicions that its price is unmoored from its value.
It’s common for people to buy assets even when they know they’re overvalued, “because they expect prices to go even higher,” said Bruce Mizrach, an economics professor at Rutgers University’s Rutgers School of Arts and Sciences.
And, he said, “they all believe that they can exit before the bubble crashes.”
Just remember: That’s what everyone else is thinking.
“By the time most individual investors get into a rising investment, it’s often too late,” said Kent Baker, a finance professor at American University.
How Does Trading Cryptocurrencies Differ From Stocks
While you can invest in cryptocurrencies, they differ a great deal from traditional investments, like stocks. When you buy stock, you are buying a share of ownership of a company, which means youre entitled to do things like vote on the direction of the company. If that company goes bankrupt, you also may receive some compensation once its creditors have been paid from its liquidated assets.
Buying cryptocurrency doesnt grant you ownership over anything except the token itself its more like exchanging one form of currency for another. If the crypto loses its value, you wont receive anything after the fact.
There are several other key differences to keep in mind:
The Sec’s Lawsuit Against Ripple
The most significant obstacle for Ripple and XRP right now is an ongoing SEC lawsuit. On Dec. 21, 2020, the SEC filed a lawsuit alleging that Ripple sold $1.3 billion in unregistered securities through its XRP cryptocurrency.
Ripple claims that XRP isn’t a security. It has also said that the SEC didn’t provide it with proper notice that selling XRP would be considered a securities offering.
One potential outcome is that Ripple and the SEC come to a settlement agreement. Until that happens or there’s a ruling, the lawsuit will be a thorn in Ripple’s side for several reasons:
- It’s keeping Ripple from its goal of going public.
- It has resulted in XRP being unavailable to buy on many major cryptocurrency exchanges.
- It has likely kept XRP’s price down. While many cryptocurrencies have blown away their previous prices in 2021, XRP hasn’t come near its all-time high of $3.84 in 2018. At the time of writing, it costs less than $1. To be fair, it has still quadrupled investors’ money in a year.
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Can I Make Money Investing In Bitcoin
While Bitcoin’s value has recently soared to around £30,000, its value is extremely volatile and it has dropped to as low as around £300 in the past so you shouldn’t invest if you can’t afford to lose the cash.
Martin said on The Martin Lewis Money Show: “As to whether it’s any good I don’t talk about investing. The thing about investing and Bitcoin is an investment is that prices go up and prices go down. With Bitcoin, they go up massively and they go down massively. And the reason for stressing that so much is that you can make a fortune, but you may lose a fortune.”
He added on TV: “So if you can’t afford to lose the money that you put in, then do not invest in it. It’s a gamble, like all forms of stocks and shares, and all forms of investment and putting money in gold. That’s your choice, but if you do it the right way the investment should work for you, but it doesn’t mean you won’t lose money though.”
[Technically, it’s arguable whether Bitcoin is investing or just speculation as investing usually includes the chance to generate income or accumulate, while speculation is a straight bet on the price of something. Yet that’s splitting hairs, either way it is a big risk. There’s no protection with Bitcoin, there’s no guarantee it will be worth money. Of course, if you buy and the price rockets, you could make big money. Whether that will happen or not, no one knows.
What Does This Price Drop Mean For Crypto Investors
For those who invest in crypto for the long-term using a buy-and-hold strategy, swings like this are to be expected. The recent dips are nothing to be overly worried about, according to Humphrey Yang, the personal finance expert behind Humphrey Talks, who says he avoids checking his own investments during volatile market dips.
Ive been through the 2017 cycle, too, Yang says, referencing the crypto crash of 2017 that saw many major cryptocurrencies, including Bitcoin, lose major value. I know that these things are super volatile, like some days they can go down 80%.
Experts recommend keeping your cryptocurrency investments to under 5% of your portfolio. If youve done that, then dont stress about the swings, because theyre going to keep happening, according to Bill Noble, Chief Technical Analyst at Token Metrics, a cryptocurrency analytics platform.
Volatility is as old as the hills, and its not going anywhere, Noble says. Its something you have to deal with.
As long as your crypto investments dont stand in the way of your other financial goals and youve only put in what youre ultimately OK with losing, Yang recommends using the same strategy that works for all long-term investments: set it and forget it.
Dont check on it. Thats the best thing you can do. If you let your emotions get too much into it then you might sell at the wrong time, make the wrong decision, says Yang.
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Are There Alternatives To Bitcoin
Bitcoin is far from the only cryptocurrency. There are literally thousands of them. Bitcoin, however, is the best capitalized, with a current market cap of $925 billion. Among the other popular virtual currencies are ether, litecoin, and monero.
Ether, in particular, has also seen a huge surge in its price, from about $260 last February to an all-time high of nearly $1,800 this week. Lowry points out that ether also can be used by businesses to execute contracts.
Some cryptocurrencies are extremely limited in their business applications. One that circulated a few years ago, could be used only to make payments to dentists.
Each coin has its own following, said Seward. Bitcoin maximalists, for example, believe in bitcoin and only bitcoin.
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Why Ripple Xrp Faces A Lawsuit
On December 22, 2020, the SEC sued Ripple claiming that XRP is a security and not a digital currency. The SEC argued that XRP should be treated like the shares of a public company are treated. The SEC said that Ripple Labs violated investor-protection laws when it sold a Bitcoin-like digital asset called XRP. The SEC also charged Ripple, CEO Brad Garlinghouse, and co-founder Christian Larsen for engaging in an illegal securities offering.
Ripples counter-argument is that XRP has been identified as a currency in the past. One of the major differences between XRP and other cryptocurrencies has been that XRP is sold by Ripple in segments for select periods of time. The case against Ripple, Garlinghouse, and Larsen is scheduled for a virtual pre-trial conference in February.
El Salvador Develops Law To Recognise Bitcoin As Legal Tender
El Salvador could become the first country in the world to make bitcoin legal tender under proposals by its president.
President Nayib Bukele said in a recorded message to the Bitcoin 2021 conference in Miami that the move would generate jobs and help provide financial inclusion to thousands outside the formal economy.
He said bitcoin could be the fastest growing way to transfer money sent home from abroad. He plans to put the legislation to congress for approval this month.
The US dollar is the current official currency of the Central American nation. About one quarter of El Salvadors citizens live in the US.
Mr Bukele, who has maintained approval ratings above 90% since taking office in 2019, added that a large portion of the $6bn sent home each year by El Salvador nationals living abroad is lost to intermediaries.
The president, whose New Ideas party has a super-majority in congress, touted adopting bitcoin as an idea that could help El Salvador progress.
By using #Bitcoin, the amount received by more than a million low income families will increase in the equivalent of billions of dollars every year, he said.
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Whats The Downside Of Cryptocurrencies
There are a lot of negatives to consider before buying digital currencies. If you want to use them to actually buy something, bitcoin, Lowry points out, has very long processing times. It can take up to 10 minutes for a transaction. Other mainstream platforms credit cards, Venmo and Paypal take seconds.
Fundamentally, speculating on anything is a gamble. Bitcoin is the darling of the crypto world now, but even if it gets more widespread adoption its never been clear if bitcoin will remain the dominant player here, Lowry said.
If youre interested and want to invest a small portion of your portfolio in crypto to diversify, that should be fine, Lowry said. But know its extremely volatile. Bitcoin has risen a lot over this past year, but know that what happens next may not mirror the same price pattern. Be cautious. There may be parallels between this and the internet bubble.
Why Are Regulators Concerned
The FCA has also warned investors to be wary about companies that promise high returns from cryptocurrency. The nature of investment means that there is never a guarantee of making money.
From January 6 this year the FCA banned the sale of complex derivatives that speculate on cryptocurrency movements.
This means that financial services cant offer retail customers contracts for difference, spreadbet options, futures and exchange traded notes that focus on digital currencies.
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Crypto Is Everywhere But Should You Invest
Ten years ago, most people would have laughed if you said you hold part of your investment portfolio in cryptocurrency a type of virtual currency that is secured through various cryptographic and computer-generated means. But these days, you might be seen as behind on the times if you don’t currently invest, or if you have never traded a single Bitcoin, Ethereum, or Litecoin in your life.
Like it or not, cryptocurrency is practically everywhere these days and no longer just for day traders and nerds. In fact, many traditional businesses are integrating cryptocurrency into their platforms in some form, or using it as a means to launch other types of products.
Cryptocurrency Continues Gaining Steam
Case in point: In October of 2020, PayPal launched a new service that made it possible for their account holders to buy, sell, or hold cryptocurrency, or to use it to buy stuff at 26 million different merchants.
According to the payment platform, mainstream use of cryptocurrencies has largely been “hindered by their limited utility as an instrument of exchange due to volatility, cost and speed to transact.”
However, they believe their platform could provide a means to make cryptocurrency more useful as a payment method.
PYPL was expected but also needed to usher cryptocurrency into the mainstream.
McCormack also points to the payment platform Square SQ , which reportedly invested $50 million into Bitcoin in October of last year.
The answer depends on who you ask.
Sushiswap $1926 $302bn Market Cap
For a variety of reasons my top pick for this month would have to be SUSHI. SushiSwap is a decentralised exchange which allows users to trade between any two ERC20 tokens on the Ethereum blockchain, with SUSHI being the governance token that can be used to vote in proposals and receive a share of the revenue generated by the protocol. Many crypto investors will be aware of Uniswap but may not know much about SUSHI, SushiSwap started life as a fork of Uniswap in late August 2020 but has grown into an extremely differentiated product. Currently, SushiSwap is a more decentralised version of Uniswap.
We can compare Uniswap and SushiSwap on a simple market cap to total value locked ratio. Total value locked refers to the amount of liquidity locked in the protocol, liquidity is the lifeblood of any decentralised exchange as it enables assets to be transacted between users.
19 March:UNI Mkt Cap: US$15.6 blnUNI TVL: US$4.9 bln
SUSHI Mkt Cap: US$2.7 blnSUSHI TVL: US$4.7 blnRatio: 0.58
Another important feature of SUSHI and the SushiSwap protocol is that stakers of SUSHI directly receive a share of the protocols fee revenue. Most investors will be used to the idea of dividends, SushiSwap pays their token holders a continuous dividend through xSUSHI . This enables SUSHI to be valued using traditional stock market valuation techniques, which is an exciting development in an industry that has been ridiculed for only being good for speculation.
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Consider Your Tolerance For Risk
The latest crypto crash is further proof of this sector’s volatility. Considering cryptocurrency’s history, a 30% drop is fairly mild. Bitcoin, for example, has fallen by more 80% on three separate occasions since 2012, according to data from Visual Capitalist.
This year alone, Bitcoin has already experienced several steep drops. So this recent crash is par for the course — and there will likely be many more crashes like this in the future.
Before you invest in cryptocurrency, think about whether you can tolerate this level of risk. Although Bitcoin has always managed to bounce back from its slumps, there’s no guarantee it will always recover.
If you know you’re going to lose sleep when your investments plummet overnight, crypto may not be the best investment for you. But if you have the stomach for this type of turbulence, you may have the right personality for investing in crypto.
Other Ways To Buy Or Invest In Bitcoin
Bitcoin ATMs. These work like normal ATMs, only you can use them to buy and sell bitcoin. Coin ATM Radar shows more than 7,000 bitcoin ATMs around the U.S.
Peer-to-peer bitcoin owners. You can buy bitcoins directly from other bitcoin owners, much like you would buy items on Craigslist, through peer-to-peer tools like Bisq, Bitquick and LocalBitcoins.com. Use extreme caution if buying bitcoin directly from individuals.
Grayscale funds. Grayscale Investments is a digital currency asset manager. Two of its investment trusts Grayscale Bitcoin Trust and Grayscale Ethereum Classic Trust are publicly traded over the counter, which means you can buy them through many discount brokers. There are fees, and GBTC often trades at a premium, that is, GBTC shares often cost more than bitcoin, even though bitcoin is its only holding. The thinking is that some investors are willing to pay extra to buy bitcoin through a traditional exchange, without needing to worry about wallets and storage.
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Whats Behind The Latest Bitcoin Drop
Many investors see Bitcoins price swings as part of the game, but volatility is tough for individual investors to deal with, Noble says. Like Yang, he warns against selling too fast.
While this recent drop is reminiscent of 2017s sell off, Bitcoins presence has grown a lot since then. New short-term investors who are selling their holdings in reaction to the drop may be influencing the continued dip in Bitcoins value, according to a recent report from Glassnode Insights, a blockchain analysis firm.
While fluctuations are expected, Noble says this swing is a bit out of the ordinary. I thought the market was maturing and these things would be less frequent and severe. Boy was I wrong, he says.
This particular drop was caused by a combination of factors that may have made this drop more severe, Noble theorizes, from excitement about low-quality coins, to negative remarks from Elon Musk, to Chinas latest crack down on crypto services. The accumulated response made this sell off all the more violent, says Noble.
He likens the drop to the stock market crash of 1987, from which the markets took months to recover. But because crypto moves a lot faster today than equities did in the 1980s, Noble says we may see a quicker recovery.
Dont panic and puke, Noble says. If you keep your positions small, you can try to tolerate the volatility.