The Dangers of Investing in Cryptocurrencies

DO NOT under any circumstance take this as financial advice. I have no idea what I’m doing with regards to investing, I merely want to point out some of the dangers to you. DO EXPECT to throw money out the window unless you know very well what you are doing. ANY INVESTMENT is a dangerous game, especially for novices like me.

There, that should get the mood set.

In this article, I’ll focus on explaining to you some of the dangers of investing in cryptocurrencies. I’m doing this to warn you about the dangers involved, and maybe even scare you away from investing completely. This isn’t a beginners game and you will get burned if you approach it without proper preparation.

Investing Bits and Bytes? You’re Joking, Right?

You may be surprised that there is a thriving market for Bitcoin based investments. Even Litecoins now have dedicated stock and options markets. Why on earth would such a thing exist at all? It’s just numbers, right? Not real money?

Note: No, I’m not having the debate about the merits of Bitcoin, whether Litecoin has a place at all, cryptocurrencies in general, or other similar discussions now. My opinion is that there is a market need for cryptocurrencies, Bitcoin, Litecoin, or otherwise. Currently, Bitcoin and Litecoin are my favorites to lead this race, but don’t listen to me.

Well, as with all things subject to speculation, people will speculate, trying to make more of what they already have. Whether they speculate in the volatility of the market, or the long-term success of any particular cryptocurrency, these markets will pop up and as long as there are willing participants who believe they can benefit, they will thrive.

I would like to stress, though, that investing with and in cryptocurrencies is an extremely risky business. It is even more tricky and complicated than regular speculation because you also need to take into consideration the exchange rate between the various cryptocurrencies, and the exchange rate between cryptocurrencies and fiat currencies.

In other words, and make no mistake about this: DO NOT under any circumstance put money into cryptocurrency speculation that you are not completely comfortable considering lost the moment you buy in. Nobody understand this market, nobody knows where it is going, nobody has any relevant previous experience with cryptocurrency markets, much less with how stocks and options work.

So, Why Are You Investing?

Personally, I have a few Bitcoin and Litecoin investments, but like I explained, I consider these funds lost and have no hope of ever recovering them. I am using the investments to learn more about investing in general and about cryptocurrencies in particular. I have faith in cryptocurrencies as the future of commerce, and I want to learn as much as possible. I’m a learning junkie, in case you haven’t read anything I’ve written before.

At the time of this writing, I have yet to realize any losses on my investments, but I have also spent weeks and months learning and calculating, reading about investment strategies, how traditional markets work, how psychology plays into the game, and so on. I have spread my investments to balance any risks, and I’ve constructed an investment profile that matches my risk profile (which is ‘let it ride’, basically) with my expectations for the growth of cryptocurrencies.

I am a complete novice at this game; I expect to suffer heavy losses, perhaps even a complete loss, or, as it stands right now, even more than I have invested. I have spent considerable time learning, and that time may instead have been used for other, more profitable ventures.

I have, however, put in some of the legwork to understand as best I can how this game works, and it has taken considerable time. When I say I’ve worked weeks on this, I’m talking about 15-18 hour days, seven days a week. This probably makes me more informed than most first-time investors, but make no mistake; I am utterly incapable of making sound decisions, and I’m having to completely rethink what I’m doing on a daily basis. DO NOT take any of what I tell you as any kind of advice on what you should do, with one exception (two, counting the previous sentence): DO YOUR HOMEWORK.

Why is it So Complicated?

I’ll talk more about the complications of investing in cryptocurrencies in a later blog post, but be aware that investing in cryptocurrencies is more complex than regular investments. Rather than having an investment go up and down based on a single or few market conditions, you need to take the exchange rate into consideration, and that may move in any direction at any time.

Further, since Bitcoins and other cryptocurrencies are by nature decentralized and out of government control, you have no recourse if something goes wrong (recourse meaning your ability to get money back if you’re tricked or scammed). Plenty of people have lost plenty of money to scammers, but also to people who have had honest intentions but very little experience or just plain bad luck.

Also take into consideration that the cryptocurrencies’ exchange rates are extremely volatile at present. This is partially due to its size but also because it is a young market and nobody really knows what drives the exchange rate. Bitcoin Market Capitalizaion Snapshot from Blockchain.info

Many people lost large fortunes during April 2013 after what seems to have been a bubble in the Bitcoin/US Dollar exchange rate, even seasoned investors who thought they could ride the wave into the sky.

Finally, because the Bitcoin stock investment market is extremely young and small, but also due to its decentralized nature, it is to a large extent based on trust. You need to do far more investigations into the background of the issuers of stock denominated in cryptocurrencies than you would for a regular stock exchange, where you can trust somewhat in the exchange to do some of the due diligence for you.

The cryptostock market is definitely maturing in this area, but has a long way to go before its reputation and process for admissions is as strict as it would be for example for being traded on NASDAQ.

So, if I haven’t scared you off yet, I haven’t done a good job, but I would like to see that you’ve at least become more aware of the dangers inherent in investing in an unproven, highly speculative, and largely misunderstood market.

Be safe, and in the case of Bitcoin, Litecoin, or other cryptocoin investments, that may mean sitting on the bench for a while.

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