April 29, 2022

Crypto: Fool’s Gold or Future Gains?

Patrick Mayles
Forbes & Seeking Alpha Contributor

With so many new investments to choose from, including NFTs and cryptocurrencies like Bitcoin, it’s easy to feel like you’re missing out. Since most of them have gone gangbusters over the past few years, the truth is that you might be!

Cryptocurrencies and other digital assets have the potential to play a major role in tomorrow’s economy, but our advice for new investors is not to overdo it, and certainly not to sweat short-term movements (which happen a lot). 

Like all investments, it makes sense not to give them an outsized place in your portfolio, and to save for the long-haul rather than betting on tomorrow’s price jump.  

Real Possibilities, Unproven Value 

Cryptocurrencies, as well as other block-chain based assets like NFTs (non-fungible tokens), have some exciting applications. Some people think that, because inflation is hurting traditional currencies like the dollar and the Euro, people may flood their money into cryptocurrencies as a reliable store of value. It makes sense that cryptocurrencies could offer some protection from inflation. Since cryptocurrencies can’t be controlled or “printed” indefinitely like government money, the total supply has a firm limit. 

However, since inflation started picking up in mid-2021, Bitcoin has actually dropped. We just haven’t seen whether cryptocurrencies can really function like a regular currency, and this is why there’s such hot debate over the assets’ value, and why cryptocurrencies fly all over the place pricewise. 

NFT’s (non-fungible tokens) have achieved something special as well. They use blockchain technology to make a digital item, such as a painting, song, or image, totally unique. The item of course can be “copied”, but there will always be only one original file. There are many applications of this, from selling works of art to writing unchangeable contracts, but there is still a lot of uncertainty over how it will be applied. The most expensive auctioned NFT’s show that hype and celebrity play a big role in the NFT market.  

After the Party, Get Ready for the Hangover 

Source: CoinMarketcap


Bitcoin’s Wild Ride 

Bitcoin and other cryptocurrencies are extremely volatile, often flying up and down by double-digit percentages within the same week! But in the long-run, they’ve trended in the right direction: toward the moon. 

There’s no guarantee that this will continue to be the case, especially in the short term. In the past ten years, there were some very special circumstances that boosted cryptocurrencies and NFTs, as well as pretty much every other high-yield investment like stocks and real estate. 

The main factor was low inflation, which allowed central banks to set interest rates close to zero for many years. Low interest rates encourage people to borrow money because it’s cheap to borrow, and to park their money somewhere that they can get some return, like stocks, real estate, or meme investments, which boosts the price of those assets. This is a big part of why crypto, real estate, and stocks have all consistently seen prices soar since 2012, even during the pandemic. 

This Goldilocks situation (low interest rates, healthy economy and low inflation) looks to be coming to an end. You’ve likely seen on the news and in your daily life that inflation is out of control. Governments’ main tool to fight inflation is to raise interest rates, which could start to tamp down on borrowing and also lead to a lot of people pulling their money out of risky assets. 

If we go through a recession this year, as many experts are predicting, we have no history to guide us on how cryptocurrencies will move. They only really hit the scene after the last big recession. 

There’s a lot of uncertainty around how crypto will do if the broader economy takes a hit. It looks safe to say that for now they’ll behave like other risky assets, which means they’ll likely take a dive in the short term and keep growing in the long run. 

Moral of the Story: Diversify! 

If you’ve read our other information on investing, you know “diversify” is our absolute favorite word. Peace of mind, healthy returns on your savings, and safety from sudden crashes all depend on a diverse portfolio. 

Cryptocurrencies, NFTs, and other emerging digital assets could very well keep shooting up, but their volatility shows that this is far from guaranteed. We propose a simple rule for investing in them: buy a diverse basket of them (don’t bet the house on Dogecoin), and don’t invest anything you aren’t willing or able to lose all of. 

If you set aside a small percentage of your savings in a wide variety of these trendy assets, you could see outsized returns without the outsized stress. 

 

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