If you are reading this article, you probably fall into two categories. You are either already vested in cryptocurrency or planning to invest in one very soon (literally). Before you take the plunge, take a step back and consider this: Are cryptocurrencies the right investment for you?
There are three questions you need to ask yourself to see if cryptocurrencies are really the right investment for you at this very moment.
Mindset: How prepared are you for any loss?
What is the intrinsic value of cryptocurrencies like Bitcoin, Ethereum and Litecoin? Nobel laureate, CEO of S&P 500 companies and top investors have come out to question the intrinsic worth of cryptocurrencies. None of them believe that cryptocurrencies have an intrinsic worth. Worse still, the man who won the Nobel prize for his work on bubbles, Robert Shiller, is calling Bitcoin a bubble. At a time when bitcoin fell as low as US$7,000, it seems that Robert Shiller’s claim could come true. While the cryptocurrency market has been recovering steadily, you need to be mentally prepared for the losses that might come in the future.
It is not just about being willing to take losses. You also need to think carefully and be mentally prepared about how much you are willing to lose from your investment in cryptocurrencies. Like all investments, the more potential gains there are, the more risk you are taking. Cryptocurrencies have the ability to make you very rich in the span of a few days. The opposite holds true too. They can plummet very quickly if investors lose confidence in them.
Motivation: Why are you investing in cryptocurrencies?
Are you a living-in-the-past investor?
The motivation behind your investment in cryptocurrency can be a huge determining factor in whether cryptocurrency is a suitable investment asset for you. With the media reporting about how cryptocurrency traders/investors are making quick gains, the market has reached a stage of irrational exuberance. If you had placed money on any cryptocurrency in 2017, you would have made at least 100% in returns. Just like how Warren Buffett likes to say, “A blindfolded monkey can make a better pick than you”.
However, if you are investing in cryptocurrencies because you think that the same will happen again in 2018, you might want to reconsider. For starters, cryptocurrencies are no longer as cheap as they were in 2017. Furthermore, with so much hyped demand for cryptocurrency, the market is turning unstable. Moreover, what happened in 2017 doesn’t have to repeat itself in 2018. Some might argue that the cryptocurrency market is slowly gaining legitimacy. However, the path to legitimacy can be a long one. In the meantime, cryptocurrencies will continue to face scrutiny and volatility.
Read also: 5 Cryptocurrencies to Watch Out for in 2018
Are you a FOMO investor?
There are some of you who might fall into this other category of investors: The FOMOs (Read: Fear of missing out). When you first heard about cryptocurrencies, you were as apprehensive as can be. You didn’t want to take the plunge. But you saw your friends getting their skin in the game and making three-fold on their initial investment. Still, you were uneasy about putting your money in these so-called “currencies”. You continue to stay out of the game.
But soon, you realized that everyone in your neighbourhood is making so much money on cryptocurrencies that you regret your decision. Fearing that you would be too late and miss the party, you are now throwing what you can spare into cryptocurrencies. You think that you would rather be late than to never have been part of the party.
Knowledge: How much do you know about cryptocurrency?
To be frank, not many people know much about cryptocurrencies, other than the name of each currency. Neither do the cryptocurrency miners. Even the blockchain developers themselves might not fully understand cryptocurrency. Some of you might rebut, “Why do we need to understand how cryptocurrencies work? I don’t understand how the internet works as well, but I am using it every day”. While this might be true, are you sure you are comfortable with investing in an “asset” that you do not even understand? Moreover, the worth of an asset is dependent on its intrinsic value. How do you gauge its value without first understanding cryptocurrencies?
The very least you could do is to understand the mechanics behind blockchains and cryptocurrencies. You should familiarize yourself with terminologies like SHA256, proof of work, proof of stake, fork and block reward. Apart from the terminologies, you should also be understanding the differences between different cryptocurrencies and their respective blockchain. For example, Ethereum and Bitcoin are driven by very different purpose. Ethereum is a decentralized computing platform that enables SmartContracts and Distributed Applications to be built and run without any third party involved. Bitcoin, on the other hand, offers the potential of lower transaction fees than traditional online payment platforms.