7 Reasons Why You Shouldn’t Invest in Cryptocurrency
For the last 3 months, the cryptocurrency market has been on a tear reminiscent of the 2017 bull market.
While I’m happy to see a resurgence in price because it means good business for us here at HodlBot, I’m also very wary. Times like these inspire FOMO and pose a dangerous invitation for those wanting to invest in cryptocurrency for all the wrong reasons.
There’s enough material out there to tell you why you should be investing in cryptocurrencies, so here are some of the biggest reasons why you shouldn’t.
1. You have high-interest debt
“Once my crypto portfolio moons, the first thing I’ll do is pay off my student loans and credit card debt. — Anon Trader #385
If you have credit card debt or any debt with high interest rates, do not purchase cryptocurrency until you’ve paid it off. The same applies if you’re borrowing money to purchase cryptocurrency.
Cryptocurrencies are extremely volatile. They are not going to dig you out of debt and liberate your life. It’s possible for all cryptocurrencies to take a nose-dive for the next 10 years.
If you can’t afford to pay off high-interest debt, then you can’t afford to invest in cryptocurrency, period. Better to miss a potential opportunity, than to fall into financial ruin. Don’t be this guy.
2. You want to day trade crypto because you think it’s easier compared to other assets.
“I heard I can achieve financial freedom by learning how to daytrade Bitcoin because it’s way easier than Forex. — Anon Trader #1335
I hear this one constantly. Here’s why it’s not true.
Financial markets are ruthlessly efficient
Traders are constantly seeking new and improved strategies regardless of the asset class. While cryptocurrency may seem like a new asset class to you, it’s been home for a myriad of algorithmic traders & professional traders for years now.
If you’re looking for low-hanging, easy opportunities to trade and make money, you’ll find nothing but slim pickings here.
Day Traders Fail to Compare Their Performance Against the Market Benchmark
When evaluating how performant your active trading strategy is, you should always compare it to the market index. Saying you made money or outperformed in Bitcoin during the 2016–2017 bull run means very little because the run heavily favoured alt-coins.
Most day traders who think they did exceptionally well during the bull run, actually underperformed the market index. If you indexed the top 30 coins from the beginning of 2016, you would have 175x’d your money by 2017. Did you beat that?
It’s easy to get lucky in the short-run but it’s hard to stay lucky for long
Some day traders may get lucky and outperform the market in the short-run, but it is notoriously difficult to outperform the market over the long-run. Past outperformance does not guarantee future outperformance. Don’t get fooled by randomness.
According to the 2017 SPIVA scorecard, 50% of active money managers outperformed the S&P500 in a single year, but only 5% outperformed over a 15 year period.
3. You Want to Invest in the Newest Fad Cryptocurrency
“PoW Blockchains Networks are so 2017, I’m all about PoS, DAGs, ternary number systems, zero-fee, scalable blockchains — Anon Trader #532”
New, cutting-edge technology does not a market, win. Cryptocurrencies are trying to disrupt existing human networks. The main two are centralized fiat currency networks and centralized human organizations. As such, it is not so much the technology that dictates the pace of disruption, but rather also the social and economic properties of a cryptocurrency network that will determine whether it is successful.
Bitcoin took existing technology and shaped it into an application that had the right economic incentives and disincentives for the network participants. Bitcoin’s value grew as the network became larger, more robust, and more difficult to displace.
It’s not easy for a new cryptocurrency to win by simply having novel technology. All these new fad technologies coming out are about making the blockchain scale faster, operating cheaper, as if that was the sole determining factor on whether a cryptocurrency network will succeed. Not only are these novel applications untested and finicky, but they also don’t have scale.
Obligatory meme
4. You have FOMO and Want to Make Money Quick
“I know it’s a bubble. I want to get in and get out before the bubble pops” — Anon rader #1935
It is extremely hard to time the market. While it might go up as it did in 2017, it could also come crashing down like 2018. Most professional traders get it wrong.
If you treat cryptocurrency investing like make money quick scheme, you are essentially gambling.
People who got FOMO and started investing as it was going up in 2017, lost a ton of money that they still haven’t recovered. Greed and FOMO are more dangerous than anything because it will push to stake more than you are prepared to lose.
5. Cryptocurrency is a Speculatory Asset
“If you buy something like bitcoin or some cryptocurrency, you don’t have anything that is producing anything. You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more.” — Warren Buffet
Cryptocurrency is a speculatory asset. A coin’s price ultimately depends on the supply & demand dynamics in the marketplace. The price goes up when people want to buy it, and there are not enough coins to be sold at the current price.
Bids in green on the left side and asks in red on the right side, forming what looks like a valley around the market price.
The future price is entirely dependent on what other people will buy it from you at. It is not based on fundamentals. Although some are trying to create fundamental valuation models for cryptocurrencies, we are still very far away from reaching any kind of meaningful consensus. As such, fundamentals are certainly not priced into the market.
6. You Don’t have an Emergency Cash Fund
“Every time I pay rent, I just pull it out of my cryptocurrency portfolio” — Anon trader #321
If you don’t have an emergency cash fund, you shouldn’t invest in cryptocurrency. Do not treat cryptocurrencies as an equivalent.
While cryptocurrencies may be “liquid” to trade against other cryptocurrencies, they are not so liquid in real life.
Withdrawing cryptocurrencies and exchanging them for fiat always takes longer than you think. It can be an extremely arduous process.
You can’t buy many goods & services with cryptocurrency without dealing with a fiat-crypto exchange. Also, you don’t want your liquid assets to be super volatile and change up to 20% in a single day.
7. You’re Trying to Make Back What You Lost
“X coin dropped 75%. I’m waiting for it to bounce back and make back what I lost. After that, I’m done.” — Anon Trader#5321
Most humans are extremely loss-averse. That’s why it’s very common for investors to fall into the sunk cost trap where they’ll decide to keep or double down on a bad investment because of the time and money they’ve already put in. Most people will stubbornly hold on even if cutting losses is the best outcome going forward.
What if the investments you’re waiting to bounce back, never do so? With respect to emerging technologies, it’s very common for a single asset to significantly outperform another while the others go to zero. Emerging tech investments like cryptocurrencies tend to follow a power law distribution.
If we look at today’s market cap for cryptocurrencies, the combined market cap of the top 20 coins makes up 89% of the entire market. Assuming returns in the cryptocurrency market also follow a power law distribution, we can expect that a few coins will net colossal returns, while others perish.
Perhaps the coin you’re holding on to has already had its heyday and is never bouncing back.
Invest Responsibly
If none these reasons apply to you, then investing in cryptocurrency may be a valid and viable option.
There are plenty of good reasons to invest in cryptocurrency, such as:
- portfolio diversification
- hedge against inflationary fiat currencies
- owning censorship resistant assets
- privacy
Indexing the Market
If you do end up investing in cryptocurrency, I recommend looking into cryptocurrency index funds. Index funds are low-cost, transparent, rule-based portfolios designed to track the performance of the entire market. In equity markets, index funds outperform 80% of all professional money managers.
About the Author
I quit my job recently to start HodlBot.
We created HODL10, HODL20, HODL30 indices and the first ever application that allows you to create your own personalized cryptocurrency index fund.
To get started all you need is a
- Cryptocurrency Exchange Account
- $200 in any cryptocurrency
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