Is it worth investing in cryptocurrencies?

Is it worth investing in cryptocurrencies?

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Investing tips
26/10/2021 20:062 years ago
Andrzej Mańka

The current “gold rush”, triggered by the bitcoin exchange rate, is an excellent opportunity to take a closer look at the rules of investing and understand the difference between professional and occasional investing. 

In this article I address the following questions: 

What are bitcoins and who is behind them?

What are other popular cryptocurrencies besides bitcoin?

What is blockchain?

What is meant by the “mining” of currencies?

What are the basic terms related to blockchain and cryptocurrencies?

What are the main platforms for trading and investing in cryptocurrencies?

Why has the price of bitcoin risen so rapidly? 

What are the rules of investing? 

What is the difference between investing and speculating?

Why we are crazy about cryptocurrencies 

Perhaps now all of us, but certainly some of us, are crazy about cryptocurrency! 

Bitcoin and cryptocurrencies have been in the news for several years now. However, it was only this year that they captured mass interest because of their staggering prices. The most important of the cryptocurrencies, bitcoin, fires our imaginations, as the rate of return on investment reaches unbelievable – sometimes unprecedented – levels. 

Someone who sensed the potential of cryptocurrencies and invested $100 in bitcoins in 2010 now has $73 million! 

Even for those who caught on much later,  $100 invested in bitcoins in December 2020 now yields, after just 10 months, five times that amount. Meanwhile, traditional forms of investing, such as in financial instruments or even gold, yield significantly less. Investors can generally expect returns between a few and a dozen percent per year.

Bitcoins have gained in prestige, especially since Elon Musk, the creator of companies such as PayPal, Tesla, or SpaceX (which is preparing to expand to Mars), bought an astronomical amount of $1.5 billion dollars in bitcoins in February this year. 

Yet in May 2021 Musk changed his mind unexpectedly and withdrew from the idea that Tesla cars could be paid for with bitcoin. This U-turn only confirms the highly speculative, unpredictable nature of investing in bitcoin – and cryptocurrencies in general. 

On the other hand, more established financial institutions are starting to accept cryptocurrencies as a means of payment. Recently, cryptocurrency supporters have been joined by VISA, which has stated that it will be possible to pay with crypto using its cards. 

It’s become increasingly hard to argue that cryptocurrencies are just another spectacular speculative bubble.

Their price fluctuates enormously. In such a situation, as usual, the leading players with the means to influence prices, and to initiate their unexpected increases or decreases, have the advantage.

A brief overview of useful terms 

Bitcoin: the first and oldest cryptocurrency introduced in 2009 by the legendary Satoshi Nakamoto, creator of the revolutionary concept of cryptocurrencies and blockchain. The identity of Satoshi Nakamoto is unclear, as it  is a pseudonym for a person or group of people. 

You can find more useful information about these technologies revolutionizing the way we think about money here

Blockchain: the foundation of cryptocurrencies is an advanced technological system called blockchain, or “blockchain.” It is a type of database that collects information about all payments and operations carried out by users. Blockchain is also a public accounting system that provides transparency. It has become popular outside of cryptocurrencies as well, with the idea being taken up by governments and large corporations such as Google and Amazon. 

Altcoins: a collective name for hundreds of cryptocurrencies that are not bitcoin (the most popular cryptocurrency). Only the very well-known represent some value in the eyes of traders or investors. Here are some examples: 

Ethereum: on the market since 2015, it can threaten the hegemony of bitcoin, because its mining is cheaper and simpler. 

Tether: created in 2014, it is pegged to the U.S. dollar in a 1:1 ratio. This cryptocurrency is controversial due to the low transparency of operations and the often unclear decisions of its owner, Tether Ltd.

Ripple: a cryptocurrency with a predetermined amount, which is 100 billion units. Unlike other cryptocurrencies, it is based on the so-called open source, so enables quick transactions. 

Mining: generating more bitcoin through complex mathematical calculations used to validate a given transaction. Almost any computer can be used for these procedures. The calculations consume so much energy that environmentalists have increasingly raised concerns. 

Wallet: since cryptocurrencies are completely electronic, this requires the creation of a virtual wallet for each user, in which he can store his resources. 

Trading: an important term for users of cryptocurrencies, because in fact, cryptocurrencies are generally traded or rotated, and not invested in the classic sense. Trading platforms are used for this purpose. The most well-known are: 

Fidelity Investments: considered to be the best cryptocurrency platform.

TD Ameritrade: an especially good platform for beginners and mobile users. 

tastyworks: suited to those looking for a low-cost platform.

Interactive Brokers: ideal for international traders and those with advanced knowledge of cryptocurrencies.

Why the bitcoin price may have risen so sharply?

Bitcoins are a currency with a finite number of tokens. Unlike the official currencies we use every day, which are regulated by central banks, it cannot be “added to” and created indefinitely. 

Consequently, if demand grows and supply shrinks, the price goes up. 

Many investors don’t trust traditional currencies. They fear the current money printing that is the response of most governments to the pandemic crisis. Cryptocurrencies seem to be a natural and appealing alternative to these concerns. 

So is it worth investing in cryptocurrencies now? 

It depends. 

And it depends not necessarily on the bitcoin market or other cryptocurrencies, but predominantly on us and our competencies. 

Only organized, long-term action will bring the concrete financial results you desire. If you act “casually” it is speculation. You can make (or lose) a lot of money on speculation, but you must be well-versed in it and have a great deal of trading experience. 

Now let’s take a closer look at the art of trading. 

The three steps to investing

Investing is, next to generating money, the most advanced form of personal finance management. However, anyone can invest professionally and with some effort, generate a lot of money. In a sense, it is a skill, like driving a car, communicating in a foreign language, or playing a musical instrument; knowledge and practice are required to develop such a skill. 

For those who are interested, an exciting variety of investment opportunities awaits. You can invest in real estate, businesses (especially startups), gold and precious metals, art, or in the stock market and financial instruments. After all, cryptocurrencies are just one of the many options available. 

Here are three proven steps for successful investing: 

Step 1. Learn to work with risk (“risk management” is the popular term, but I prefer “work with risk” because it captures the essence of the process more accurately). 

Step 2: Get your finances in order. It’s also a good idea to build a reserve capital, which will allow you to function for at least six months in case more difficulties arise than you initially assumed. 

Step 3: Plan your action and get to work! Create a useful and easy-to-follow system of work. 

Learn the basics of personal finance 

Investing is both the most profitable and the most complex stage of personal finance management. 

Although it is complex, it remains doable and accessible for anyone.

In a somewhat simplistic way, useful for understanding the money we manage on a daily basis, our personal finances can be divided into four levels.

The first level is budgeting. If you want to make an effective budget for yourself or a whole family, you need to know the exact structure of expenses, the most important current and future needs, all sources of income, and the general principles of planning. Budgeting can be time-consuming, especially in the beginning, but overall it is a fairly simple task.

The next level is saving. While it seems straightforward, saving can pose problems because of the probable need to change some habits relating to the pleasure of spending, or even our entire lifestyle! So technically saving is very simple, but from a psychological point of view it brings challenges.

The third level is the ability to get out of debt. An invaluable skill, especially in our somewhat chaotic world where loans, credit cards, debits, or generally living under the dash is not only the norm, but actually a lifestyle marketed daily by businesses and banks.

When you carry out a general cleanup of your finances, by learning how to budget, save and manage debt, you are ready to start investing.

It’s best to begin your investing adventure with a brief review of all the key issues related to managing your personal finances.

Next, take an analytical look at yourself to get the most accurate picture of your character traits and personality. 

Do you like risk? If so, what is an acceptable level of risk in your case? Can you cope with stress, with making decisions under time pressure? Or do you prefer a quiet life and cannot imagine giving up your free weekends and evening chats with friends in a cozy café?

Not forgetting, of course, the must-have skill: financial literacy. Do you know how to calculate and how compound interest works? 

It’s important that you learn financial engineering thoroughly to make effective investment decisions. Finance is not a difficult subject, but it does require some effort and time to fully understand it and grasp how to manage it. 

Pay attention to what and how you think, and learn about cognitive strategies and biases

It is worth taking a close look at the so-called cognitive errors. The English Wikipedia, under the heading “cognitive bias”, lists as many as 104 cognitive errors that characterize our thinking. They can be grouped into several categories. 

In the first of these categories are the errors we make due to the excessive amount of information at our disposal. We are all familiar with this issue in the age of the internet, social media, and ubiquitous smartphones. 

The second group contains the mistakes we make due to our inability to properly interpret the data at our disposal. This is why algorithms are so popular – they try to bail us out of finding meaningful patterns in the data that bombard us in various forms from all possible directions.

In the next group are serious inaccuracies that distort our view of the world under the influence of memories. When you look closely at the way you present your memories to yourself or others, you will find that you pick out certain elements, ignore others, and slightly distort others to better suit your current needs.

Finally, in the last group of cognitive errors are those that inevitably occur when making decisions under time pressure. If you need to make a decision quickly, without time for detailed analysis, you may miss something important.

12 golden rules of investing 

Once you have all these steps of preparation behind you, it’s time to finally prepare for the most exciting financial move of your life! Here are the 12 rules of investing:  

1. Prepare a professional plan.

A plan is the absolute foundation of any successful action! You can’t achieve financial prosperity without precise goals, a calendar, and performance checks. 

2. The best time to invest is now.

No matter how old you are or what experience you have, if you want to start investing and radically change your future, start preparing now.

3. Start with something simple.

Experience in any field is gained in stages, so start with a small step that is simple, quick, and relatively easy. Learn as much as you can and prepare for the next stages of investing.

4. Know exactly what you are doing.

Regardless of the type or size of investment, always know what you are doing. When you understand what the positive effects will be, are aware of all the technical aspects of an investment, and can articulate why you want to make that investment, everything will be OK!

5. Establish a level of risk that is acceptable to you.

Recall the most important decisions of your life so far. What were they like? Bold, different from those around you? Or rather similar to the decisions of others, the majority? And how is your decision-making now? What does risk mean for you? Be very precise, accurate, and honest in your answers, because an acceptable level of risk is the most important component of any investment.

6. Choose the area and subject of your investments.

It is fundamental, especially at the beginning of your journey, to choose the type of investments you want to make. What turns you on the most? Real estate? Startups? Precious metals? Works of art? Or maybe cryptocurrencies? It’s best to invest in what you know and understand well. Once you have selected the industry, you should of course continue to explore it until you find a very specific object to invest in.

7. Use simple systems.

When you have a book on investing to write, or a training course to prepare, you know that you have to cover a lot of ground, presenting multiple different investing models, decision matrices, and a variety of useful tools. When you start investing, though, you need to simplify the process by choosing optimal systems and methods. In general, the simpler the system in investing or business, the more effective it will be.

8. Automate your work.

Use web and mobile applications for investing. Search out free or paid tools that will relieve you from the tedious process of collecting data or analyzing it.

9. To diversify or not to diversify, that is the question!

Warren Buffet has three favorite industries that he invests in: insurance, banks, and consumer goods. The general rule of diversification is that you need to choose your industries carefully and not get distracted by too many investment types. Others say it’s best to focus on one area. I think you should decide what serves you and brings you the best results.

10. Do something different from the majority.

Avoid investment advice from the mainstream media, or from friends who are amateurs in this field. When there is a buzz about an investment opportunity , when a TV channel urges you to invest in a fund, or everyone on Facebook is talking about bitcoins, it means that the real money has already been made by others. Look for good contacts with specialists in a given field and rely instead on reading blogs, or trade and expert magazines.

11. Invest only the money you can lose.

Each investment should be carefully calculated. If you expose too much of your wealth or savings you could end up in serious trouble. Therefore, never invest money that you cannot afford to lose if it fails.

12. Focus on values, not prices.

Prices change, prices can be capricious. Values are timeless. When you know your industry and your area of investment intimately, you begin to see the values that will survive a crisis or a speculative bubble. Learn to distinguish between prices that are “inflated” by someone else’s speculative actions, and values which are much more durable.

Remember that these are generally very subjective matters. The judgment is ultimately up to you and the final decision is always yours! 

Your most important investment 

And while you’re at it, there’s another investment, the most important of all, that yields the highest rates of return: an investment in yourself. The more you know, the more you understand, and the more experience you have, the more money you will make from investing.

Cryptocurrencies are just another, perhaps temporary, fad. The real value lies in your ability to invest, and somewhat less in the fascination with ephemeral and capricious speculative bubbles. 

If you know your way around investing, have the benefit of experience, and understand the cryptocurrency market inside out, you can make crores on them even now, when the biggest winners have long since claimed most of the cream. 

Otherwise, consider one important point. Why are you only interested in cryptocurrencies now that they have become the focus of mainstream media? Professional investors rely on expert sources, not popular, often sensationalist reports. 

If you are fascinated by bitcoins, or other cryptocurrencies, and if you have seized the idea of multiplying your money, use that energy to simply learn how to invest professionally. 

Andrzej Manka

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