There are many people telling you why you should invest in this coin or that coin, but I feel there are not enough people telling you why you should at least reconsider your crypto investments. The goal of this article is to make you rethink your crypto investments to see if they really are suitable for you. So let's start with the negatives of crypto investing, what the implications are and how you can counteract these effects.
1: This is probably the most obvious reason, but it has to be said. Cryptos are extremely high risk. It is probably one of the asset classes in the world with the highest risk to lose your initial investment, looking at the amount of exit scams and unsuccessful projects. The reason for this is not that crypto is inherently bad, rather it stems from the fact that issuing a crypto is probably the easiest way to get funding for a project. Thus, many cryptos bring exposure to projects in their very early stages. According to the SBA only 30% of U.S. businesses survive the first 10 years, and after only 5 years there is a 50% chance of failure. In other words, investing in cryptos, many of which are just a few years old, is a huge gamble. However, it must be noted that these statistics are based on U.S. numbers and may differ around the world. But just looking at the historic coin market cap snapshots we see how many coins go into obscurity after just a few years:
So, what can you do to pick the right crypto? Really, you can not pick THE right crypto. The way to counteract the huge risk of failure is to diversify your investment across many cryptos. Remember that the maximum decrease in price is always 100% while the maximum increase in price is, in theory, unlimited. This means that even if 9/10 of your investments turn out to be losers, one investment can still save you. Even though your investment is 70% likely to fail after 10 years, the 30% that do succeed can return enough to more than offset the loss of the rest of the portfolio, considering you are getting in at such an early stage. If you only hold one or a few cryptos, the most likely scenario is that your portfolio will lose you money. If you want to learn more about diversification and why it is the golden rule of investing, read here: thedecrypter.com. There I prove mathematically why a diversified portfolio beats a non-diversifed one in the long run. This diversified approach is what investors use when investing in start-ups, they know that their investment will most likely fail but they also know that the few who succeed will bring big enough returns to make the total investment portfolio highly profitable.
2: As we have started to list these reasons in order of most to least obvious, let's keep going with that. Cryptos are not only extremely risky, but also extremely volatile, especially looking at those with a lower market cap. A good way to see just how volatile cryptos are is to look at the Crypto Volatility Index. If you had all your net worth in crypto (NOT RECOMMENDED!), you could one day be worth 10m USD and the next day be worth just 8m USD, and the day after that be worth 11m USD. This is not what you want if you, for example, is a retiree looking to have investments to withdraw from during your retirement. In that case you would want a stable portfolio with a modest growth to counteract your withdrawals. You certainly do not want something that risk plummeting 90% in a year as that wipes out your whole lifeline.
Thus, to invest in crypto you need a long term investment horizon. You can not invest in crypto and expect to make a profit in just a few years, to take on this much volatility and risk your investment horizon should be, at the very least, 15 years. This is not only needed to combat volatility, but also because the adoption of a groundbreaking technology is not quick, especially not in old and large industries like financials, which blockchain is changing.
3: It is incredibly hard to calculate the fair fundamental value of many cryptos. Is Bitcoin worth 13,000$, or 7,000$, or 23,429$? Who knows?! You could try calculating it through the cost of producing one Bitcoin, but the fact is that the production cost varies from producer to producer, and even if it was the same across the board, I dare you to name one other product/asset/resource that sells for its production value. The fact is that people want to make profit and will sell for as high a price as people are willing to pay, so to get the real fundamental value we need to know what people are willing to pay. Technical analysis may indicate likely scenarios for where the price is heading but that is not the same as a fundamental value. The implications of this is that you do not know at what price a crypto is cheap or expensive.
So how can you know when the price is right to buy or sell a crypto? Well, one way is to invest in income producing cryptos such as exchange coins like COS or NEX, or stakable coins like VET. With these kinds of cryptos you can calculate your yield on cost (value of passive income per year per unit/value per unit) and with that create a somewhat accurate fundamental value by comparing that yield to other investments and adjusting it to risk. You could also try to calculate the value of a crypto by market penetration of an industry with a know market cap, by comparing a cryptos market cap to another similar crypto etc. Either way you do it, it will not be exact, but combining these factors can give a somewhat clear lead of the fundamental value of cryptos. I will explain techniques on how to calculate the value of cryptos in a future article, so become a member or subscribe to the newsletter if you want to be the first to read them!
4: Many countries have unclear or unfavorable laws regarding crypto investing. In some countries it is outright illegal, in others you get taxed for every trade you do between cryptos and in some there is no regulation at all. Either way, this is not a good legal environment to be in as an investor as it is hard to know how to file your taxes, and even if you know how it takes a lot of time and mind numbing effort to look through a bunch of old trades and determine what the correct tax is. The legality of cryptos is also ever-changing providing uncertainty, which is never something you want in investments.
Depending on which country you live in, these tax laws are often confusing, annoying and makes investing in cryptos very expensive. In Sweden, where I live, I have to pay 30% tax on the gains I make from all forms of passive income from crypto and on the profit I make for every single trade. If you compare this to the tax on my brokerage accounts where I pay ~0,3% (it's quite a complicated formula but 0,3% is the estimated amount) on the value of the portfolio each year, it is obvious that cryptos are more expensive to invest in. In the future we will hopefully see cryptos being more equal to other forms of investments in regards to tax laws. Until then, there is not much to do to combat this except tax evasion which we do not recommend. If the tax in your country is based on each trade as it is in Sweden, try to limit the amount of trades you do as much as possible so that you pay less tax and have less trades to keep track of for your tax filings.
Green: permissive (legal to use bitcoin)
Yellow: contentious (some legal restrictions on usage of bitcoin)
Pink: contentious (interpretation of old laws, but bitcoin is not prohibited directly)
Red: hostile (full or partial prohibition)
So, to summarise, crypto investing is not always a golden shower of outsized returns. There are, in fact, major risks and other negative aspects of it. That said, cryptos are not inherently bad investments, but as with any investment, there are risks. Hopefully this article has taught you more about these risks and how you can better counteract them. Also, I want to underline the importance of not having cryptos as your only investment, I hope this article can better show you why.
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/Alex - TheDecrypter.
Note: Invest at your own risk and always make sure to research your investments thoroughly.