The rules of investing seem simple: diversify your portfolio and focus on the long term. That’s until you see a guy on Reddit who got rich all night betting on a cryptocurrency.
Erik Finman became a millionaire after investing $1,000 in bitcoin at the age of 12. Glauber Contessoto invested all of his savings in Dogecoins on February 5, and by mid-April, his investment was worth more than $1 million, CNBC Make It said. He is not alone. When the price of dogecoin rose 400% last week, the owners shared thousands of dollars on Twitter and Reddit.
You can seriously regret not throwing a few dollars into one of these cryptocurrencies. But don’t be yet!
Choosing the right cryptocurrency – and getting rich on it – is harder than it seems. Here are the reasons.
There are tons of cryptocurrencies
Today, you know the original cryptocurrency, bitcoin, whose market value in excess of $1 trillion is worth about half of all the money invested in the cryptocurrency. You’ve probably heard of Ethereum and Litecoin, which have now become more mainstream, so you can buy and sell them so easily
But there are plenty of other cryptocurrencies – according to CoinMarketCap.com, there are more than 9,000 – that you probably haven’t heard of, and many more appear every day.
You should be lucky (or maybe predicting the future) that you chose Dogecoin, instead of Feathercoin, years ago. As financial author John Paul Koning points out, Feathercoin is a much more serious cryptocurrency – created with the intention of mass adoption, not a joke – that is currently worth $12 million, while the meme cryptocurrency Dogecoin is worth $50 billion. Of course, if a group of people accidentally toss coins, some of them toss ten heads in a row, said Chris Kuiper, vice president of stock research at CFRA Research. For example, if you have a lot of Robinhood traders trying to sell altcoins, some of them are pretty good performers
The timing should be good
The time it takes a coin to increase value, the most difficult and the worst, the impossible. Investors may be in a hurry to buy or sell because of events you can’t predict, such as a tip on Reddit or because Tesla says it does.
“Suddenly you have a risky fear of losing,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “Everyone buys it, it goes up a lot – until another hot topic comes out.”
It’s like a dot-com bubble, he added: the internet came alive, investors buy everything that has a dot at the end of the name. But with cryptocurrency, it’s even more dangerous, because instead of buying companies with a profit, you’re basically buying an idea from someone – there’s no way to give value to its money.
Dogecoin has built a strong community over the years and, thanks to its lightness, is perfect for the meme stock movement that launched GameStop stock earlier this year, said Richard Smith, general manager of the Cycle and Financial Cycle Foundation. expert.
“But I don’t think it’s something you can predict or we can believe will continue,” he added.
Remember: The cryptocurrency doesn’t just grow. So not only do you need to know when the cryptocurrency burns, but you also need to buy it when it appears. If you bought $1,000 bitcoins in mid-2017 before the price went up, you could have made more than $8,000 if it peaked later in the year. But if you bought the same amount of up to$ 1,000 and sold it a year ago, you lost more than $800 – almost your entire investment.
So what about those people who are just in time?
Just because they did it once doesn’t mean they can do it again. Those investors who buy their property cheaply and sell expensively – and Horneman says it’s just luck – may be at greater risk if they engage in other speculative investments.
“They’ll think throughout their investment philosophy: ‘That’s the way I can make money, it’s easy,'” Horneman said.
There is no guaranteed future
Even if you choose the right cryptocurrency, buy at the “right” time, and plan to get rich in the long run, this purchase does not come with the promise that the coins will be available forever.
Even bitcoin, which is considered the most legitimate cryptocurrency, could be banned or at least regulated. Earlier this year, Treasury Secretary Janet Yellen said the US government should “limit” the use of bitcoin, adding that it is commonly used for “illegal financing.”
“Investments like this are based on speculation alone – all regulators will remove the wind from the sails,” Horneman said. “That’s why there is significant coherence across the board.”
While it’s hard to believe now, investors may also lose interest in cryptocurrencies. Remember AOL, once praised as the king of the media but has since become something of the past. And there are many other examples, from Betamax to minicomputers.
How to invest in cryptocurrencies
If you feel you need to scratch crypto-itch, you can give it a spot in your portfolio along with your stocks and bonds.
Bitcoin performance doesn’t seem to be directly related to stocks, and it helps to have good assets while others dwindle. However, as Money said earlier, the correlation has increased in “bad times”, so you need to be careful when revealing your cryptocurrency portfolio.
Experts say you can spend up to 5% of your total assets on riskier investments such as cryptocurrency. Just make sure you don’t expect to be a millionaire overnight, and that the money you put in is money you could lose.