Every few months, the cryptocurrency conversation flares up again. Every time, I get an earful about how I’m missing out on riches beyond measure if I don’t get in on it. And every time, I smile and nod, and… continue not to get in on it. But this time, I’ve finally decided to shed some light on another perspective: some of the reasons NOT to invest in cryptocurrency.
The old investing adage rings as true as ever: we should be fearful when others are greedy, and greedy when others are fearful.
Today I’m looking to bring at least a bit more caution to the crypto investing conversation. So if you:
- Have no idea what’s going on with all this crypto hype
- Think it seems fishy and are starting to feel like you’re the only one, OR
- Have already decided to YOLO your life savings on Dogecoin but want to do your due diligence first
Then this post is for you.
First we’ll cover a few burning questions about what’s even going on with crypto right now, and why everyone’s talking about it. Then I’ll get into my main reasons NOT to invest in cryptocurrency. So if you’re an expert already and just want to fight me over the list, feel free to jump ahead.
What Is Going on with Cryptocurrency Right Now, Anyway?
What is Cryptocurrency?
Very basically, cryptocurrency is a reimagined form of money based on a technology called blockchain. It exists entirely digitally, is decentralized (meaning not backed by any single bank, government, or private entity), and many believe it has the potential to dramatically change the world in the years to come.
Some of the better-known cryptocurrencies include Bitcoin, Litecoin, Ethereum, and Dogecoin. Though there are many, many others.
Why Is Everyone Investing in Crypto Right Now?
The simple, blunt truth is that most people putting their money into cryptocurrencies right now are doing so because other people are doing it. There is a ton of buzz around crypto right now. Buzz drives more buyers, buyers drive the price up, price drives more buzz, aaaand repeat.
Humans are highly social animals that rely heavily on social proof in making our decisions. So when everyone on social media, at family gatherings, or around the watercooler is talking about how they put $500 into Dogecoin last month and it’s now over $9,000, it’s hard for us to hear that and not think, “hm, well I’d like over $9,000…” More people buy, and prices continue to go up. The hype train chugs along and a cycle is created.
In other words, a gold rush.
In other-other words, a textbook investing bubble.
Why Is Everyone Telling Me to Invest in Crypto Right Now?
This can also be explained by simple human behavior. As much as we like social proof before we make a decision, we also like it afterward.
Say your coworker Brandon just took out another mortgage to buy a bunch of Dogecoin. He’s talking about it because he’s excited, but also because he subconsciously wants you to buy it. Because he knows you’re a smart guy. And if you buy a bunch of Dogecoin, then that validates his decision – giving him more evidence that it really is a good idea, rather than a meme investment that no one should gamble their house on.
And not insignificantly, for the people who have already bought an asset, keeping the hype cycle alive will continue pumping up the money that they have already put in.
Can I Make Money Investing in Cryptocurrency?
The short answer here is yes, it’s possible.
Many people have already made significant sums of money in crypto, and many more will yet. But the real question isn’t whether it’s hypothetically possible to make money in crypto. What we should ask is whether it’s a safe, reliable, or wise way to even try to make money. And whether there are better options.
Keep an eye out: history shows that in moments like these, for every one of me, raising the warning flags, there will be 100 others out there telling you that it is a guaranteed win. They’ll have fancy charts and complex-sounding analysis. They’ll call me a hater and say that anyone can get rich in this with the right strategy. And imagine the great stroke of luck that has befallen you when they turn out to be the ones selling that single, “right” strategy. What sweet, SWEET serendipity!
Is Cryptocurrency a Safe Investment?
Not right now.
There may be a day when things stabilize, but at the moment cryptocurrency is anything but a safe investment. Regardless of whether there is money that can be made in crypto, the fact stands that it is fundamentally unstable and dangerously misunderstood. Remember:
Just because it’s possible to make money, does not make something a safe investment.
As we’ll explore deeper in the latter half of this post, the future of crypto is wildly uncertain, while its present is shaky at best, and its past is littered with red flags. A safe investment should be stable, well understood, and with a clear trajectory ahead of it. Right now, the crypto market can claim none of these.
Why Did Crypto Crash Today? Will it Crash Again?
When it comes to the latest price collapse of your cryptocurrency of choice, it can be hard to nail down what exactly triggered it. But what we can say for sure is that with an asset like this, the price is based almost entirely on public sentiment, rather than any empirical measure of value. And that sentiment can change fast. When you’re measured entirely by public mood, crashes are bound to happen. So today’s crash, if there was one, was inevitable. And the next one will be too.
We can never predict the exact timing of a crash. Nor can we say for sure if, or how well, the asset will recover. The only sure way to guard against these crashes is to steer clear of an asset class that is constantly (and predictably) crashing in the first place!
What are the Disadvantages of Investing in Crypto?
There are many distinct disadvantages that make good reasons not to invest in cryptocurrency. Here are just a few:
- Extreme Price Fluctuations: Unpredictability makes it almost impossible to get in (or out) of your investment at a safe time
- Understanding: Crypto is not well understood by almost anyone, and investing in something you don’t understand adds massive risk
- Decentralization: The utopian idea of decentralization comes at a cost – much centralization and regulation exists to protect the everyday investor from themselves and others
- Uncertainty: The future possibilities for crypto are bright, but entirely uncertain, making it very difficult to plan your investing strategy around it
- Logistics: Managing a new, untested type of investment can cause plenty of headaches in the form of paperwork, taxes, even buying/selling
There are more, but you get the idea. This is a new thing, and its implications and possibilities are exciting. But its true value is unseen, its future is uncertain, and its mechanics are risky.
Is Crypto a Good or Bad Investment?
The bottom line is that it’s possible to make money with cryptocurrency, maybe even a lot of money, but that does not make it a good investment. A good investment is something that:
- Is easily understood
- You can rely on
- Has real fundamental value
- Will grow steadily over the long term, despite fluctuations
Cryptocurrency is the opposite of all of that.
Even so, you and I will both keep hearing about crypto investing for the foreseeable future. And we will likely hear more, not less, from people like your coworker Brandon telling you ridiculous things like “you’re wasting your money if you don’t get in now.” So let’s look at some of the things you’re going to see, hear, and feel about crypto, and the most important reasons not to invest in cryptocurrency anyway.
6 Reasons NOT to Invest in Bitcoin (or Any Crypto)
1. The FOMO Problem
When there’s a gold rush on some shiny new type of investment, there tends to be a lot of buzz about it. It can suddenly seem like all around you, you’re seeing people exploding their wealth, racing to put more money in, and making big plans for what they’re going to do *when* their money triples. It’s natural to feel a bit of FOMO around this madness.
But here’s the thing: if you’re afraid of missing out on an investment, then you already have. You simply cannot look at the returns someone made last week, month, or year, and assume that it has any bearing on what will come next.
Instead of popular hype and emotional impulses, investing decisions should always be based on your own goals, assessment of value, and long term strategy.
2. Confusing Volatility with Value
As we covered above, crypto prices do often go up, and sometimes very quickly. But thinking that these upswings make up the whole picture is one of the most rudimentary investing mistakes you can make. People who manage their money well understand the difference between price and value.
Crypto, as of now, is a highly speculative, highly volatile investment. This means that its price can swing from deep lows to explosive highs and back again in no time at all. But this price has everything to do with public emotions about the asset, and very little to do with its actual value.
The underlying value of cryptocurrencies right now is dubious at best. That’s not to say that they necessarily aren’t (or won’t become) valuable. But their practical use is extremely limited right now. And there’s still a lot of confusion about what you’re actually investing in when you buy cryptocurrency. We’ll cover that in more detail in the next two points.
3. You’re not Investing in Blockchain
This might be the most important distinction I have to make in this whole article, so please do read carefully.
Whenever I start derailing an otherwise pleasant cocktail party with one of my signature diatribes against crypto investing (sorry, Sarah), I inevitably trigger some jamoke into lecturing me about blockchain. I don’t understand blockchain, this guy tells me (he’s not wrong). It’s going to change everything. It’s going to flip the whole world economy on its head. Centralized currencies are ripe for toppling, and now is the time to get in on the revolution.
Now, I actually am pretty optimistic about new technologies bringing us into the future, this one included. If blockchain can build the new, better economy of tomorrow, bravo. I’m in.
But here’s the point, the one that I said was so important: when you buy crypto, you’re not investing in blockchain. You are not buying an ownership stake in the future of that technology. You are buying a product made with it.
This is like someone in 1996 telling you that Amazon is going to change the world, and you run off to buy a bunch of books from them. You didn’t buy stock in Amazon. You didn’t buy into a tectonic shift in ecommerce. You bought a paperback about Dilbert. What you bought was a product associated with Amazon.
4. It’s a Currency
One of my favorite crypto jokes goes something like this:
Son: “Hey dad, can I borrow $5 in Bitcoin?”
Dad: “$6.82? What the hell do you need $2.08 for?”
Remember, you’re not investing in a technology, a company, or a group of people here. You’re investing in a currency. One that is going through constant hyperinflation and hyperdeflation, despite hardly even being used by anyone.
The reason currency exists is to be a stable, reliable means to exchange value. We each add value to society through our work, earn money for it, and exchange that money for the value that others contribute. Currencies are just the languages by which we trade that value.
A currency whose perceived worth swings constantly is a terribly unreliable means for trade. It is failing to do its ONLY job. On top of that, adoption of most cryptocurrencies is next to zero. You can barely use them for trade anywhere right now, even if you wanted to. This is yet another argument that soaring crypto prices do not reflect soaring crypto value.
5. Survivorship Bias, or: The Gambler’s Fallacy
One of the most common rallying cries of inexperienced investors, particularly when it comes to cryptocurrencies, is to point to some recent price surge and say “look, it works! I made a ton of money, so it was a good investment.”
This is equivalent to walking up to a roulette table, putting all your money on red, hitting it big, and then proclaiming to everyone around you that you’re an expert at roulette.
Sure, it worked out for you that time. You made more money in one roll than anyone else made all night. But past outcomes do not indicate future results.
A massive risk working out for you is not a sign that it was the right call.
When many people take a large risk and it doesn’t work for most of them, we have a tendency to look at the few who “survived” the risk and believe that they are in control. We want to think they were smarter or more prepared than the others. That there’s a way for us to do it, too. But in cases like this, it’s just odds. When enough people try it, a few will get lucky, plain and simple.
6. The “New Economy” Argument
Whenever there is an economic bubble, the experts can see it pretty easily. They point out the red flags, which are always the same. But every time, the crowd shouts “You just don’t get it; that’s the old way of thinking. Things don’t work that way anymore, this is the new economy.”
They said it nearly 400 years ago in Holland with Tulips. They said it 20 years ago with websites that weren’t making money. 10 years ago they said it about shoddy mortgages that no one could pay. And countless other times in between.
And you guessed it, they’re saying it right now about crypto.
Rather than accepting that a trendy new thing (and its promised 500% gains) don’t make sense and don’t play by the age-old rules of money, greed drives people to deny both common sense and math. So they try to believe that there is a new set of rules. A new reality where this does make sense.
But there isn’t.
When you hear the ‘new economy’ argument, you’re hearing someone who’s already in a bad investment and trying to make sense of it. Burton Malkiel masterfully places this, and many other investing follies, into clear historical context in the investing classic, A Random Walk Down Wall Street.
What to Invest Your Money in (Instead of Crypto)
Instead of listening to every googootz that comes along telling you how to get rich with this thing he just found out about, when it comes to money it’s best to listen to the experts. And no, I don’t mean me. I’m just a different googootz. I mean the people who have dedicated their lives to understanding and writing about the fundamentals of good investing.
What they will all tell you is that there are plenty of reasons not to invest in cryptocurrency, or in any shiny new thing that upends common sense. If you want to build serious wealth through investing, then you’ll steer clear of the sublime arrogance of thinking that you can outsmart the economy with your ‘new’ one. You can’t. Not long enough for it to matter, anyway.
But the great news is, you don’t have to beat the market to get rich. Financial freedom is simpler than you may think. The global economy is always growing, and all you need to do is hop on and ride upward with it. And the easiest way to do that is with low-cost, diversified investments like broad market index funds.
If you have some cash to play with and you really want to ride the crypto train for a while, go ahead. I honestly hope you have fun. But if you want to make SERIOUS wealth for life, then you’ll have to do it the way it’s always been done: with wise, long-term investments in assets built on real value.