Why (and Why Not) To Invest in Cryptocurrency

May 15, 2021 Topic: Cryptocurrency Blog Brand: The Buzz Tags: CryptocurrencyBitcoinDogecoinElon MuskFinance

Why (and Why Not) To Invest in Cryptocurrency

It is always advisable to join investment communities and gain a better understanding of the mechanics of the thing that you are investing in.

 

There is little question that “cryptocurrencies”—alternative online currencies such as Bitcoin, Ethereum, and Dogecoin—are here to stay.

The alternative tokens have been hyped by figures as diverse as Tesla CEO Elon Musk, Dallas Mavericks owner Mark Cuban, rapper Snoop Dogg, and celebrity chef Guy Fieri. However, they have also been a source for investment from tens of millions of Internet users worldwide, fueled by phenomenal returns for the tokens since the beginning of the pandemic. As the world transitioned online, interest in cryptocurrency skyrocketed, and prices have followed; over the past year, Bitcoin, the largest and most successful token, has increased in value from roughly $8000 per coin to over $50,000, an increase of at least six hundred percent.

 

Far and above the most successful cryptocurrency of the past year has been Dogecoin. The Shiba Inu-inspired cryptocurrency, originally founded in 2013 as a parody of other tokens, has increased in value by more than 20,000 percent since the beginning of the pandemic. Dogecoin’s price peaked at 72 cents per token over the weekend; it has since fallen to roughly 50 cents per token, a sign of the incredible volatility that cryptocurrencies experience.

What is a Cryptocurrency?

Cryptocurrencies are digital assets designed to function the same way that real-world currencies do; people can use them as a medium of exchange to pay for goods and services.

The difference between a cryptocurrency – Bitcoin, for instance—and a real-world currency lies in the lack of a central bank managing the value. While some practical restrictions exist on cryptocurrencies—Bitcoin, for instance, is capped at a total supply of 21 million, of which 18 million have so far been mined—there is nothing backing the currency up; its value is entirely dependent on abstract supply and demand, leading to wild price fluctuations.

Proponents of cryptocurrencies have argued that they function as a “store of value” rather than a functional product on their own. In this sense, Bitcoin fills much the same function as gold has throughout human history.

However, in addition to being much more tangible, gold actually has some real uses. Cryptocurrencies, on the other hand, are strings of numbers with no practical uses; their value is purely a social construct.

Should I Invest in Cryptocurrency?

In retrospect, it is easy to look back over market trends and identify times when investing in cryptocurrency would have led to enormous returns. For instance, at the beginning of April, a Dogecoin cost six cents, a price that has since increased more than eightfold.

However, if you had invested in Dogecoin at its height—74 cents on Friday, May 7—your initial investment would now have lost one-third of its value. The volatility of cryptocurrency means that it is sometimes very profitable, but can be equally disastrous at the wrong time.

Ultimately, before throwing money into investments you do not understand, it is always advisable to join investment communities and gain a better understanding of the mechanics of the thing that you are investing in. As with all investments, do your research first, make decisions based on rational calculations, and do not invest more than you can lose.

Trevor Filseth is a news reporter and writer for the National Interest.

Image: Reuters,