Updated: Nov 9, 2021
Bitcoin. Ethereum. Coinbase. These days cryptocurrencies seem everywhere, and the gains look amazing. More and more people are asking how they can invest in Bitcoin and other cryptocurrencies.
Ten years ago, people would have laughed off a virtual currency and the prospect of adding crypto to their investment portfolio. Then they read that Bitcoin just became the fastest asset to reach $1 trillion market cap. Now major companies like Tesla and PayPal are jumping on the bandwagon, and no one wants to miss out on the opportunity to make some easy money. Especially since Bitcoin was less than $4,000 per coin in January of 2019 and this year passed $60,000 in early April, and then some experts suggest that Bitcoin could be worth as much as $300,000 by the end of 2021.
Digital Cryptocurrencies are not backed by real assets or tangible securities. They are traded between consenting parties with no broker and tracked on digital ledgers and acquired by exchanging real currency to purchase digital coins or tokens. Now with PayPal making it possible for account holders to buy, sell and hold cryptocurrency, it is possible that digital currencies become a more acceptable and legitimate form of payment.
But are they right for you? Be careful. Cryptocurrencies are extremely volatile. Their value can drop as fast as they rise. Bitcoin rose from about $30,000 at the beginning of 2021 to about $52,000 on April 19. Then during the week of April 19, the price of Bitcoin dropped in value by more than 20%, according to Coindesk.com. Investing always involves risk, but it is wise to avoid unnecessary risk.
In fact, Dr. Robert R. Johnson, Professor of Finance at Heider College of Business, Creighton University, says “‘Investing’ in Bitcoin and other cryptocurrencies is pure, unadulterated speculation.” He argues that no one should consider buying Bitcoin or any other cryptocurrency as an investment. Crypto can quickly become a game of high stakes poker and that’s not the best way to build a financial future.
Solid investments have a fundamental value because they are associated with goods or services. According to Warren Buffett, Berkshire Hathaway CEO & Chairman, “Cryptocurrencies basically have no value and they don’t produce anything... It doesn’t deliver, it can’t mail you a check, it can’t do anything, and what you hope is that somebody else comes along and pays you more money for it later on. But then that person’s got the problem. But in terms of value: zero.”
Since cryptocurrencies are privately traded between consenting parties, they are not regulated or administrated by any overseeing authority. These currencies can be vulnerable to hackers or fraud.
Fraud is more common but if someone runs off with a, there is really nothing to do about it. Owners of cryptocurrency can reside anywhere in the world and are largely anonymous.
Despite the drawbacks, some will still want to invest. But should you? Most advisors say the market is too unproven. Only invest what you can afford to lose. If you must, Ramsey Solutions offers this suggestion:
If you’re out of debt, have an emergency fund that will cover three to six months of expenses, and you’re already investing 15% of your income in stock mutual funds—which are hundreds of times more secure than crypto—then you may make the choice to play around with cryptocurrencies.
Much better to have a portfolio balanced and in line with your own risk tolerance. (And cryptocurrencies are not part of the allocation of a conservative risk tolerance.) The way to build lasting wealth is slow and steady. Consider these last two quotes from famous, wealthy people.
“I do think people get bought into these manias who may not have as much money to spare. So I’m not bullish on Bitcoin. My general thought would be that if you have less money than Elon [Musk], you should probably watch out.”
— Bill Gates
“Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time.”
— King Solomon