So you want to get volatile?
Cryptocurrency is a rapidly-growing market. This is not breaking news. I’m sure you know both sides of the coin (so to speak): crypto has made queens—and paupers. But those wins and losses don’t necessarily come from winners picking good coins and losers picking bad ones. It’s possible to talk to two people who have both invested in Dogecoin, but one lost money and the other gained a profit. Whether you win or lose can depend largely on timing. This is because cryptocurrency is an incredibly topsy-turvy investment; all cryptocurrencies experience huge fluctuations in their valuation—a quality known on Wall Street as volatility. Cryptocurrency is an incredibly volatile investment. In one day, Bitcoin’s value dropped 30%. But, why?
This question brings up something that we often forget with cryptocurrency: it isn’t intrinsically valuable. There isn’t gold or diamonds or anything backing up crypto’s value. At no point did the U.S. Treasury say, “Yes, any time someone wants to bring us Bitcoin, we will give them X number of dollar bills from our reserves.” Not all die-hard crypto fans would agree, but there is an argument that crypto’s value really only comes from how much people are willing to trade for it—in goods, other cryptocurrencies, or in dollars.
Let’s unpack this.
There are investors who are interested in crypto not to use it as a currency, but to use it as a hedge against inflation, or as an investment vehicle. But without anything intrinsically valuable backing up the currency, crypto’s market value is based entirely on speculation, which is essentially educated guesswork.
Investing in something that is speculative is a guaranteed way to introduce volatility in your portfolio. It means the investment’s value isn’t very grounded, which makes its price incredibly sensitive to even slight changes in investors’ expectations or perceptions.
Investing in speculative assets is essentially like a hot air balloon ride: you might enjoy the view from the top, but once you realize you’re only suspended by hot air, you’ll wish you could get off the ride without falling. Unfortunately, in the case of speculation, oftentimes what goes up, must come down.
For example, Vox cites a fascinating graphic on “The Musk Effect,” or the phenomenon of how strongly the value of Bitcoin is affected by Elon Musk’s tweets. If it makes you nervous that one person’s Twitter account has a huge influence over the value of your investments, good. It should. Having the value of your investments be at the whim of one person’s fickle opinion sounds like a huge risk to me.
To invest or not to invest…
Before you decide whether you want to invest in crypto, you need to know if you’re up for a bumpy ride. Earlier I referenced a day where Bitcoin’s value dropped 30%. Can you imagine losing 30% of what you have in your bank account in one day? If that mere thought made you break out into hives, cryptocurrency may not be a good investment for you.