Should you invest in Cryptocurrency?

Posted by Jonathan Weyermann on February 6, 2018 at 12:00 AM

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With the rapid ascent in the dollar value of cryptocurrencies like Bitcoin or Ethereum, most investors must be asking themselves if they should invest in Cryptocurrencies,  or if they've missed the boat. With the more than 20 fold growth of Bitcoin, the common sentiment must be that this can't continue to go on like it has.

It's difficult to predict which currencies will win out in the end, mostly because technical superiority and usability as a currency of exchange are not the only factors in the uptake of a currency, but also mind presence.

Better known currencies have an advantage because more people wish to invest in them, driving the price higher. They also draw more developers to them, increasing their capabilities,  and thus it seems like being first (ie.  Bitcoin)  is a significant advantage.

While the overall trend of these currencies is up,  sometimes sharply so, due to the limited amount that can be mined, this trend seems far too aggressive with Bitcoin. With almost 80% of all Bitcoins mined, and those remaining exponentially more difficult to mine, Bitcoin is a very scarce commodity. It seems that at least until some saturation point is reached, the long term trend can only be up. 

That said, there are lots of risks. There seems to be a big chance that one currency could outgrow all the others.  While currently Bitcoin has the largest market cap,  Ethereum has been gaining ground. There is the chance that cryptocurrencies could get crushed by new regulations. Further, the currencies have no intrinsic value, and will ultimately have to actually be useful in the real world. If the only use is speculation and money laundering and other illegal activities, and illegal activity gets rooted out and crushed, the demand may drop. They are certainly a very volatile investment.

That said, I'd recommend investing a smaller but consistent amount in various currencies. To do this, I'd sign up with Coinbase, purchase Etherium and send it to an exchange. I currently use Binance.com, but you can use any exchange. From there, various currencies can be purchased. I'd spread my money around and buy as many as you can, adding to my positions every time I add more money. You can use a rebalancing methodology where you sell some of the overperformers and add to underperformers, though they tend to grow very irreguarly, so you may be better off holding into a winner for a while.

With Altcoins, there are definitely some pitfalls to avoid. Some are outright scams, but it may be a while before this is discovered. Usually, this will cause the price to unrecoverably collapse. It's best to try to vet the coin before your put your money down. At the very least you should do a Google search or two. This will at least allow you to avoid coins that have already been flagged as scams,  lest you be tempted to purchase a high number of inexplicably cheap coins.

The price of these coins are easily manipulated by pump and dump groups, and can easily grow in the hundreds of percent in a day, and often fall just as fast. It's best not to purchase too many coins in response to sudden price increases, as these rapid rallies often don't last. An exception may be when coins first hit an exchange. That said, pre-ico sales on some coins have been giving out a great deal of extra coins, so much so that they're sometimes dumped when they hit an exchange driving the price below the ico price. 

Ultimately, Altcoins are a very risky investment with potentially great rewards and huge price fluctuations. They are one of the very few ways a retail investor can get in on the ground floor of a startup. That said, almost anyone can do an ico, and scams are everywhere. Regardless, I would avoid buying a lot at once (if you use coinbase with a credit card you will have limits to keep you from overspending). This will force you to cost average and prevents you from buying a lot at the top.