Cryptocurrency: is the risk to reward ratio worth it?
What is happening to the crypto industry?
90 billion dollars was wiped out from the market as Bitcoin (BTC) crashed yet again on 19th July 2021. Few days later on 22nd July, Elon Musk says that Tesla will likely start to accept bitcoin for vehicle purchases again.
Cryptographic and digital forms of money have consistently been unstable due to market speculation, and it doesn’t take a lot to trigger a slump. One contributing factor was Elon Musk’s declaration that Tesla would not accept Bitcoin as a form of payment back in May 2021.
Soon after, China started a crackdown on cryptocurrency mining, which caused significant panic and drove down prices further. Following, the IRS then revealed that they were tightening measures about collecting taxes on cryptocurrencies. The culmination of events that took place was probably a large contributing factor to the most recent cryptocurrency crash.
Cryptocurrencies are also volatile because they are highly speculative, and many investors are still not entirely certain about them. It is also unclear if cryptocurrencies would still exist in a few decades, and when prices start to fall, nervous investors are more likely to panic-sell — causing prices to drop further.
What’s even more daunting is that even the most promising cryptocurrency projects that raised a tremendous amount of interest and investments not too long ago can also take a severe beating on their prices when the market dips. During times like these, their project development and technological advancement that were praised and highly regarded suddenly becomes irrelevant and ignored.
The lack of clear regulations for the cryptocurrency markets also allowed large token holders known as ‘whales’ to manipulate the markets by releasing speculative news and rumours, which affect market sentiments for their advantage. Unfortunately, the smaller and uninformed retail investors are the ones that will lose most of their investments over time. The whales profit by scooping up tokens when retail investors panic sell, or they dump their tokens onto retail investors when prices are high with fear of missing out (FOMO). This vicious cycle can happen many times over a short duration, wiping out smaller retail investors while whales grow more affluent and powerful.
Perhaps the smart thing to do in the current market situation, especially if profiting in the shortest amount of time is your priority, is to enter a position when the price is low and exit your position once a short-term target profit is achieved. This is called day trading. Day traders have accumulated considerable gains in a short time by applying this strategy.
Alternatively, thoroughly researching and understanding the project you are investing in and setting a longer time frame for project fruition, and profit-taking may also work. However, this strategy may take up a lot more time, lock up funds and cost you other opportunities. There is also no guarantee of returns to be had even after years of patient waiting.
Whichever strategy that is adopted, we need to understand that cryptocurrency markets are highly speculative, and it doesn’t help that the speculated projects are mostly experimental start-ups. There are fortunes to be made, but many more have also lost in these markets. Even if a justified project is seriously worked on and developed upon, there is still no certainty that it will be successful and be widely adopted or even be profitable.
With the onset of the COVID-19 pandemic, the importance of securing an additional source of income and work flexibility has allowed more retail investors to take an active approach towards getting started on their investment journey.
On a precautionary note, as the wise says, “Never invest more than you can afford to lose” cannot be more apt than for the cryptocurrency markets.
