Should You Trade Cryptocurrencies?
By Dale Gillham |
When it comes to cryptocurrencies, people generally sit in one of three categories. The first being they know nothing and don’t want to know. The second category are those who have an awareness of them but do not want to get involved and the third type are those who have caught the bug and are speculating.
So what are cryptocurrencies and are they something you should be taking notice of, and should you attempt to trade cryptocurrencies now or in the future?
Before we get into what they are, the category you sit in right now will be determined by your knowledge, experience and tolerance to risk. The type of people who know nothing about cryptocurrencies will generally have a low level of knowledge on investing and a low tolerance to risk.
In my experience, those who speculate on cryptocurrencies also have a low level of knowledge and experience in investing, although they are prepared to take high levels of risk.
Before we consider whether it is worth trading cryptocurrencies, let's take a look at what they are.
What are cryptocurrencies?
Basically cryptocurrencies are a form of electronic money. So that begs the question, will cryptocurrencies become a primary currency that we use every day around the world? I don't believe that cryptocurrencies will become a main form of currency anytime soon.
Although, we are definitely heading towards a cashless society with the introduction of Apple pay and others but I don't think we will be buying our groceries or paying bills with Bitcoins anytime soon. They are just too unstable for the masses to take them seriously as an everyday currency.
This brings us to the question of the current limitations around cryptocurrencies. First and foremost, a lack of regulation is causing major issues for this form of currency becoming mainstream. Cryptocurrencies are largely unregulated around the world and this results in them being highly volatile.
The lack of regulation makes them very risky to own because any regulation, while welcome, will change the landscape and could cause major issues for all parties in this market. In short, uncertainty guarantees volatility.
For currencies to be stable they need government regulation and safety nets such as regulated currency exchanges. For example, investing in stocks, which are valued by a company’s overall profitability and asset base, and buying them through a regulated exchange gives the market certainty and in turn relative stability.
When you speculate on cryptocurrencies, you are realistically putting your trust in someone who you don’t know, and expecting them to honour that currency and to hold your investment in it safely.
And you are also trusting that someone else you don’t know will be willing to pay you more than you did for it. Lastly, you are hoping to be able to convert it to something more tangible that you can properly value like real cash or assets.
According to our regulators, exchange platforms on which you buy and sell digital currencies are not regulated, so if the platform fails or is hacked, you will not be protected and will have no legal recourse.
Cryptocurrency failures in the past have lost investors significant amounts of real money. In most countries cryptocurrencies are not recognised as legal tender and are only regulated to the extent that they fit within existing laws, such as tax laws.
This alone is why I will not touch this area at all and to date I do not know any professional investors or traders who do. You might be asking if there are any valid reasons for cryptocurrencies? Sadly, at the moment, I don’t think they have a lot going for them and there is no valid reason that I can see for trading or investing in them.
Just because someone can buy or sell something does not make it viable for others to do so. There are plenty of examples over hundreds of years of people investing in something that turned out to be either a scam or a financial disaster.
That said, the whole idea of cryptocurrencies is that they are decentralised and it gives consumers back power over the banks and I have to think that is a good idea. Decentralisation means lower transaction fees and faster processing times for individuals when making payments.
This is nice, in theory, however, we are not yet at a point where this is possible on a daily basis.
Personally I would much rather have my money in the stock market where I know I can make money and not have to worry 24 hours a day whether my investments have dropped 20 per cent plus in a matter of minutes.
The truth of the matter is that the laws of making money have not changed, and, on the whole, those who do not follow them end up broke, while those who do end up financially secure.