Bitcoin, Ethereum, Cardano ...

By now, you must have had someone advise you to invest in either Bitcoin, Ethereum, or another cryptocurrency. You must also have heard someone tell you to stay away from such investments.

 

Let me be clear, I am not Financial Advisor and the whole point of this article is not to sway your opinion, nor to push you to buy or sell cryptocurrencies. I use the fact it is divisive topic to touch on a few points that I feel everyone should be aware of.

 

What is a cryptocurrency?

In layman terms, a cryptocurrency is a type of "virtual money". It works like pounds, dollars, euro, pesos (you can buy sell save exchange) ... BUT you cannot carry it in notes or coins.

Like the dollar, which goes up and down against the euro, the pound or the peso every day, the price of cryptocurrencies in your national currency will change every day.

If your currency moves by 2-3% against the dollar, it is already pretty huge from one day to the next. Now, it is not unusual to see some cryptocurrencies gain or lose 10 or 20% in a single day. Some gamblers will tell you that it is fantastic way to earn easy money, other more risk averse people will tell you that this price instability is very dangerous.

To help you better understand how cryptocurrency prices work, think of it as another product. Among several other things, the price of anything you buy is determined by the demand and supply for that product. The same thing happens with cryptocurrencies. For example, if many people start buying Ethereum and few want to sell it, then the price of Ethereum will rise and if many people sell their Ethereum holdings without a larger number of people looking to buy, then the price of Ethereum will fall.

Cryptocurrencies can be very unstable (on the upside and the downside) because relatively few people transact with cryptocurrencies (compared to dollar or euro). Overtime as more and more people and institution use cryptocurrencies, the price volatility will hugely reduce. We already do not see the large swings you could witness in Bitcoin prices 10 years ago, but it will take more time for prices to stabilize and move within.

After talking about cryptocurrencies in general, let us talk about the two main ones :

Bitcoin (BTC)

Bitcoin or BTC is the first cryptocurrency that succeeded and currently has the biggest market capitalization. It is sometimes called "digital gold". Like actual gold, Bitcoin is mined, just not physically. The process of Bitcoin mining is beyond the point of this post, but what you need to know is this. When a new block is created (and transactions are added in the blockchain), the miner receives additional Bitcoin as rewards for validating transactions. Like gold, Bitcoin has a fixed supply (of 21 million units).

As the supply is capped, and many expect the demand to increase ... it is easy to understand why you would expect the price of Bitcoin to go up. That being said, just because something is scarce, it does not make it automatically expensive. Eventually the value bitcoin can bring will over time drive its price. Speculation or revolutionary asset? The jury is out!

Ethereum (ETH)

ETH was initially released in 2015. To keep it simple, Ethereum is a cryptocurrency like Bitcoin. It does not have a fixed supply, but allows developers to create "smart contracts" (which opens the door to a lot of innovation). Ethereum is far from being a "finished product", there is a lot going on at the moment and this is additional risk compared to Bitcoin (which looks more stable, from a technological perspective).

After reading those two definitions you will understand that I kept it extremely high level and over simplified. There are thousands of other cryptocurrencies (some having very solid fundamentals while some are just ... "shitcoins").

I find cryptocurrencies fascinating for several reasons.

From the fanatics who are philosophically rejecting centralization to the haters who feel it is just another bubble everyone seems to have an opinion (and a strong one). With prices going up and down wildly, cryptocurrency investors go through emotional rollercoasters.

Whenever we mix "beliefs", "emotions" and Money, we can predict random and unpredictable behaviors. Of course if you know me, you know I love finding the origin of such behaviors. No matter if you believe cryptocurrencies are for you or not, if you have invested, will do it, or will never do it and decided to sit on the fence, I want to leave you with several takeaways.

 

Tips for cryptocurrency investment

 

1.   Like every other investment, strive to understand it before investing in it. Cryptocurrencies are high risk and complex investments but not too complicated that you cannot understand. Read articles online or Watch YouTube videos. Most of what you need to know is available online for free. That being said, be conscious of the fact the most popular articles and videos have probably been optimized to show up in searches and that its creator may or may not have a commercial agenda.

 

2. Don't invest any amount you are not willing to lose. The price of cryptocurrencies can be very unstable at times. One day or another you will see its price decrease sharply: it is a fact of life! When such things happen, you can get scared, sell out of panic and end up losing a lot of money only to discover next month that the currency has recovered. This type of event has the potential to trigger the Victim in you, and you know how tough that can be! When you invest money that you are willing and ready to lose, it allows you to be patient and calm and weather the storms.

 

3. Don't invest out of FOMO (Fear of Missing Out). Like I said at the start, there seems to be this excitement about cryptocurrencies that comes around every few months. Don't let the Fool in you get carried away. There are many opportunities to make money. If you don't do one, you can surely find another one that is more suitable for your style. Invest only in what you understand and what you are comfortable with and not because you are scared you will miss out on an opportunity to "cash-out".

 

4.   Invest for the long term and because this is the best investment strategy, don't just pick ANY cryptocurrency that you see is gaining traction, especially if you are a beginner. This is where the discipline of the Warrior kicks in. Have a long term plan and stick to it.

 

Depending on who you ask, some would say cryptocurrency is a fad: it is not an investment because it is not backed up by any asset. Others would say it is "the future of money". 

At the end of the day, before you invest in something, ask yourself, "WHAT DO I THINK?" It doesn't matter what your friend, family or some random person on the internet thinks. YOUR investments need to suit YOU.

So, based on what you know, what do you think?