Cryptocurrency – What’s It All About?, Part 3: Trading Cryptocurrency

Welcome to the final part in this Cryptocurrency – What’s It All About? series on cryptocurrency. A lot of ground was covered in Part 1 and Part 2. You may or may not be interested in using cryptocurrency as a means of exchange. But what about trading in it, directly or in fund form? If you’re considering that possibility, know that, at this point:

• Cryptocurrency is a highly risky holding: For every cryptocurrency success story you read, there are plenty of other tales of woe.
• Cryptocurrency should still be considered a speculative investment: With the amount of volatility and the risk involved, cryptocurrency investing may not be right for you.

Remember the Risks

All the transactional risks covered in Part 2 can also impact cryptocurrency traders. To recap, these include:

• Potential loss or theft of an underlying cryptocurrency you’re holding
• Loss of equilibrium between a cryptocurrency’s supply and demand
• Governmental regulation hobbling a cryptocurrency’s growth potential
• The massive energy consumption required to mine cryptocurrency

That’s a lot of potential buzzkill for your happily-ever-after holdings. These and other risks have translated into an extremely volatile ride for cryptocurrency traders, and one reason you might want to think twice before piling your life’s savings into them.

Then again, every investment carries some risk. Without risk, there’d be no expected return.

Setting Expectations

What’s a bitcoin worth? A dollar? $100? $1 million? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s. As described in this Wall Street Journal piece, bitcoin was trading for around $7,000 per coin in early 2020; as of February 20, 2021, the price topped $55,000. By the time you’re reading this piece, there’s not much stopping it from being worth far more than that … or far less. There is no way to know for sure where the value of a bitcoin will go from here. The expectations should be that it will continue to be a volatile and risky investment for at least the short-term, and probably longer than that.

Venturing Forward

All this said, what if you are still interested in trading in cryptocurrency, for fun or potential profit? If so, here are key tips to consider:

1. Treat it like an entertaining trip to the casino. Don’t venture any more than you can readily afford to lose!
2. Use only money outside the investments you need to fund your essential lifestyle.
3. If you do strike it rich, regularly remove a good chunk of the gains off the table to invest in your managed portfolio. That way, if a bubble bursts, you won’t lose everything you’ve “won.” Also set aside enough to pay any taxes you may have incurred.

Making Sense of Cryptocurrency

This wraps the three-part series on cryptocurrency. Hopefully you’ve been able to put this headline-grabbing subject in proper context. What other questions do you have? Whether cryptocurrencies mature into mainstream transactional tools or they eventually wither on the vine, Escient Financial remains available to assist you in managing your total wealth, in whatever form it takes. Feel free to...