In the last three weeks, the value of bitcoin (relative to the U.S. dollar) has surged by as much as 85%.
In the financial markets, this is what we refer to as “going parabolic,” and these events have raised an interest in cryptocurrencies amongst many traditional investors.
In the latest rally, valuations have hit levels above $13,000 per crypto coin before retracing their initial gains.
This is a far cry from bitcoin’s closing value of $340 in 2014 and many mainstream financial media outlets would like us to believe that a large number of crypto millionaires have been made in the process.
While there might be some technical truth to these stories, it is important for conservative investors to exercise patience, disregard the hype, and avoid making irresponsible decisions with trendy investments. After all, this is the type of behavior that has led to countless financial catastrophes in the past (including the market collapses of 1929, 1987, and 2008).
Know What You’re Buying
Though it might seem like nothing more than a cliché market aphorism, I cannot stress this point enough: Do your research before investing in cryptocurrencies. There are many basic lessons that should be understood before committing real money to any financial markets position. For instance, do you know the difference between bitcoin and bitcoin cash? If the answer is “no,” maybe it’s time to take your foot off the investment gas pedal and do some reading on their pros and cons before you start buying.
Of course, this same rule applies to things like small-cap stocks or any other financial asset that involves higher-than-normal levels of volatility. It might seem like the fun and trendy thing to do, if you want to get involved in the world of digital currencies.
However, we must always remember that real money is on the line and that there are no guarantees in any financial markets investment.
As always, it is important to understand the basics. Cryptocurrencies do not have “fundamentals” in the traditional sense. In other words, there are no earnings associated with these assets. This lack of performance data can complicate matters for investors looking to place a speculative value on cryptocurrencies or to assess the validity of any specific trading instrument.
What drives price action in the cryptocurrency space is nothing more than basic supply and demand. In many ways, cryptocurrencies can actually function as extremely pure market instruments in that regard.
The communal nature of the blockchain ensures that factors like insider trading or privileged corporate information will never be attached to the cryptocurrency space, and this does help to level the playing field for the average investor.
Of course, many of those traditional investors will continue to view the cryptocurrency world with a high degree of skepticism — and there are perfectly valid reasons for this. After all, cryptocurrencies make up an entirely new asset class that has not had the benefit of history to test its flaws or its advantages.
Moreover, there is a wide variety of cryptocurrency instruments (each with its own crypto market cap and associated volatility characteristics). Knowing their differences can help you to avoid the unnecessary losses which are often encountered as a result of buying at the wrong levels.
For these reasons, a healthy degree of skepticism will always be a valid component of any approach to financial market investments. Fortunately, most of our traditional strategies and economic logic can still be applied to this new realm of digital assets.
Ultimately, patience pays — and nothing replaces good old fashioned research for those looking to ride the bitcoin wave to profits.
Richard Cox is a personal investor with more than two decades of experience in the financial markets. He is a syndicated writer, with works appearing on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine.
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