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Monday, November 22, 2021
Putting money to work in cryptocurrencies remains far from a normal investing exercise, which is something people with grand visions (note this number of people is growing as cryptos reach the mainstream) of getting rich off of dogecoin (DOGE-USD) or Shibu Inu (SHIB-USD) in under 12 hours need to be reminded of consistently.
So allow me to offer that reminder today as bitcoin (BTC-USD) — the benchmark crypto — has been coming under its latest selling spell.
Buying a crypto — despite all the hype of them being an amazing asset class and must-own “things” for the next decade — is not like buying a share of stock in Starbucks or JPMorgan Chase. Am I simplifying things here? Perhaps, but again it’s warranted as more individuals with no investing experience flock to crypto trading.
With Starbucks or JPMorgan, you get quarterly earnings releases, earnings calls, investment bank presentations and media appearances by execs. You generally know how these large, well-known companies are doing financially and likely to do in the years ahead. Even with micro-cap companies (aka penny stocks) that are publicly traded, you get a peek at some form of financial statements. In many cases, management will even pick up the phone when you call them.
But crypto is an entirely different ballgame with extreme periods of volatility (see bitcoin prices below, via a nifty chart compiled by my colleague Julie Hyman), no financial statements and no execs. It simply just exists, and thrives on hype and speculation and crumbles on any number of fears that could appear out of thin air. In other words, you could lose your shirt while investing in cryptocurrencies if you truly do not understand what you are signing up for.
The losing your shirt aspect is only rising in probability as more sophisticated investors get involved in the crypto space and employ an array of trading tactics. Check out what CoinShares Meltem Demirors told us on Yahoo Finance Live about why cryptos still battle through pockets of extreme swings:
“One of the things we can’t forget is crypto markets function differently than traditional markets. It’s still challenging to access leverage. Traders particularly have to pay a funding raise to keep their options open, to keep their positions open. That can be really expensive. So you have to remember unlike traditional markets where there is a tremendous amount of leverage and borrowing you can get at very low costs, crypto leveraged cash is very expensive. The other thing is that sentiment tends to be rather volatile.”
Who am I to argue with a pro like Meltem who has been in the crypto game for a while. You shouldn’t argue either (especially if you have no idea what she was talking about above), just learn as much as you can on crypto before dabbling. That…