Financial

What You Need to Know About Cryptocurrencies

The talk of the town for the better part of the year has been cryptocurrencies. You have probably heard of a few of the popular ones: Bitcoin, Dogecoin, and Ethereum. A lot can be said about the current state of cryptocurrencies, and that conversation seems to change almost by the day. 

Depending on where you get your cryptocurrency news it seems, you have heard strong arguments for and against cryptocurrencies, their role in our wider financial system, and how we should value them. Cryptocurrency maximalists sound like revolutionaries, while on the flipside, others are waiting for it all to come crashing down in spectacular fashion. 

Let’s assume that you are somewhere in the middle. You are curious about what the noise is all about and maybe just trying to wrap your head around what these two sides are arguing about in the first place. You are on your own financial journey and, naturally, you ask yourself, where do cryptocurrencies fall, if at all, in your overall investing strategy? 

Here at The Financial Gym, we are all about gymsplaining financial concepts, or in other words, making sense of all this noise and presenting it in plain English. We do this to leave you feeling empowered, with actionable steps to start engaging with the financial tools at your disposal. Discussions around cryptocurrencies in particular have been taken over by some powerful undercurrents that tend to dominate and scale rather quickly with social media platforms. Some of these undercurrents include FOMO, volatility at the fingertips of influential individuals (for example, Elon Musk), amplified exuberance through various social channels, and that the crypto market is a 24 hours a day, 7 days a week market. 

There is a lot to be said about cryptocurrencies, but a solid approach to investing in cryptocurrencies must abide by the 5% rule. This approach is echoed by all trainers here at The Financial Gym, and it states that no more than 5% of your investable income should be dedicated to a single investment, suchs as commodities, individual stocks, and, you guessed it, cryptocurrencies. 

Now, let’s take a step back and look at the past month or so to get you caught up on the conversations around cryptocurrencies.These resources speak to some themes that have emerged in recent conversations on the topic:

Social: Bitcoin falls after Elon Musk tweets breakup meme 

Elon Musk has carved out quite a space for himself in the cryptocurrency markets. It has not been in the traditional sense of creating a cryptocurrency, but in the weight that his comments carry on a particular cryptocurrency. A single tweet has sent the value of Dogecoin soaring by double digits.

Energy: How Much Energy Does Bitcoin Actually Consume? 

This Harvard Business Review highlights research by the Cambridge Center for Alternative Finance (CCAF), which illustrates that, at the time when the article was written, the annual energy consumption of Bitcoin was roughly equivalent to the annual energy draws of entire countries like Malaysia or Sweden. 

International: In a world first, El Salvador makes bitcoin legal tender 

El Salvador made headlines in June by being the first country to make bitcoin legal tender in the nation. This is a vastly different approach from countries like China that are looking to reign in cryptocurrencies due to their decentralized nature by taking a harder stance against them

Why keep informing yourself before taking the plunge?

  • You don’t want to let fear of missing out guide your actions.

    • We’ve all heard of Crypto Millionaires. Unfortunately these are EXTREME rarities, and the investment itself is so volatile the average investor should come nowhere close to investing in this before MANY other areas of your financial foundation are in order. For instance, you’ll want to pay off any high interest debt, establish an emergency fund, and get started with retirement investing first.

  • Cryptocurrencies appear to be a new and lucrative financial tool, but you should have some fundamentals to fall back on rather than the hype surrounding it. 

    • Take a step back and understand where you’re getting all your cryptocurrency information and news from. It’s become, in many concerning ways, a big meme currency in an unprecedented time when social sentiment and media has an effect on cryptocurrency prices.

    • This “investment” can shift DRAMATICALLY in a moment’s notice from something as simple as a Tweet.

    • Crypto isn’t truly aware of what it “is” yet. When you look at “investment” in most companies, you can evaluate and often decipher if a company is over or under valued based on your research. With crypto, we often evaluate its value when it shifts after the fact or based on a random news blurb or tweet.

  • Cryptocurrency markets are 24/7, and that can be a real roller coaster!

    • If you are someone who is often nervous about their investments and checks them throughout the trading day, it’s important to understand that crypto is ALWAYS fluctuating. You could go to sleep with a small investment on Saturday night up $200 and wake up after a shift in the market down $500. THAT’S how volatile this is! It is NOT to be used as your base level investing strategy.

We hope to keep the conversation around cryptocurrencies going, but also want your approach to this new space to be educational and in the spirit of getting you to your financial goal.



Source
What You Need to Know About Cryptocurrencies is written by Hector Lopez, A Certified Financial Gym Trainer for financialgym.com

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