If You Don’t Understand it, Don’t Invest in It

If You Don’t Understand it, Don’t Invest in It

If you have been watching the news at all for the past couple weeks, you have probably seen the words “cryptocurrency” and “Bitcoin” thrown around.

 

Well, if you haven’t noticed, there has been pandemonium over this thing called Bitcoin.

 

People are actually losing their minds over Bitcoin. Some have even been taking out mortgages to buy it.

 

So far on this blog, I haven’t spoken on current events happening in the finance world. Why? Because things move so fast. It is hard to keep up.

 

But Bitcoin looks like it is here to stay. I am sure it won’t be too long until people start asking me about it (I am no expert). I just want people to think clearly and reasonably about this.

 

If you don’t understand it, don’t invest in it.

 

This is a general principle in investing. If you don’t know what your investing in, you should not be investing in it. Bitcoin is one of those investments that people are throwing a lot of money into without taking the time to understand it.

What is Bitcoin?

Bitcoin is a digital currency. When you think of cash, you imagine physical dollars. Or when you speak about gold, you think actual gold bars. Not so for Bitcoin: you may get a photoshopped picture of the coin with a B marked on it, but that is about it.

 

Bitcoin is what many call a “cryptocurrency”. Cryptocurrency is items of value that are exchanged only online, like digital cash. Bitcoin itself was invented and released to the internet world in 2009.

 

Here are the main goals of Bitcoin:

1. No middleman, thus no processing fees or credit card fees
2. You can purchase and sell anonymously
3. It is totally open source, meaning it is not regulated by banks or a governing body

 

Again, Bitcoin started as a cash alternative; just another way to pay for things or exchange money anonymously online. Now, it has morphed into something different: an investment vehicle.

 

What’s the fuss?

So you want to know what all the fuss is about? Well, take a look at this graph.

 

 

1 coin = $2,450 on July 1, 2017
1 coin = $19,380 on December 16, 2017

 

That is a growth of 790% in 6 months!



You get the picture?? People are losing their minds on this. What we see happening is a modern day gold rush.
The price is soaring because of the simple concept of supply and demand. There is a finite number of bitcoins and a nearly unlimited demand for it. The more buyers that come into the bitcoin market, the higher the price will go.

 

People are starting to act irrationally

When things like this happen, people go crazy. And do stuff that includes:

 

Take out a mortgage to buy bitcoin
– Invest their life’s savings in bitcoin
– Move their retirement from long-term investments into bitcoin

 

Over half of America does not have $1000 in their savings account. Almost half of Americans are not even invested in the stock market at all. If you are in one of these two groups, don’t even think about investing in bitcoin. You should focus on building your cash reserves instead.

 

Bitcoin Millionaire says don’t buy it

Another personal finance blogger, Millennial Money, who is a bitcoin millionaire, says its best to stay away. Here are some of his points.

 

1. It is not secure

Bitcoin transactions are totally done over the internet. And accounts where one holds bitcoins also called “wallets”, are on the internet. This means at any point your bitcoins or digital wallets could be at the mercy of hackers. In other words, there is not a physical bank you can go to and withdraw your money in order to store it under your mattress. Your bitcoins are only as secure as the website that holds them.

 

2. It is a scammers paradise

Because bitcoins are anonymous, fraud investment firms are scamming buyers. They are capitalizing on the ignorance of investors.

 

3. It is hard to actually value

With the price fluctuating so much, it is hard to nail down a true, reasonable value. As fast as the value rose, the value could easily drop. We may be sitting on a bitcoin bubble. Who knows? Investing in Bitcoin is extremely risky at the moment. You are essentially gambling with your money at this point.

 

4. The government could regulate it heavily or make it illegal

In the short-term or long-term, Bitcoin could be heavily regulated by the government. Right now, there are very minimal regulations and people are taking advantage. But we all know that financial regulations can change quickly.

 

Build wealth step by step

Don’t get caught up in bitcoin. Come back to the basics of paying off debt and saving. It is simple and boring, but you know what you’re going to get.

 

Update (1/22/18): Bitcoin’s value currently sits at $11,230 and last month it was hovering around $19,000.  That’s a 42% drop in one month!

 



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8 Comments on "If You Don’t Understand it, Don’t Invest in It"

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Daniel Varone
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Thanks for the post. That last point is very true. When gold was made illegal in the US, at least there was a physical product that could be hoarded (for when it become legal again), also gold (and silver for that matter) has physical benefits (apart from being a currency) such as being some sort of a conductor (so I’ve heard, I’m not an engineer. ) Bitcoin…what can you use it for? It doesn’t physically exist.

Tawcan
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Great points, only invest in something you don’t understand. If you invest in something that you don’t understand, chances are you’ll get burned.

Michael @ The Budget Boy
Guest

Great principle that applies to all investing! It’s insane the risk that people are taking — getting 2nd mortgages and moving life savings into something that can move up or down 20% in a day.

When I found out you could buy bitcoin with a credit card, I couldn’t believe it. Most likely it will end badly for lots of people. Thanks for the post!

JoeHx
Guest

As a computer science major and software engineer, I do understand Bitcoin… so I have bought some. But the fact people have taken out mortgages to buy a bit-load of Bitcoin scares me. It means a Bitcoin crash will have implications beyond imagination.

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