When NOT to invest in crypto

A LOT has been written about cryptocurrency of late. You can be a firm believer, a sceptic or a naysayer, but you cannot ignore it any longer. As an active participant in the industry, I get asked by numerous friends and family if they should invest, how much they should invest, what coin to buy, etc. From these conversations, I’ve discovered three common traps that most people fall prey to.

Here they are:

1. You think you can double your money in a few months

All of us have that friend who doubled or even tripled her money within a few months by investing in some speculative meme coin (like Doge or Shib) or we know someone who bought Bitcoin when it was less than INR 1 lakh, and is a crorepati right now.

Yes, there’s money to be made in this industry- and quick money. Don’t we all love instant gratification? But what no one talks about are the scores of people who’ve lost everything they invested. The most recent instance- the “Squid Game” coin which claimed to allow holders to play the online version of the popular series, dramatically rose in value from a few cents to over $500, and then crashed back to less than a dollar (the creators ran away with the money)- all within a week, causing retail investors to lose most of their holdings.

Apart from the rampant Ponzi schemes and outright fraud, even coins with strong fundamentals experience very high volatility. It is very common for even Bitcoin (the crypto with the largest market cap) to experience double digit gains or losses within a 24-hour period. This level of volatility that would make headlines in the regular financial sector, is a by-line in the world of crypto.

At the end of the day- this is a very high risk- very high reward industry. Most regular retail investors forget this basic principle. If you happen to be one of the unlucky few to get on the bandwagon just as prices crash, you could see your investment halving instead of doubling.

2. You do not believe that crypto has a future

If you’re someone who thinks crypto is a bubble that’s eventually going to burst- stay away from investing in this industry.

Why? Remember the volatility I spoke about earlier? You will definitely get spooked when you see prices crashing (especially the first time) and pull out your funds just at the moment when true believers will be investing more.

Add to that the uncertainty around the regulatory status of the industry. The media has a field day with news reports about a ban on cryptocurrency every time some conversation on regulation is initiated. It’s difficult not to sympathise with industry outsiders. There were two examples just this year where Bitcoin (and all other crypto) was selling in India at 20–30% discounts from global prices due to panic selling. Whereas, crypto-believers like me wait for opportunities like this to increase our holding. Warren Buffet fans out there, this one is for you-

“Be fearful when others are greedy. Be greedy when others are fearful.”

The best way to beat volatility and minimise risk is to increase your holding period. Crypto is definitely a long-term investment. The people who have made real money from crypto are those that have held onto their Bitcoin for years. You will not be able to brave the volatility storms if you don’t truly believe that this form of money is the future.

3. You have no financial plan

Investing in crypto is NOT and SHOULD NOT ever replace a robust financial plan. You have to balance the risk-reward of crypto as you would any other asset class to fit with your personal circumstances and risk profile.

Say you urgently need money for some unforeseen expense, but instead of an emergency fund, you had invested your money in crypto just the previous month, prices have crashed. You will be forced to pull out your investment at half of what you invested. You want to buy a house next year and are planning on investing in crypto until you need it for the house? You need to plan ahead and be prepared to move your holdings into a low volatility instrument, well in time, just like you would do for traditional financial instruments.

Because of volatility, a financial plan is all the more important when it comes to crypto.

If this article has left you scared- don’t be! The technologies underpinning cryptocurrencies have phenomenal utility and are definitely here for the long run. The paradigm of this asset class may be new, but investment principles to beat volatility remain the same- invest small amounts at regular intervals and hold for the long term. And yeah, do stay away from coins that people claim will give you the moon!