Cryptocurrency

Why Cryptocurrency Is Bad

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Why Cryptocurrency Is Bad? It’s a big trend right now to invest in crypto. A number of new cryptocurrencies, such as Bitcoin, are available for purchase in a straightforward manner.

Consider your position before jumping into the cryptocurrency market. The mere fact that something sounds thrilling does not imply that it is a wise decision.

Reasons why Cryptocurrency is Not Good

It’s historically volatile

Prices of cryptocurrencies have a history of being extremely volatile, rapidly increasing and plummeting. Taking a glance at any cryptocurrency’s price chart is all you need to do. Even for well-known currencies like Bitcoin, daily price fluctuations can be large.

The value of other cryptocurrencies fluctuates dramatically as well. During the month of May in 2021, the price of Ethereum was above $4,000. The price reduced to little about $1,800 by July 2021. It’s now down to $4,000, down from a peak of $4,858.52 in November 2021. That was on December 10th, 2021. It’s possible that smaller currencies like Dogecoin may see even greater volatility.

Valuing cryptocurrencies can be difficult

A company’s management, balance sheet, and sales may all be considered when determining a stock’s value. In the long run, you may create an opinion on the company’s products and services, and you can trace the long-term historical value of various equities and stock indexes.

Other assets, such as commodities and real estate, can also be valued more easily. Some of these assets are physical and can be held in your hands. In contrast, it is more difficult to value cryptocurrencies. Unlike other asset types, you can’t physically touch cryptocurrency. Comparing it to other asset classes can be hard because it might be difficult to arrive at a reasonable valuation.

It’s Harmful for the environment.

Many people have turned to computer mining because of the burgeoning interest in cryptocurrency. There has been some concern raised about the environmental impact of bitcoin, according to The New Yorker, due to the fact that it consumes a significant amount of electrical power, much of which is generated from fossil fuels.

Be aware that certain cryptos are less efficient than others if you’re interested in making environmentally friendly investments. To avoid supporting coins that rely heavily on fossil fuels, you should carefully choose the coins you support with your money.

Taxes are really complicated

Because of the growing interest in cryptocurrencies, many individuals have turned to computer mining. According to The New Yorker, some people are worried about bitcoin’s environmental effect since it uses a lot of electricity, a lot of which is derived from fossil fuels.
If you’re looking to invest in environmentally friendly cryptos, be aware that certain cryptos are less efficient than others. You should exercise caution while selecting the currencies you back with your hard-earned cash in order to avoid supporting those that rely heavily on fossil fuels.

Your tax bill will be influenced by the method of receiving your bitcoin. Coins purchased using fiat currency and held as an investment may be subject to long-term or short-term capital gains taxes, depending on how long you’ve held them.

On the other hand, if you receive crypto as payment for your services—for example, I received 1 Bitcoin in 2011 for writing an article—then it is deemed income and may be taxed as such, based on the coin’s current value. This might lead to further problems in the future. Make careful to consult a tax specialist if you invest in crypto.

We could be in a bubble on the verge of bursting

In light of recent price increases, there are fears that crypto is in a bubble. Cryptocurrencies have had their ups and downs, but the current surge in the value of numerous cryptos might imply that this is the case.

When prices rise to this level, it’s understandable that some investors could be tempted to cash out. When this occurs, they might command a premium price for their coins. Prices begin to fall as a result of the increased volume of sales. Unless the price of cryptos drops significantly enough, there will be no buyers, and the crash might leave investors who bought in later with substantial losses.

Fiat currencies could work on blockchain

There is nothing blocking fiat currencies from operating on the blockchain, despite the fact that many advocates refer to the blockchain as a public record and a safe method of sending payments. The U.S. dollar is one example of a fiat currency, which is one that is issued by a government or central bank.

The idea of a digital dollar has been floated by certain executives at the Federal Reserve Bank of the United States. This entails placing the US dollar on the blockchain and enabling the use of a dollar token to carry out transactions. It’s possible that other countries may follow China’s lead and digitize their currencies as well.

Cryptocurrencies aren’t truly mainstream yet

Though there is a lot of excitement about cryptos, they aren’t really commonplace yet. In order to make a payment or convert your crypto tokens to fiat cash, you must first identify a recipient that accepts the cryptocurrency you’d like to use. Several studies have shown that a tiny number of people own the majority of the Bitcoin value.

It’s impossible to predict if cryptocurrencies will become a viable mainstream asset class in the future because they haven’t been extensively used for payment and aren’t yet viewed as mainstream assets (they’re typically tagged as speculative).

There’s a potential for fraud and theft

Even while some cryptocurrencies are real, there is still the possibility of fraud and theft. To add insult to injury, there are several investment opportunities associated with cryptos because they are so popular. It’s bad enough that the Securities and Exchange Commission frequently releases investor alerts regarding crypto-fraud. At the beginning of 2018, the Bitconnect mania collapsed, resulting in almost $2 billion in fraud.

As a result, if a criminal gains access to your crypto wallet, he or she will be able to take your money and you will have no recourse.

There’s a lack of regulation

The crypto industry has so far been largely unregulated. In many ways, it’s reminiscent of the Wild West. It is possible for anybody to create a coin offering without going through the verification process that a publicly traded corporation would go through, because there are several cryptocurrencies and crypto exchanges.

Cryptocurrencies are now uninsured by SIPC, despite the fact that the legislative situation may change. So if your crypto assets are managed by a business that collapses, you may not be able to get your money back.

You don’t have a robust portfolio yet

Cryptocurrency, a new asset class, may not make financial sense for you if you don’t already have a substantial investing portfolio. You may choose to restrict your alternative assets to 10% to 20% of the overall portfolio value when determining an asset allocation for your portfolio.

For some, a lesser amount of their budget may be better spent on alternatives. There are a few ways to keep your alternative investments under 10% of your overall portfolio. All of my other options, including cryptocurrency, fall under this category.
If you don’t already have a well-diversified portfolio of more traditional assets, it could be a good idea to do so before investing in more volatile options like cryptocurrency.

You’re putting too much of your portfolio into crypto

Take a step back and think about how much of your money is currently invested in cryptocurrencies before adding another one. When it comes to my investments, around 5% of my portfolio is made up of virtual currencies. If I don’t sell anything first to keep my asset allocation where I want it, I’m not inclined to buy another coin.

If the crypto bubble bursts or price volatility catches up with you, you face the risk of losing more of your capital than you can afford.

It’s not supported by the banking system

The financial system hasn’t fully embraced cryptos yet. Performing cryptographic transactions necessitates going outside of these restricted channels. Even while some exchanges are introducing credit cards that offer crypto incentives or debit cards that give you immediate access to your coins, the financial sector has not yet caught up with cryptocurrency.

For the most part, these payments are not performed using popular cryptocurrencies, but rather the underlying blockchain technology. As an alternative, they are making use of the underlying technology to better their own financial ecosystems.

The market is crowded with made-up currencies

Bitcoin and Ethereum are two well-known examples of cryptocurrencies that have gained significant attention; however, there are still many more. As of December 2021, there are more than 8,000 cryptocurrencies registered on CoinMarketCap, a cryptocurrency price tracking website.

As a result, it’s difficult to predict which currency will take off. When it comes to cryptocurrencies, it’s shocking to learn that some of them, like Dogecoin, began out as jokes before seeing their value soar. When it comes to predicting which cryptos will rise to the top and last, it may be a challenge.

What to do if you still want to invest in crypto

Cryptocurrency investment is perfectly OK if you find it fascinating. In fact, if you’re willing to take on some more risk, it can be a good method to boost your portfolio’s growth. Start by just using money that you can afford to lose before getting started.

Bottom line

One of the most interesting ways to add to your portfolio and generate money is by investing in cryptocurrency. It’s important to conduct some research and see whether you’re willing to put your money at risk before investing in cryptocurrencies.

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