Understanding the Downside of Cryptocurrency

Testingnickn
2022-05-11

Before we can answer @CaptainTigerquestions, we need to understand the main difference between cryptocurrency such as Bitcoin and Ethereum and stock market.

Stocks vs Crypto

Stock is an ownership interest in a business (backed by the company’s assets and cash flow), whereas cryptocurrency in most cases is not backed by anything at all.

Because cryptocurrency is not backed by assets or cash flow, the only thing moving crypto prices is speculation driven by sentiment. As sentiment changes, prices shift, sometimes drastically. So cryptocurrency is driven only by the hope that someone will buy it for more in the future, what’s called the “greater fool theory" of investing (do read more about greater fool theory, it is fascinating!).

In essence for a cryptocurrency to be a successful investment, you must get someone to buy it from you for more than you paid for it. That is, the market must be more optimistic about it than you are. @TigerStars

Cons of Bitcoin

1) No intrinsic value, as mentioned previously, bitcoin aren’t backed by underlying assets or earnings, compare that to $Coinbase Global, Inc.(COIN)$for example, even though it is in the red, it has value because of their future earnings power and what they will return for their owners, while bitcoin offer nothing of the sort.

2) Extreme volatility, bitcoin have been extremely volatile so far in their relatively young existence. The price they trade at is determined by the whims of traders. Fortunes can be made and lost quickly and there’s no telling where a coin might trade next.

3) Cybersecurity risks, despite cryptocurrency enthusiasts touting the security benefits of digital coins, there have been notable hacks involving cryptocurrencies. It is often difficult to recover stolen funds.

4) Regulatory risks, while some country has embraced bitcoin, many governments are much more skeptical about cryptocurrencies. China has banned them altogether and other countries could follow suit.

Where is the Bottom Line of Bitcoin?

The good ol theory of supply and demand apply here. The supply of an asset plays a vital role in determining its price. A scarce asset is more likely to have high prices, whereas one available in plenty will have low prices. Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time.

If you tell me that shrinkage in future supply will create a surge in demand to fuel a rise in bitcoin's price, then I will have a differing opinion. In stock market we have what is called "Rights Issues" and "Warrants", and what happen when company issue new shares in this case? Price went down!

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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • shining87
    2022-05-11
    shining87
    i will chose stocks rather than Bitcoin.
  • YaleBrewster
    2022-05-11
    YaleBrewster
    Thanks for your detailed sharing.
  • LeilaLynch
    2022-05-11
    LeilaLynch
    It is good to begin crypto trading, but always have this at the front of your mind, one of the reasons why many fail on their investments or trading is because they try it without proper guidance and money management
  • ramondk
    2022-05-12
    ramondk
    Hype over for crypto?
  • jeffry09
    2022-05-11
    jeffry09
    I will not chose to buy Bitcoin.I don't trust it.
  • MyrnaNorth
    2022-05-11
    MyrnaNorth
    Has anything about crypto been true? It isn't a hedge, obviously. It is traceable, able to be seized, and taxable. What is the point other than just being the shiny new thing?
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