When the price of Bitcoin surpassed USD 50,000 (R 740,000), the fear of missing out hit an all-time high again for many investors.
However, South African actuary Imran Lorgat says one surefire way to say you are about to make an investment mistake is to be spurred on by a strong fear of missing out.
Lorgat has been investing in Bitcoin for five years. While viewing Bitcoin as a breakthrough technology, he also warns that cryptocurrencies are highly speculative digital commodities and will challenge investors with extreme volatility.
If the question “should I or shouldn’t” keep you up at night, Lorgat recommends that you be guided by proven investment principles.
Understand what you are buying
According to Lorgat, you should make sure you have a solid understanding of what you are buying and the risks associated with your investment.
“Many invest in cryptocurrencies without knowing the basics. When looking to buy bitcoin, invest time researching how it works and the risks associated with owning bitcoin. “
Since the advent of the internet, developers have succeeded in digitizing everything from the written word to audio and video.
Attempts to digitize a currency, however, failed until 2008 when an anonymous developer or group of developers under the pseudonym Satoshi Nakamoto managed to create Bitcoin, the world’s first successful digital currency.
Lorgat explains that Bitcoin is essentially a new technology. “It is a digital currency that is not issued or controlled by any government or central bank.
Instead, it is managed by its users who secure the system with software that anyone can download. People can send Bitcoin to one another without the need for a bank or financial intermediary. And they can keep it in their own digital wallets. “
But be careful, says Lorgat. “A wallet that is kept on a cryptocurrency exchange is not the same as a wallet that only you can access.
The wallet on an exchange is like a bank account that holds money on your behalf. A bitcoin is only really yours if it is kept in your personal wallet, laptop, phone or wallet device. “
Understand the risk
While Bitcoin is arguably the most volatile currency in the world, Lorgat points out that it’s important to distinguish between short-term volatility and long-term fundamentals for investing.
“In the long term, the price of Bitcoin is determined by supply and demand as well as the introduction and technological development of the currency. In the short term, however, the price is mainly determined by hype and emotions. “
According to Lorgat, bitcoin volatility in 2017 showed that the hype affected price rather than informed decisions based on facts.
“Investors who had done their research and had insight into the tremendous technological advances in Bitcoin were holding onto their bitcoins while retail investors bought to get rich quick and then sold just as quickly.
In the end, Bitcoin price crashed and people lost a lot of money. “
Lorgat points out that an additional risk is the high tendency to fraud in the cryptocurrency sector. “It’s easy to take advantage of people who don’t know exactly how cryptocurrencies work.
These people can be lured into trading programs, cloud mining programs, bitcoin imitators, or even downright Ponzi programs while falsely believing they are investing in bitcoin. “
According to Lorgat, there are over 8,000 cryptocurrencies, not including the ones that have already failed. Still, over 60% of the total market capitalization for cryptocurrencies is Bitcoin.
“New cryptocurrencies are introduced every day, many of which fail shortly after being launched. Often projects that have little in common are mixed up under the umbrella of the cryptocurrency.
Bitcoin, for example, is a currency. Ethereum, on the other hand, is a platform for running applications like Android or Windows. “
According to Lorgat, choosing an established and credible exchange is crucial when buying cryptocurrency. “There are many horror stories out there about how exchanges are hacked and millions of dollars worth of investments stolen.
If you decide to put significant sums of money into Bitcoin, you should spend some time looking for secure offline storage. Consider buying a hardware wallet from a reputable company. “
Time in the market
Lorgat agrees that the Bitcoin success story makes it tempting to spend a lot of money buying the cryptocurrency. However, he warns that there is no guarantee that Bitcoin price will continue to rise in the future.
He adds that the investment adage “you can’t time the markets” also applies to Bitcoin.
“Bitcoin has been around for about 13 years, and during that time public interest in it has increased and decreased. A lot can happen that will either drive the price up or down. “
Lorgat points out that investors who resisted the temptation to trade their Bitcoin above highs and lows are likely to have won the most.
However, if you bought Bitcoin in the middle of a hype and then panicked it when the price collapsed, you would have made huge losses.
“The conventional wisdom of ‘dollar-cost averaging’ also applies to Bitcoin and is popular with Bitcoin investors.
This means investing the same amount every month without checking the price or timing the market. I am following this strategy myself.
In this way, highs and lows balance each other out over time. It’s also common to combine this strategy with a long-term perspective, usually five to ten years or more. “
So should you or shouldn’t you?
Bitcoin started 2020 with a market cap north of $ 131 billion, which was larger than many government currencies but largely kept out of the public eye. However, as the world contracted under the problems associated with Covid-19, institutional investors viewed Bitcoin as a potential hedge against inflation and financial instability.
Lorgat explains that while a central bank can print money when needed, thereby devaluing a currency, bitcoin is a finite resource.
There will only be 21 million bitcoins at a time, and at the time of writing there were around 18.6 million in circulation. For this reason, Bitcoin is increasingly viewed as a commodity with a scarcity value and is often referred to as “digital gold”.
Even so, Bitcoin has a notoriously volatile trading history and the events of the past few months show once again how unpredictable cryptocurrencies are.
Lorgat therefore strongly cautions against borrowing money to buy Bitcoin or use money that you cannot afford to lose.
“Before you decide to invest, ask yourself if you can afford to lose this money without putting your financial situation at risk.”
According to Lorgat, Bitcoin shouldn’t be on your shopping list unless you’re ready to buy and “hodl” long term.
The term “Hodl” comes from a misspelling of “hold” in a Bitcoin forum by a trader who refused to sell during a crash. The term “Hodl” has since become synonymous with a “buy and hold” strategy, in which investors look at Bitcoin for the longer term instead of following a short-term hype.
“If you decide to buy Bitcoin, make sure you can hodl,” Lorgat said.
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