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What Cryptocurrencies Can Teach Us About Investing

Canada may enter a recession soon. The quick, steep rise of inflation is something that hasn’t been seen since 1981. We aren’t the only ones experiencing an apocalyptic economic downturn; American economists predict the U.S. will also go into a recession next year. Cryptocurrencies, as well as other markets, have taken a huge hit, plummeting to more than half their value within months. 

In 2021 and in the first half of 2022, blockchain technology was a big topic. Crypto seemed a promising avenue for digital natives who believed decentralized (meaning not governed by a single entity but rather distributed through a network) digital currency was an opportunity to get rich. 

Millennials and Gen Z are reaching certain milestones slower than older generations because some can’t afford them. Here comes cryptocurrency, marketed to budding investors as a way to financial freedom; if we bought the right coins, learned to time the market, and followed the advice of experts, “we were all going to make it” — hence, the hashtag #wagmi. However, as people lost thousands of dollars — some in retirement or house savings — to the summer 2022 crypto crash, there are certain lessons to gain about investing in general.

Don’t Invest More Than You Can Afford 

Crypto is a high-risk investment, with values shifting by the minute. Examples of other high-risk assets include forex trades, single-stock ETFs, and high-yield bonds. If a huge dip occurs or a recession comes, investors lose large amounts; sometimes, all of it. High-risk investments can produce big results in a short amount of time, but if people aren’t equipped to handle the losses, they lose more than just money. 

According to NextAdvisor, one man lost $20,000 after the Celsius Network shut down in March 2022. Celsius, a lending platform, went bankrupt due to founder Alex Mashinsky’s lack of proper risk management. As a result, users’ remaining funds were frozen in their accounts.

The Terra Luna coin crashed in May 2022, despite being one of the most popular coins and reaching its peak a month prior. Its second iteration, Luna 2.0, created to make up for holders’ lost funds, dropped by 60 per cent after launching. Simon Seojoon Kim, venture capitalist, reported losing over three billion dollars worth of Luna, yet he remained hopeful about cryptocurrency in an interview with Bloomberg. While Kim can afford to lose billions, most people can’t. Hence, it’s best to invest what you can afford, or nothing at all. 

Don’t Be Swayed by Social Media

Calm and patience are needed virtues when riding out bearish waves. They tend not to last longer than bullish waves, so hang in there and don’t do anything. But, the sentiment to budge and act quick is understandable; people pull out their funds during crashes, which plummets values even more. On the other hand, when an asset’s doing really well, sometimes it’s because there’s hype around it online. 

Elon Musk is a huge influential figure on Twitter. He put $1.5 billion worth of Bitcoin into Tesla’s balance sheet so the company could accept Bitcoin payments. This raised the coin’s value significantly — not only because he bought, but others followed suit. However, two months after the fact, Musk stopped accepting the payments and pulled out most of Tesla’s Bitcoin, causing a 4 per cent drop in the coin’s value. People’s portfolios were hit. According to The Guardian, a young man lost $7,000. The reason for Musk’s decision? Bitcoin consumes too much energy during its mining process. 

Investors should wonder how informed Musk was prior to purchasing Bitcoin. Always question influencers. Regardless, this proves the power of influence. No matter what, stay committed to your professionally informed decisions. 

Stay Balanced on a Tightrope!

We may be impressed by crypto millionaires and their cars and jets, but investing is a long-term endeavour for most people. High-risk investments can be considered gambles. 

Meme coins, which carry a lot of hype — Shiba Inu, Dogecoin, Dogelon Mars, etc. — are created as a joke. These fad coins circulate for a little while, potentially earning investors high yields. However, if you get in too late, you might lose your investment. In this current crash, many now feel that cryptocurrency itself was a gamble. Dr. Alex Koh, an early retirement YouTuber whose channel is now private, was so engrossed in cryptocurrency, he was ready to sell his house and car, according to The Guardian. But, the man lost his earnings and no longer believes crypto to be “a beacon of hope”, he says. 

Highly volatile assets probably aren’t the best retirement plan. Instead, Wealthsimple advises that a well-balanced portfolio is most favourable, with low-risk assets and defensive stocks. 

Digital Coins Are Here, Right Now

Is it the end for cryptocurrency? Absolutely not. They’re here to stay. Governments and banks are adopting digital currency. These government coins are CBDCs: Central Bank Digital Currencies. In 2019, there was talk about The Royal Bank of Canada (RBC) possibly opening a crypto trading platform. Meanwhile, Nigeria already launched the eNaira, Bahamas launched their Sand Dollar, and China issued the eYuan. In North America, JP Morgan launched Onyx, a blockchain-based transactional platform. Morgan Stanley offers wealth management clients with at least $2 million worth of assets the opportunity to hold Bitcoin. 

At the end of the day, we all want financial stability and the freedom to do what we want, when we want. But sometimes, it takes a little bit more patience than desired. 

Josephine Mwanvua | Contributing writer

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