Let’s face it, crypto trading is cool. At least, that’s how it looks on social media. Across the internet, you’ll find hashtags, Twitter threads, YouTube videos, and much more dedicated to the topsy turvy world of cryptocurrency. And when you come across stories of inexperienced investors who became overnight millionaires after taking a punt on Bitcoin, it’s natural to wonder why you aren’t doing the same. That’s where the fear of missing out, or FOMO, starts to set in.
The problem is that while there are lots of reasons to think about exploring cryptocurrency (like taking advantage while it’s still in its infancy), FOMO is never a good basis for any financial decision — especially an investment where there’s a significant risk of money being lost. As trading services, provider Trade Nation notes in its guide to crypto trading: “If you’re a beginner trader, there’s probably nothing harder to get your head around than crypto. Yet in spite of this, the FOMO is incredibly hard to shake […] It really isn’t that simple, and getting involved is riskier than you probably realize.”
Perhaps you are comfortable with taking big risks, but the point is that you should always be driven by facts rather than FOMO. Here are five reasons to fight back against the fear of missing out and think carefully before investing.
Extreme volatility can be costly
One of the main reasons people are drawn to crypto is its extreme volatility, meaning it can bring significant profits in a short space of time, and quicker compared to other financial assets. However, prices won’t always move in your favor, which is why you need to remember that losses can accumulate just as quickly. For example, while Bitcoin hit an all-time high above $63,000 in April 2021, it fell below $30,000 just two months later.
“You have a high chance of losing it all, but a small chance of winning it big,” Nate Nieri, a CFP with Modern Money Management, told NextAdvisor. If you’re happy to take the risk, think about just how much you’re willing to risk. “Don’t gamble an amount that would burden your family or prevent you from achieving your goals,” Nieri adds.
There’s a lack of regulation
Other financial assets are regulated by a relevant body, giving investors confidence that their interests are being protected. Unfortunately, it isn’t easy to regulate cryptocurrencies. Some countries such as China have launched measures to crack down on crypto, but other governments have a tough task on their hands. Although protecting investors and consumers is crucial, they don’t want to do this at the expense of cryptocurrency innovations that could transform our financial systems for the better.
This could change in the future. For example, Gary Gensler, the newly appointed head of the US Securities and Exchange Commission (SEC), has called for greater regulatory oversight of exchanges trading crypto-assets to instill more confidence. But in the meantime, are you comfortable investing in an asset that isn’t being held to strict standards?
Fraud and cybercrime is commonplace
The lack of regulation and lack of understanding about something as new and complicated as cryptocurrency, unfortunately, makes it prime material for fraud and cybercrime. Perhaps the most famous example is the OneCoin scam, a Ponzi scheme promoted as a cryptocurrency that brought in approximately $4 billion worldwide according to US prosecutors. And with the prevalence of self-professed cryptocurrency ‘experts’ online, many unsuspecting investors are being duped. In fact, according to Action Fraud UK, of the 5,039 reports of investment fraud involving social media, almost 45% were cryptocurrency scams.
Of course, this isn’t to say that there aren’t other types of investment scams. Forex scams, for instance, are very common on social media too. You always need to have your wits about you and do your research before committing to any kind of investment. However, as cryptocurrency is so hard to get your head around at the best of times, it may be harder to spot the warning signs.
Cryptocurrencies risk being discontinued
Unlike fiat currencies like pounds, euros and dollars, cryptocurrencies are by no means a certainty. As of January 2021, there were 4,000 different cryptocurrencies. Since Bitcoin was formed in 2009, over 2,000 coins have died. There’s always a risk of a cryptocurrency being discontinued, and if that happens to the one you’re investing in, you could stand to lose a lot of money.
There’s no guarantee that any particular crypto will be a success, so if you still want to invest, all you can do is make sure you do plenty of research to make the most informed decision possible. Don’t just invest in a coin because you’ve heard of it. For example, Dogecoin has become one of this year’s most well-known cryptos, but many people believe the hype is temporary. Speaking to Yahoo Finance, veteran trader Eddie Ghabour, managing partner at Key Advisors Group, said: “I look at Dogecoin as more of a speculative play that when this bubble bursts, it will probably cease to exist.”
The future is unclear
Cryptocurrency has existed for over a decade now, but that’s still very recent for a financial asset. Even leading financial experts don’t totally understand how it works yet. That means there’s a lot of uncertainty, and while cryptocurrency could indeed be the thing to revolutionize our financial systems, it could also be a bubble on the verge of bursting, as many have predicted.
The future of crypto is certainly unclear, which is why so many trading providers don’t even offer it at present. However, the decision is entirely yours. Once again, make sure you weigh up the risk and never invest more than you can afford to lose. After all, anything can happen when it comes to crypto.