Part 2
IN my last article, I discussed eight reasons why people should not put money into cryptocurrencies and how the current chaos should prompt people to cautious consideration. In the next articles starting with this one, I will discuss in-depth one by one the points I have made in the first article.
The first reason I gave why people should not put money into cryptocurrencies is because of its incredible volatility. The fact remains that despite their increasing popularity, cryptocurrencies are still a relatively new and highly volatile investment option—if ever this is even regarded as an investment option in the first place.
This particular article will explore more deeply the reasons why the volatility of cryptocurrencies makes them a risky and unreliable investment choice. Some of the points made here may be connected to the other points I made in the first article; but this is necessary as all of the reasons I gave is connected logically and by necessity.
Cryptocurrencies’ incredible volatility is the first reason I gave as to why people should not put money on it. So what makes cryptocurrency very volatile?
1. Lack of regulation. One of the main reasons for the high volatility of cryptocurrencies is their lack of regulation. Unlike traditional investments such as stocks, bonds and real estate, cryptocurrencies are not backed by a government or central authority. This means that there is no one to guarantee to the stability of the currency and no one to provide a regulatory framework for the market.
This lack of regulation makes it easier for market manipulation, which can result in significant price swings. Arguments may be made by proponents that there are countries where “regulation” is in place. The fact of the matter, however, is that there is still no uniform international law that regulates cryptocurrencies. And in a lot of countries, such has been even banned outright.
2. No mass adaptation. Another factor contributing to the volatility of cryptocurrencies is the limited number of people who use them. Unlike fiat currencies such as the Philippine peso or the US dollar, the latter especially as it’s widely used and accepted, cryptocurrencies have yet to gain widespread adoption. This means that their value is largely determined by a small group of early adopters and speculators, who are often more interested in quick profits than long-term stability. This leads to rapid price swings as these individuals buy and sell large amounts of the currency, creating a feedback loop that amplifies price fluctuations.
The crypto space has been touting that mass adaptation is improving in the past years. The country of El Salvador, in particular, has been branding itself as a “Bitcoin destination” since 2021. Recent reports, however, reveal that using Bitcoin in the country is not as easy as advertised.
3. Association with illegal activities. Another factor that makes cryptocurrencies a volatile investment is their association with criminal activities. Because they can be used to anonymously transfer funds, cryptocurrencies are often used by individuals involved in illegal activities such as money laundering, fraud and cybercrime.
This association with criminal activities gives the public the impression that cryptocurrencies are unreliable and untrustworthy, which will, in certain instances, negatively-impact their value and contribute to increased volatility.
Those who are familiar with investments will say that volatility is a necessary component of investing and will argue that, so what if cryptocurrencies are volatile? Take note that the argument I am making is that of “incredible volatility,” which results in the following:
1. Poor choice as an “investment. ” The high volatility of cryptocurrencies makes them a poor investment choice if ever they are considered as an “investment” because it makes it difficult for investors to make decisions that are based on good judgment. With rapid and unpredictable price swings, it is difficult for investors to determine the true value of a cryptocurrency, making it difficult to make informed investment decisions. This unpredictability can also make it difficult for investors to plan for the future, as they cannot be sure of the value of their investment in the long term.
2. Results to possible huge financial losses. The volatility of cryptocurrencies can also possibly result to significant financial losses for investors. Because the prices of cryptocurrencies can change rapidly and unpredictably, investors who are not able to sell their investments quickly enough can end up losing substantial amounts of money. This makes cryptocurrencies a particularly risky investment option for individuals who are not familiar with the market and who do not have the financial resources to withstand large losses.
In conclusion, the volatility of cryptocurrencies makes them a risky and unreliable investment choice. With their lack of regulation, limited adoption, association with criminal activities, unpredictability and potential for significant financial losses, it is clear that putting money in cryptocurrencies is never a good idea.
While the touted potential for high returns may be tempting, it is important to remember that the perceived rewards does not compensate for the risk one has to take.
In the next article we will discuss in depth the next argument as to why you should not put money in cryptocurrencies and that is because of issues with regards to regulation.
Zigfred Diaz is a Cebu-based registered financial planner of RFP Philippines. Aside from practicing law, he is a licensed environmental planner, real-estate broker and appraiser. To learn more about personal-financial planning, e-mail info@rfp.ph or text 0917-6248110.
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