economics
WHAT CRYPTOCURRENCIES CAN TEACH US ABOUT INVESTING
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by Josephine Mwanvua anada may enter a recession soon. The quick, steep rise of inflation is something that hasn’t been seen since 1981. All major banks have predicted the country will enter a recession in early 2023. 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 the last few years, 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.
Even Spike Lee starred in a commercial for the crypto ATM Coin Cloud. In it, he claimed cryptocurrency was an inclusive, non-oppressive avenue towards “new money.” However, as people lost thousands of dollars to the summer 2022 crypto crash — some in retirement or house savings — there are certain lessons to gain about investing in general.
Don’t Invest More Than You Can Afford
Don’t Be Swayed by Social Media
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.
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.
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.
Influencers flood social channels with financial advice they aren’t qualified to give. They then rake in profits through memberships to private groups and online courses.
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. It will be hard to manage emotions if that money can’t be recovered because of what you were planning to secure with those funds. Hence, it’s best to invest what you can emotionally afford, or nothing at all.
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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.
the EDGE Spring 2023
Elon Musk himself 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.
