The value of cryptocurrencies like Bitcoin has surged dramatically since the election of former President Donald Trump. As of November 22, Bitcoin reached an all-time high of over $99,000—a staggering increase. The potential for high returns is drawing more investors into the crypto space, but there are significant risks you need to consider before going all-in.
While it’s true that the political environment under a Trump presidency might favour cryptocurrency growth, it’s also crucial to understand why you shouldn’t jump in without caution. Below are six critical reasons why, despite the soaring values, you should think twice before investing heavily in crypto.
1. A Single Negative Event Could Send Crypto Values Plummeting
Despite the optimism surrounding crypto under a Republican-controlled administration, it’s important to remember how volatile the market is. As Rachel Lawrence, CFP, head of advice at Monarch, highlights, a major market event—such as the collapse of FTX—can quickly reverse any gains.
- Crypto is sensitive to world events: Geopolitical tensions, economic crashes, or regulatory changes can cause sharp, unpredictable drops in value.
- No guaranteed stability: Even though Bitcoin and others are on an upward trend, one negative event can wipe out years of growth in mere minutes.
Just like the traditional markets, the crypto landscape is influenced by external events. Investors need to be prepared for the potential of a market correction or outright crash.
2. Crypto is Inherently Risky and Highly Volatile
While the idea of doubling your investment overnight might be tempting, crypto is not a guaranteed path to riches. It’s highly speculative and moves in unpredictable ways.
- Price swings: Crypto can rise or fall by thousands of dollars in a single day. Unlike traditional investments like stocks or bonds, cryptos don’t have stable assets backing them up.
- Market manipulation: The lack of regulation in crypto markets opens the door to manipulation, insider trading, and pump-and-dump schemes.
Lawrence compares investing in crypto to betting in a casino—there’s no underlying asset to secure the value, and the market can change on a whim. It’s crucial to approach crypto investments with a healthy level of caution.
3. Beware of Get-Rich-Quick Schemes and Scams
The crypto space is rife with fraudulent schemes targeting unsuspecting investors looking to strike it rich. Many scams prey on people’s desires to make easy profits without fully understanding the risks involved.
- Promises of guaranteed returns: Be wary of anyone promising you “easy money” or “guaranteed profits.” If it sounds too good to be true, it probably is.
- Unsolicited offers: Avoid unsolicited crypto offers you receive via social media, email, or messaging apps. Scammers are known for preying on people who are new to the market.
If you’re considering an investment in crypto, always do your due diligence first. Search online for complaints or reviews, and steer clear of platforms with shady reputations.
4. Liquidity Issues: You Might Not Be Able to Sell When You Want To
Another risk with crypto is liquidity. Not all cryptocurrencies are widely traded, and you may find yourself stuck with an asset you can’t sell quickly when needed.
- Low-volume coins: If the cryptocurrency you buy is obscure or low-volume, you might not be able to sell it at all—especially when demand dries up.
- Price fluctuations: The prices of some lesser-known coins can shift drastically in short periods, making it difficult to offload your position.
If you plan on buying crypto, make sure you choose well-established currencies (like Bitcoin or Ethereum) that have larger markets and are less likely to be discontinued.
5. Crypto Platforms Lack Legal Protections
Unlike traditional investments like stocks or bonds, crypto transactions are often unregulated, leaving investors vulnerable to fraud, hacking, or other risks. There are no guarantees that your investments will be protected.
- Lack of recourse: If your crypto account gets hacked or funds are stolen, you have no legal recourse to get your money back.
- No SIPC protection: With stocks or mutual funds, if a firm goes bankrupt, the Securities Investor Protection Corporation (SIPC) protects your investments. For crypto, there’s no such safety net.
The unregulated nature of crypto can make it difficult for investors to secure their holdings and trust that their assets are safe. This is why it’s essential to take additional security measures to safeguard your crypto holdings.
6. Overexposure to Crypto Could Lead to Financial Ruin
Given the inherent risks associated with crypto, it’s unwise to invest too much of your wealth in this asset class. Rachel Lawrence recommends keeping your crypto investments to a small percentage of your overall portfolio.
- Only invest what you can afford to lose: A common rule in investing is to only put in what you can afford to lose completely. In the world of crypto, where the market is highly volatile, this is more important than ever.
- Diversify your investments: Diversification is key. Never place all your bets on one asset, especially one as unpredictable as crypto.
For most investors, 5-10% of their portfolio should be the upper limit for cryptocurrencies. Keeping the rest of your investments in more stable and traditional assets (like stocks, bonds, or real estate) can reduce overall risk.
How to Invest in Crypto Safely
If you decide to invest in crypto, it’s important to take steps to mitigate risks.
- Use reputable custodians: Choose trustworthy platforms or companies to hold your crypto, such as hardware wallets or well-known crypto exchanges.
- Set up multiple recovery options: Ensure you have a way to recover your wallet if you lose your password, and store recovery information in a secure location.
- Stick to established coins: Invest in widely-recognized cryptocurrencies like Bitcoin or Ethereum, as these are less likely to disappear or lose value overnight.
- Use dollar-cost averaging: Instead of trying to time the market, invest fixed amounts in crypto regularly. This strategy spreads out your risk over time and can help you avoid emotional decision-making.
By taking these precautions, you can reduce some of the risks associated with crypto investing.
Conclusion: Approach Crypto with Caution
While cryptocurrencies have gained popularity, and the Trump presidency might create a crypto-friendly environment, investing in crypto still carries significant risks. As with any speculative investment, be sure to do your research, understand the volatility involved, and only invest what you can afford to lose.
Invest smart, stay informed, and be cautious in this rapidly changing market.
