WIf he invested in Bitcoin in 2020, he would probably do a good job. At that time, the cryptocurrency was temporarily worth around 8000 euros. At the end of March 2022, the price was more than 40,000 euros.
Stories of such amazing profit opportunities attract investors to the crypto market. They are not only dependent on the pioneer Bitcoin, but also invest in other digital currencies such as Ethereum, Cardano or Dogecoin.
Cryptocurrencies are digital, cashless means of payment. They are managed and traded in a decentralized, secure payment system on the Internet – without the banks’ control.
Nearly 300 million people owned such digital currencies by the end of 2021, the Crypto.com platform has calculated. And the number of investors is expected to continue to rise. “A lot of people are afraid of missing something. That’s why they go on board,” says Hartmut Walz, a financial economist at Ludwigshafen University of Applied Sciences.
At the same time, it is becoming easier and easier to buy cryptocurrencies. Many online brokers have long offered individual currencies for sale. Even some savings banks soon want to make this possible for their customers through their checking accounts.
Interest in Bitcoin & Co. has increased significantly
Timo Emden, specialist in cryptocurrencies on the stock exchange portal Emden Research, states that interest has increased significantly: “Cryptocurrencies have arrived in the classic financial world, and the asset class has established itself. It is therefore delayed and makes sense that traditional banks are also taking the leap. ” According to him, many investors would invest, but they did not dare yet, because procurement and administration are complicated.
So far, anyone who wanted to invest in Bitcoin and Co. has usually had to buy coins through – mostly foreign – trading platforms. And then transfer them to your own wallet, a kind of digital wallet.
Owners must keep access to this wallet, the so-called private key, as secure as possible. Finding this out and setting it up requires time and patience.
This is often easier with online brokers: a click or a swipe, and the investor already owns a bit of Bitcoin or Ethereum, which is also stored there in a wallet.
As easy access as possible also makes it possible for investors who have not necessarily belonged to the target group to make an investment: Older savers or small investors without a penchant for technology.
Cryptocurrency risks are difficult to understand
“Cryptocurrencies are a new asset class with potential, especially when it comes to using this technology in other areas,” says Timo Emden. If you look at the past, you can see what price options there are.
Hartmut Walz, on the other hand, warns: “It is a fatal signal that it is becoming easier and easier to buy digital currencies. It is aimed at the wrong target groups. ”
The experience with the asset class is still thin. And those who want to invest should disregard the fact that many coins are long gone. So many investors ignored the dangers of buying.
“No one can really assess the risks, especially not small investors. Even the basics of the technology behind currencies are difficult to understand, ”says Walz.
One principle applies to investing: you should only buy investment products that you understand. Only then does an investor know where his money is.
Since there are no real values behind the digital currencies, they can disappear from the market at any time or be replaced by other currencies. In such a case, the money invested would be wasted. Investors should keep this in mind.
Cryptos are also volatile in times of crisis
In addition, various countries are toying with the idea of banning the trading of cryptocurrencies. In the EU, similar plans are tentatively off the table, but China, for example, is taking action against the distribution of the coins.
“Profits in digital currencies are pure luck. No one can predict how the market will develop in the long run, ”says Hartmut Walz. Even a tweet from Tesla founder Elon Musk may be enough to set prices in motion. For example, when the entrepreneur last year announced that his vehicles could also be purchased with cryptocurrency in the future.
Many investors are also dependent on cryptocurrencies as a crisis currency – equivalent to gold. After all, cryptocurrencies are not controlled by any central bank, so the argument goes.
And in the case of Bitcoin, for example, the number of coins is limited – just like with precious metals that can not be dug up from the ground indefinitely. Central banks, on the other hand, can fire up the printing presses at will, which can boost inflation.
Buying digital currencies reduces the risk of default
But Emden warns: “Cryptocurrencies offer no protection in uncertain market phases, as they act as a high-risk asset class and are usually quickly abandoned when uncertainties arise. The ‘safe haven’ narrative is and will remain a myth.”
Therefore, he also urges caution when making an investment. “The default risk is significantly higher than with equities. Investors must therefore also expect a total loss. ” But he does not want to discourage cryptocurrencies completely. It depends primarily on how much risk someone is willing and able to take.
Therefore, when you buy cyber currencies, invest only part of the savings there. And then you should not just invest in one coin, advises Emden. “You should buy more currencies to minimize the risk of default.” Above all, investors should not play in the short term, but stay on the ball in the long term.
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