Investing in trendy cryptocurrencies is often seen as a financial fallacy due to several reasons. Firstly, cryptocurrencies are extremely volatile and could fluctuate wildly in very short time periods, making them a high-risk investment. Its value is purely speculative and based on the market demand, without any underlying assets or cash flows to support it. In essence, you are betting on other investors being willing to pay more for it in the future.
Secondly, the lack of regulations and oversight for cryptocurrencies can make them susceptible to fraud and manipulation. In fact, there have been several instances of fake cryptocurrencies being promoted to unsuspecting investors.
Thirdly, the anonymity associated with cryptocurrencies has led to their usage in illegal activities. This risk can potentially lead to future regulatory crackdowns, which would negatively impact their value.
It’s understandable why people might fall for this fallacy. The prospect of earning a fortune within a short period is tempting. Moreover, cryptocurrencies continue to gain media attention and public interest, which fuels the perception that they are a lucrative investment. Social pressure or fear of missing out (FOMO) also might contribute to the decision to speculate cryptocurrencies.
The appropriate financial behaviour would include diversifying your investment portfolio across a variety of assets to reduce risk. This would typically include stocks, bonds, mutual funds, real estate, and minimal part of speculative assets like cryptocurrencies if you can afford to take that risk. Investments should also be based on sound financial knowledge and understanding of the assets, rather than trends or hype. It’s also important to consider your financial goals, time horizons, and risk tolerance when choosing your investments.
For further reading:
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“Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money” by Nathaniel Popper. Book Link.
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“Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond” by Chris Burniske and Jack Tatar. Book Link.
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“The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order” by Paul Vigna and Michael J. Casey. Book Link.