The value of cryptocurrencies like Bitcoin have been soaring since former President Donald Trump was elected president. As of Nov. 22, Bitcoin’s value had reached an all-time high of over $99,000.
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Yet some financial experts still caution about going all in on cryptocurrencies. Here’s a look at why you still might want to think twice about investing too heavily in crypto, even with Trump on the verge of taking the White House.
One Negative Event Could Cause a Collapse in the Value of Crypto
Rachel Lawrence, CFP, head of advice for Monarch, does believe that crypto values will continue to climb under a Trump presidency.
“We’re seeing a lot of indications that a Republican-controlled administration will be very crypto-friendly, meaning they will develop or allow policies that help the value of most forms of crypto rise,” she said.
“Examples include policies that don’t limit energy usage by corporations and keep overall energy prices lower, such as drilling or fracking in previously disallowed locations, since crypto relies heavily on energy consumption; political appointees who might lean towards less regulation; and blocking the Federal Reserve from creating its own digital currency, which would diminish the value of all other cryptocurrencies,” Lawrence continued.
“From these and other factors, I would expect crypto to at least rise initially, until we actually see what policies and regulations come into effect or are enforced.”
However, while she expects crypto to continue it’s upward trajectory when Trump becomes president — at least initially — this trajectory could also easily be derailed.
“The crypto universe changes so quickly in reaction to world events, so if we see something really negative happen again, like the collapse of FTX or policies that are unfriendly to crypto, it’s like any other risky asset,” Lawrence said. “The value could continue to go up, but it could also fall all the way to zero.”
Crypto Is a Risky Investment, No Matter Who the President Is
Lawrence noted that cryptocurrency is extremely volatile, so investors could easily lose it all if they go all in with this asset class.
“The biggest risk is the price going way up and way down, very, very quickly,” she said. “Prices can rise or fall enormously within minutes or even seconds.
“In this way, investing in crypto is very much like betting in a casino,” Lawrence continued. “There are no real assets backing up crypto, unlike real estate, bonds or even stocks, so it’s very hard to know what the ‘true’ underlying value of a cryptocurrency should be.”
She also noted that buying crypto requires investors to be extra savvy. It’s easy to fall for get-rich-quick schemes involving cryptocurrencies.
“If it sounds too good to be true, it very likely is, just like any other investment opportunity,” Lawrence said. “Beware of phrases like ‘don’t miss out,’ ‘guaranteed returns/profit,’ ‘get rich quick,’ ‘as good as cash,’ or any offers to sell or buy crypto that are made to you through social media or email without you initiating contact first.
“You can do a quick online search of the currency you are interested in with the words ‘scam’ or ‘complaint’ to see if they have a history of this behavior,” she continued. “Be wary of fake reviews!”
There’s also the risk that you won’t be able to sell the crypto you buy.
“If a cryptocurrency is still pretty small — meaning very few people want to buy or sell it — the prices can change even more quickly and you can have a very hard time selling it,” Lawrence said. “It could also be discontinued at any time.”
Another risk is related to the platform you use to obtain crypto.
“It can be hard to tell where some crypto service providers are located,” Lawrence said. “They could be anywhere in the world, and you might not have any way to get ahold of a support team in case you are having problems. This makes it risky to use those companies.”
Finally, it’s important to remember that crypto is largely unregulated, so it doesn’t provide the same level of protection you get with other types of investments.
“There are few — if any — legal protections for cryptocurrency holders and payments,” Lawrence said. “Most companies that help you hold stocks, mutual funds or ETFs, for example, are protected by the [Securities Investor Protection Corporation] (SIPC), which guarantees that even if the holding company goes out of business, you will still own the same amount of shares. There’s nothing similar for crypto.
“When you use a debit or credit card, you can usually dispute a charge or get fraudulent charges reversed,” she continued. “This doesn’t exist for crypto payments, so if your crypto account gets hacked and the funds are moved elsewhere, you have no recourse.”
How To Invest In Crypto as Safely as Possible
Investing in crypto always involves a level of risk, but there are steps you can take to reduce the amount of risk you take on.
“Always use a reputable company to hold your crypto,” Lawrence said. “This is called a ‘custodian.’ Or use a hardware wallet.”
It’s also important to make sure you are protected if you forget your password.
“Make absolutely sure to set up a way or multiple ways to recover your account or wallet if you forget your password and keep it in a secure location, like a locked safe or bank vault,” Lawrence said.
She also recommended investing in more well-known and established cryptocurrencies.
“Stick to the major currencies, which should almost always have buyers and sellers so your investment is more ‘liquid,’ plus they are less likely to be discontinued and disappear,” Lawrence said.
It’s also important to “only invest what you can afford to entirely lose,” she said. “I never recommend having more than 5%-10% of all your investable money in one liquid investment, such as one stock or one cryptocurrency. You might want to stick to the low end — 5% or less — for something like crypto that has no real assets backing it up, unlike a stock.”
Lawrence also recommended buying crypto in recurring chunks.
“This prevents you from trying to guess exactly when is the right time to buy, aka ‘timing the market,'” she said. “This is called dollar cost averaging.”
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This article originally appeared on GOBankingRates.com: Crypto Is Soaring After Trump’s Election: 6 Reasons You Still Shouldn’t Go All In
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
