The value of cryptocurrencies like Bitcoin (available on Coinbase) has been climbing significantly following Donald Trump’s return to the political spotlight. As of November 22, Bitcoin (available on Coinbase) hit a historic peak of over $99,000. Despite this upward trajectory, financial experts caution investors against diving headfirst into the crypto market. Let’s explore the core reasons why crypto risks should not be overlooked.
The Volatility of Cryptocurrencies
Rachel Lawrence, CFP and head of advice at Monarch, warns that cryptocurrency’s volatility is a double-edged sword. She believes a Trump presidency could create favorable conditions for crypto, including reduced regulations and energy policies that lower operational costs for miners. However, Lawrence emphasizes the unpredictability of the market:
“The crypto universe changes so quickly in reaction to world events,” Lawrence said. “While values might initially climb, one negative policy shift or global incident could send prices plummeting.”
This volatility, combined with the lack of tangible assets backing cryptocurrencies, makes them inherently risky compared to traditional investments like stocks or real estate.
Regulatory Risks Persist
Cryptocurrencies remain largely unregulated, which adds another layer of uncertainty. Unlike stocks held through brokers protected by the Securities Investor Protection Corporation (SIPC), crypto investors have no such safety net. Lawrence points out:
“If your crypto account gets hacked or a transaction is fraudulent, there’s no recourse to recover your funds.”
Platforms offering crypto services may also operate in jurisdictions with weak consumer protections, making it difficult to resolve disputes or secure assistance when issues arise.
The Energy Debate
Energy policies under a Trump administration could influence crypto’s trajectory. Cryptocurrencies, particularly Bitcoin (available on Coinbase), consume vast amounts of energy for mining operations. Policies favoring expanded fossil fuel use might lower mining costs, but this reliance on energy also leaves crypto vulnerable to fluctuating energy prices or environmental regulations. A sudden shift could have dramatic effects on market stability.
Illiquidity and Market Manipulation
Investing in lesser-known cryptocurrencies amplifies the risk of illiquidity. If demand dries up, selling your holdings could become difficult or even impossible. Market manipulation also remains a concern, particularly in small-cap cryptocurrencies with lower trading volumes.
Protecting Yourself in a Risky Market
Although crypto risks are substantial, investors can adopt strategies to minimize exposure. Lawrence recommends:
Choose Reputable Custodians: Use a trusted company or hardware wallet to store your crypto.
Diversify: Limit crypto investments to 5% or less of your portfolio.
Stick to Major Cryptocurrencies: Established options like Bitcoin (available on Coinbase) and Ethereum (available on Coinbase) typically have higher liquidity and lower risks of obsolescence.
Utilize Dollar-Cost Averaging: Investing small amounts regularly reduces the impact of market timing.
Secure Recovery Options: Always set up password recovery mechanisms and store credentials securely.
The Long View on Cryptocurrency Investments
While Trump’s presidency might create favorable conditions for crypto, the inherent risks of this volatile asset class remain. Investing only what you can afford to lose and maintaining a diversified portfolio are essential safeguards.
Companies like Coinbase (NASDAQ:COIN) and Riot Platforms (NASDAQ:RIOT) may benefit from an uptick in crypto’s popularity, but the same caution applies to equities tied to the crypto market. Ultimately, understanding the volatile nature of crypto risks is key to navigating this complex investment landscape.By remaining vigilant and informed, investors can make safer choices in this high-risk, high-reward market. Avoid going all in—your portfolio will thank you.
Featured Image: depositphotos @ zoomteam
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