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How Not To Lose All Your Money As A Beginner Bitcoin Investor

In April the price of bitcoin exceeded $62 thousand, but after the recent collapse was at the level of $30 thousand. Now this cryptocurrency is recouping its losses. And a number of experts do not rule out new growth records in the future. But novice investors should be cautious about such an asset.

Head of ICBF Investment Department Aaron Chomsky explained the dangers of investing in cryptocurrency and gave advice to novice investors:

– The price records of cryptocurrencies can now leave few people indifferent. The financial world is experiencing the emergence of a new asset class that can take a certain share of investment portfolios.

The skepticism of big Wall Street players about bitcoin a few years ago is giving way to interest and a desire to capitalize on it by expanding the product line.

In the United States, the United Kingdom, and a number of other countries where consumer protection standards are high, buying cryptocurrencies is reserved for professional investors who have both experience and a significant financial cushion, while retail investors are not yet allowed to go.

This year, the cryptocurrency market is eagerly awaiting SEC approval of the launch of the first cryptocurrency-based exchange-traded fund, which would remove the remaining barriers for retail investors. But the regulator is still in no hurry. Although there is an example of neighboring Canada, where a similar instrument has already received the green light. The reason is high volatility.

The range of quotations of bitcoin and other cryptocurrencies is still excessive for portfolios of ordinary investors. Values still exceed the parameters of gold and other commodity assets, with which the first cryptocurrency is often compared.

As an example, consider the situation that developed after May 10. In seven trading days, the quotes collapsed by almost 30% and that’s not bad at all (on March 12, 2020, the decline was 40%, in one day). Bitcoin is up 125% in the moment since the beginning of this year. That’s the price of profit for those who have invested in it. And if we add even more volatile and lesser-known cryptocurrencies, the potential scale of problems for those who are not sophisticated in how markets work becomes clear.

In addition to volatility, the specifics of the cryptocurrencies themselves and the infrastructure have to be considered. Not all investors will be able to understand private keys and wallet functionality, which is fraught with complete loss of funds, even without the involvement of hackers.

There are also no guarantees that this or that cryptocurrency exchange will not become a victim of hackers, or that its organizers themselves will not disappear with client funds, as it happened recently in Turkey.

There are many nuances to investing in the cryptocurrency market. Therefore, for those who still decided to take this step, there are general recommendations.

For example, it is better to invest a small part of capital (2-5%) without using “leverage” (borrowed funds) with the help of a trustworthy intermediary (even easier through futures on the Chicago Mercantile Exchange with a licensed broker) with a willingness to lose it.

This makes it psychologically easier to react to high volatility, while also getting insurance against losses in case the current financial system transforms, which is pushed by its unprecedented fiscal and monetary incentives in leading countries.

With regard to the use of cryptocurrencies as a means of payment, the road may be even longer and thornier.

Regulators of all countries were greatly alarmed at the prospect of Facebook launching its Libra coin (now called Diem), which was to be pegged to a basket of several reserve currencies.

This would threaten a loss of monetary sovereignty and disruption of the banking sector. Such fears led to the intensification of the study of the launch of national digital currencies (CBDC), including in Russia (digital ruble).

It is a similar digital form of national currencies will be allowed for payments in the future. In some countries, cryptocurrencies can be paid for even now, and the number of companies that are implementing such options is actively growing. But often the outlet receives not digital assets, but the same dollars or euros after conversion in accordance with the law.