Sep 22 / Conor Prendergast

Understanding Cryptocurrencies – The Importance of Financial Literacy for the Part-Time Investor

The rise of cryptocurrencies over the past decade has forced us to accept a new perspective on the finance industry.

Despite their widespread use, the public perception of cryptocurrencies remains superficial. People have a surface level appreciation for what cryptocurrencies represent, but have little understanding for how they work or what systems they operate on. They’re conceptually elaborate, and frequently misunderstood in a recreational sense. 

Cryptocurrencies are inherently anti-establishment - they give people the license to sell, mine, buy, and trade – all independent of any governance body or regulative institution. It’s an essential part of what they offer; something off-beat and non-traditional that tracks against the grain of what we might consider ‘typical’ in finance.
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But regardless of how intangible we perceive these products, the implication of their existence has some very real-world consequences.
In its totality, the cryptocurrency market represents over $2 trillion worth of traded assets, but all this wealth generation comes at a cost – particularly to the environment.

Related article: Crypto, Blockchain, and Crypto Assets 101

Products like Bitcoin are highly energy-intensive to mine, requiring immense processing power in the most literal sense.

To contextualize the kind of scale we’re talking about, think of Bitcoin’s energy consumption in terms of a medium sized country. Currently, Bitcoin in isolation consumes about half as much energy annually as the United Kingdom.

There isn’t an obvious question to ask when trying to predict the future of these products. Forecasting short-term trends and predicting where and when prices will peak and trough is at best a speculative exercise.
But there are some things to consider before casually throwing your hat (along with your wallet) in the ring.

Don’t jump into what you don’t understand 

It’s hard not to feel the excitement and exuberance you see in the media when it comes to cryptocurrency.

Related article: Cryptocurrencies and DLT – Revolutionary Technology or Asset Bubble?

It’s a fanatical culture that tends to mislead first time traders. Cutting through the noise and sourcing dependable information can often prove a tedious and unrewarding process. It’s a loose, inexact science that attracts a lot of commentators and self-proclaimed experts with an agenda to sell. Investment strategies should be simple, but above anything, informed.

So before leveraging yourself up to your eyeballs, perhaps take a breath, and consider asking some basic questions about what it is you’re actually buying.

When it comes to answering these questions, educational resource providers will have a significant role to play. As cryptocurrencies integrate further within society, their value will likely become more transferable.

Cryptocurrencies may even replace more conventional forms of payment as we continue to move toward a cashless society.
The merit of building your knowledge base now is that it sets you up with a solid understanding for later.

This matters in the long term as a way to combat the wrong kind of attitude for cryptocurrency investment where people often become myopic and impatient.

Seeing the bigger picture through investing time into your education will serve you in the aggregate.

For the time being however, cryptocurrencies are an exceptionally volatile asset class. Appreciating this and recognizing the kind of exposure you take on in the process serves as good a first step as any for the wise investor.  

Read, and read often 

Consider the value of learning something new in a space like this, even if it's just for the sake of having a conversation about cryptocurrencies. It’s a restless technology after all demanding a certain amount of attention from anyone aspiring to get ahead of the curve.

Every other day there appears to be a new development that changes the narrative. So, regardless of your political persuasion or financial philosophy, shop around, and see what kind of value you can get from a new opinion or insight.

With that said, be pragmatic in your research, and be mindful of the traps and fault lines that come with the territory.

Over-committing to a singular investment rationale might hamstring you in the long run. But, perhaps more than that, it may expose you to risks you were previously unaware of.

For example, ponzi-schemes are often dressed and packaged to appear harmless. But the reality is that they’re designed to exploit the vulnerabilities of inexperienced traders.

At the heart of this problem is miseducation.

Over-excitement and a feverish attitude can make you an ideal target for groups or individuals with exactly this in mind. Educating oneself around these pitfalls means to understand what is too good to be true, and how to accost scammers when they inevitably knock at the door.
In less apocalyptic terms, it’s just a case of being sensible, and cautious when investing your hard-earned money in something new and dynamic.  

It is important to be realistic  

With romantic notions of finding that one-stop, quick-fix, financial end-all, we have a tendency to let our imaginations run away with us.

As nice as it sounds, do cryptocurrencies represent that kind of opportunity? The answer; probably not.

The kind of margins we think of when we embellish this idea of success is simply out of reach for most of us. Unless you have the security to stake thousands on uncertain terms, it’s important to dial back on the fantastic, and embrace the realistic.

Related article: Private Cryptocurrencies: Useful or Dangerous?

These assets have tremendous potential and are likely to play a formative role in the future of finance. But before they get off the ground, it’s essential for individuals to hedge themselves moving forward.

Rather than rely on one transaction or currency, diversify your portfolio and safeguard your investments through more sensible investments.

Research alternatives and try to understand what distinguishes one cryptocurrency from another. Investing your money shouldn’t be stressful, it should be calculated. In the case of cryptocurrencies why should that have to be any different? 

Conclusion 

At the risk of sounding anti-climactic, I think it’s important people pause for a moment and consider a more holistic approach to investing.

Cryptocurrencies are exciting and fun, and they definitely make for a better conversation than bonds. But we owe to it ourselves, and perhaps more so those that depend on us, to exercise restraint where needed.

Sourcing the right tools and resources to educate yourself on these topics will empower you for the future. While understanding what’s realistic will help you to manage expectations, and critically enjoy the process without the fear of waiting for the axe to fall.  
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