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Should I Invest in Cryptocurrencies? – Part 2

investing in Cryptocurrencies

10 reasons why you may not want to invest in Cryptocurrencies

If you have not read the 10 reasons for investing in Cryptocurrencies, check it out here

1. Crypto market is full of scammers and snake oil sellers

CryptocurrenciesAnd they love volatility that this market provides. Because of the fairly small size of this market – people can manipulate the direction of an asset to their whims.

For instance, by spending $100,000 in repeat orders using a bot – they can create the illusion that the project is in high demand than what truly is.

We have seen people fake their credentials, the hype about partnerships that did not exist, use pictures of people that were never associated with their project – all to lure gullible investors to buying into their ICOs or buying the tokens on the exchange.

There are many ways people get scammed in this space and we have put together about 10 ways people have been duped in this space, you can read that to make yourself aware.

2. Utility tokens are not assets or stocks

CryptocurrenciesOne of the biggest drawbacks with owning the utility tokens is that they may eventually have no utility. This could happen primarily because most of these teams consist of kids straight out of college with no real-world business expertise. No wonder, many of them fail to manage the funds received from investors and take the projects to finish line.

If you decide to go after the team to get your investment back, you have no legal recourse because, erm, you agreed to buy utility tokens which would be useful only if they successfully execute their business plan.  If they fail, you are left with funny money that serves no purpose.

You have to be very cautious when deciding to buy utility tokens to see many things including team behind the project, their past experience, business connections, venture capital backing (this is a good indicator), social proof and ultimately – true blockchain use case.

Blockchain use case is probably the biggest.  If the project you are invested in has no blockchain use case – then there is a high degree of chance that utility tokens will fail.

Staying with established utility tokens is probably a better way to get your feet wet in this space, but that is not void of risk either. Many projects that were on top 50 lists a few years ago do not exist today.

3. Emotions (and illegal bots) drive this market more than any other market

CryptocurrenciesThis market has given a new definition to the words FOMO and FUD, that is Fear Of Missing Out and Fear, Uncertainty, Doubt. Both extremes on the emotional scale tend to drive the trends in this crypto space.

Players with big money know this. They use many tactics to drive these emotions to yield the outcome they want, including:

  • Conduct insider trading
  • Using Bots to drive false trade volume
  • Publish rumors or buy out media to create hype
  • Buy social media influencers to strengthen their rhetoric
  • Use stable coins to drive market prices

Small retail investors will not be privy to these manipulative tactics and may become easy victims.

4. People have lost (and continue to lose), a lot

You will find two types of people in the crypto space.

Those who sell you FOMO for thousands of dollars. They claim “once in a lifetime opportunity” or “if you missed the dotcom riches – here is your second opportunity”.

Then there are those that deter you from even researching this space calling it “Tulip bubble” or “funny money business” etc. Some have lost money falling for the FOMO claims. Yet others have lost money sitting on sidelines when Bitcoin was trading at $3 and never invested a dime.

Now, those who did dare to invest money into this space are facing another challenge – it is the SEC probe, whales manipulation, the fight of the miners who threaten to pull the plug, stock market plunge and holiday season, all have resulted in people who were HODLing their positions in cryptocurrencies bleed out.

CryptocurrenciesNo one knows how low this market will fall (the market has already fallen from $800 Billion to $107 billion). Those who paid into subscriptions to get names of ‘future bitcoin’, those have not invested when Bitcoin was $3 and those who have jumped on the boat when Bitcoin was trading at $19,000 – all these groups have lost monies and now those who are patiently holding their investments in this space are bleeding out every day.

If market swings are not your thing – you may want to stay on the sidelines until this space matures a little more.

5. Worse than the internet bubble

investing in CryptocurrenciesMany compare Cryptocurrencies with the Internet bubble. Even though there are similarities in the way people are getting duped out of their hard-earned money, from a sheer size point of view, Crypto space is not even close.

The stock market lost 5 Trillion dollars, that is Trillion with a T, during the internet bubble. The crypto market has lost 700 Billion dollars from its peak at the end of 2017 to the size of the market as of today.

For visual purposes, this is how it looks:

                                5,000,000,000,000

                                700,000,000,000

Internet bubble was 7 times bigger than the cryptocurrency bubble (if indeed it is a bubble). It could have been worse if it was easy for people to put money into cryptocurrencies. Thanks to the complexity involved in using fiat to buy cryptos – many people stayed away and that saved them from losing money.

One must remember that all of 5 Trillion or 700 Billion is not real money.  For instance, if you bought an asset for $3 which rose to $300 about a year after. You did not sell it and the price falls down to $6. How much did you lose?

The answer is ZERO from a personal standpoint, in fact, you are up 100%.

From the market’s standpoint, the market just lost $294, over 98% crash. 

Remember, even if 90% of people held their assets (as in above example) – and only 10% drove the market prices from $3 to $300, the only people that lose money are those who bought the asset from $6 up to top dollar, not all investors. Of course, a headline that says – 10% market lost 97% barely makes the news. However, “Bubble burst costs 97% market share” is sure to garner interest.

We are not discounting the losses endured by many, however, we want to add a perspective to the market dynamics.

Even at today’s price hovering around $3400 – people who bought bitcoin at anything less than $3400 have not lost money – however, those who bought it at any price above $3400 have.

6. SEC and other agency probes will continue to have a serious impact on the market

SEC has been cracking down on the ICOs and scandalous projects. SEC obtained an injunction against Titanium for Fraudulent coin offering scheme.

invest in CryptocurrenciesWhile SEC has been reasonable in imposing penalties and not criminal proceedings in most of these cases, the market has nevertheless been reacting violently whenever a project comes under SEC investigation.

One of the most spectacular falls in the recent memory is that of Bitconnect. While there were legal proceedings against Bitconnect from other jurisdictions, when Texas issued cease and desist – Bitconnect went from trading in 100s of dollars to cents in a quick succession of dramatic events.

7. No regulations against hackers or projects in jurisdictions with no teeth

While SEC has been flexing its muscle, it cannot reach into places where it has no jurisdiction and most of these companies are registering in countries where there are little to no regulations against raising money via ICOs.

investing in CryptocurrenciesInvestors have lost more than 100 million dollars to ICO scams. Then there were exchanges that shut down their shops overnight taking investors funds with them.

Yet, the biggest loss of funds has happened because of hacking. Once funds are hacked – it is next to impossible to recoup the funds. Government agencies, in spite of their efforts, can do very little in saving investors money. Over 700 million was lost in hacking in 2018 alone, while over the course of 5 years – 15 Billion were lost to hackers on exchanges.

Even if you were lucky to invest in a profitable project – there is a possibility of losing it all to a hack with no way to get your money back.

We expect industry grade solutions in the future that offer investor protection against hacking by way of insurance and collateral guarantees. Until then, funds are at risk.

8. Liquidity concerns are bleeding businesses out of business

investing in CryptocurrenciesIf a company has raised 10 million dollars using Ethereum in 2017 when Ethereum was trading at $1000, that same company is sitting on $900,000. Can you imagine trying to do things that you expected to take 10 million in less than a million dollar budget?

That is exactly what is leading to panic selling in the market and further extending this bear market.

However, businesses cannot wait for the bear market to turn its course. They have salaries to pay, expenses to meet. They cannot meet these expenses at 10% of the planned budget. What do they do?

They are closing shops.

They have no legal obligation to anyone who invested since they only issued utility tokens (SEC might disagree) and since they failed to bring a working product to the world – the utility tokens mean nothing.

Companies backed up by big venture capitals and reserve funds may weather this bear market – for all others – its just a matter of time till they bleed out of business.

9. We are far from Adoption

Speculators have a tendency to expect change faster than it usually takes. We believe that blockchain and cryptocurrencies are here to stay (not all of them, of course), however, for the technology itself to penetrate our day-to-day lives will take time.

While many CEOs expect few cryptocurrencies to enter the mainstream – mass adoption may not be insights for another 5 to 10 years.

Blockchain and Cryptocurrencies as a solution in supply chain management, real estate, and money transfer industries will come earlier than any other industries, based on the current trend of adoption.

10. ACCOUNTING, TAXES (and FBAR) – the BIG elephant no one wants to address

Many financial service providers are playing it safe with cryptocurrencies.  The biggest reason for this is ‘lack of guidance’ from the accounting and tax authorities in the jurisdiction that companies operate in.

Few countries are coming out with clarifications but there is not a legal framework that companies can follow. Companies are not venturing into blockchain and crypto space primarily because of lack of a framework to operate in.

When it comes to retail investors, tax authorities are cracking down on individuals who have traded in cryptocurrencies but have not reported their transactions for tax purposes.  IRS issued a subpoena to Coinbase to get details of transactions involving more than $20,000 from 2013 to 2015. Coinbase had to dish out information pertaining to every single individual that traded on their platform that met the conditions laid out in the John Doe summons.

In addition to tax reporting obligations – there are FBAR and FATCA reporting that is arguably more troublesome than the tax reporting issues one faces.

We have put together a detailed guide to help people to understand the FBAR, FATCA reporting obligations and who might need to file these forms.

You can get this guide for FREE here.

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IMPORTANT DISCLAIMER

Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.

CryptoTapas does not endorse or guarantee the accuracy of the information and claims made in respective publications referenced in this database.

About the author

RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.

RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.”  Of course, that is just his opinion.


 

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