Bitcoin has been soaring in value at times, but crashing at others. Lauren Lyons Cole, a certified financial planner and senior editor at Business Insider, explains the risks of investing in cryptocurrency. Following is a full transcript of the video.
Lauren Lyons Cole: I'm Lauren Lyons Cole. I'm a certified financial planner and a senior editor here at Business Insider.
Bitcoin isn't new, but in 2017 it was all the rage. Starting out in January around a $1,000 and climbing to $20,000 in one year is enough to make anyone take a second look at bitcoin.
But here's the thing about bitcoin, it reveals a very basic investing principle that we all fall prey to and that's that investors tend to be irrational. When bitcoin is sailing high, everyone wants to buy in. But as soon as it starts crashing, people freak out and they start selling. Successful investors buy low and sell high, but our natural instinct is to feel more comfortable buying when things are good and more comfortable selling when things are bad.
If you're new to the bitcoin craze and you're thinking about investing, the first thing you have to do is figure out what it is. If you can't explain what bitcoin is to your mom or your neighbor and why you're investing in it and why you think it's a good investment, then it's too soon for you to put your money in.
But with an investment like bitcoin, no one really knows where it's going to go. It could go to $150,000. But it could also go to zero. It's a highly risky and speculative investment. When you're investing in the stock market, it's a little bit easier to – it's still not easy, but it's a little bit easier to stomach the drops when they happen. Because, historically speaking, we know the US stock market goes up about 8%, on average, per year. Some years there are big swings up, some years there are big swings down.
But bitcoin and the other cryptocurrencies have a tendency to make huge swings. In 2017, bitcoin climbed over a 1000%, but it also dropped by 30%, 40% at various points. So it's not the type of investment that's for the faint of heart. We just don't know what's going to happen. It could go to zero. It could go way up more. It's impossible to predict. And so if you are investing in bitcoin, you have to know how much risk you can handle. The bottom line is if you're investing in bitcoin, you need to be prepared to lose everything in case that happens.
