BUY THE DIP!!! The Future of Cryptocurrency as an Investment Option
If you have never heard the term “buy the dip” then you my friend must be living under a rock. Bants aside, it is no news that cryptocurrency has gained immense popularity over the last couple of years, many young Nigerians are involved in trading cryptocurrency and not even the Central Bank’s warnings against cryptocurrency and bans have deterred Nigerian youth. So what exactly does buy the dip mean? It simply means buying cryptocurrency or coins when there has been a dip or decline in price with the hope of making profit from potential rise in its future price. Buy the dip sounds like great financial advice until you realise you don’t know what exactly the dip is and let’s be honest, no one really knows either. It’s all speculation! It’s like match predictions, one of my favourite things to do is read tweets of people predicting the outcome of matches. When the predictions come through, there is jubilation, said person is lauded as a prophet, a connoisseur, knowledgeable in all things football. When predictions come out wrong however, tweets are hastily deleted and everyone moves on. It is the same with this buying the dip thing, we are mostly winging it and although you can predict the markets with a degree of certainty if you have the skills to do so, anything can still happen.
This week the cryptocurrency market faced its biggest crash since 2017, following Elon Musk’s tweets announcing that Tesla would no longer accept bitcoin payments for its cars, the markets were in the negative for days, Bitcoin dropped to about 30,000 dollars from its previous value of $65,000. Ethereum also faced a similar fate as it faced about a 30% drop in price. Cryptocurrency has long been termed by enthusiasts as the future, it has been proposed as the catalyst for the realisation of a decentralised currency. This position has come into much doubt this week with many traders recording heavy unprecedented losses. One question is foremost on the minds of many, is cryptocurrency truly the future of finance? What trust can we place in a system that can be so easily influenced by market players? Is it a viable investment option? In this post I will be talking about the growth of cryptocurrency and what the future holds for cryptocurrency given the recent happenings.
Crypto currency operates as a digital asset where coin ownership records are stored in an existing database or decentralised public ledger system called blockchain. It does not exist in physical form like fiat currency and is not backed by any central banking authority. Bitcoin, the first decentralized cryptocurrency was invented in 2008 by an unknown person(s) under the name Satoshi Nakamoto. It is a decentralised digital currency that can be sent from one person to another using the peer to peer network just like many other cryptocurrencies. Cryptocurrency is a life wire for many young people in third world countries like Nigeria. In Nigeria, cryptocurrency gained massive popularity as a viable investment option, especially for young people because of the low entry rate. As at December 2020, Nigeria was second only to the United States of America in trading cryptocurrency, between 2015–2020 about 60,000 bitcoins had been traded in Nigeria. Bitcoin gained popularity in Nigeria because it offered a solution to many of the country’s fundamental problems. With rising unemployment rates, it provided an opportunity for young Nigerians to invest, make money and attain financial freedom without relying on the government.
Despite its growth and popularity, trading cryptocurrency is not without its own challenges. It has been heavily criticised by government regulators and this week, the crypto markets witnessed an unprecedented crash as prices witnessed a serious drop. Two separate incidents probably triggered this crash; Elon Musk’s tweets and China’s ban on usage of cryptocurrency for transactions. Earlier in the week Elon Musk announced via his twitter page that Tesla would no longer be accepting bitcoin payments and within a couple of minutes, many crypto traders opened their various crypto trading apps to find the markets in the red zones. Even though this is not the first time a country is banning cryptocurrency and is certainly not the first time China has banned its use, the announcement was coming at a pretty volatile time in the market and following Elon’s tweets, markets began to plunge thus placing cryptocurrency’s claim as a rival to gold as a store of value in serious doubt. Following the crash, more and more persons have started to question the viability of these digital assets as a store of value and of course the naysayers have expectedly come out to gloat at the coming to pass of their predictions. The question however remains, what exactly does this mean for the average crypto currency trader? Huge losses were recorded in the crypto currency markets and many persons are starting to rethink investing in it. But is all this really new? Are the happenings today really any different from historical events in the financial sector? Let’s take a trip to the 17th century where in present day Netherlands, what economists refer to as the Tulip mania took place. The Dutch pioneered a lot of economic innovation including birthing the world’s first formal stock exchange and were also arguably the creators of the world’s first futures market which was built around trading tulip flowers. The arrival of the tulip to Europe is often attributed to Ogier de Busbecq, who was the ambassador of the Holy Roman Emperor, Ferdinand I to the Sultan of Turkey. The tulip soon became a status symbol as it was different from other flowers found in Europe at the time. By 1636, the Dutch had created some sort of futures market where speculators could buy and sell contracts to buy tulip bulbs. The Dutch themselves described the entire process as windhandel (wind trade) because the tulips themselves were not actually changing hands. Just like cryptocurrency, it is said to have gained popularity and was traded by persons belonging to various economic classes. Prices rose to really high highs and by February 1637 traders could no longer find buyers to pay for increasing prices of bulbs. Demand began to collapse and many traders were left with contracts which were unenforceable since the courts regarded the debts as contracted through gambling. One thing is certain, human behaviour and markets never really change and markets will keep on correcting itself just as we have seen with cryptocurrency this week. This is nothing new and seeing as we live in an ever changing and innovation driven world, what is important is how we react to these events.
If there is one thing the recent crash in bitcoin prices has shown us, it’s the need for regulations especially with anything that concerns money. I know we live in a libertarian age where living your life without rules and other Gen Z fads are the norm but we cannot ignore the need for regulation in a sector as volatile as finance. There is a reason why many assets are backed and regulated by governments (even though this is not completely fail safe and stock market crashes have happened even with regulation, it does provide some form of legitimacy). It is to prevent such huge losses as we have seen this week and provide some measure of security to people’s investments. For example, according to the Federal Trade Commission, Elon Musk impersonators have scammed people of about $2 million worth of cryptocurrency. Scams and illegal activities are not the only reason why regulation is needed, there is need to achieve some sort of stability in the cryptocurrency space. In February this year, bitcoin jumped about 15% when Tesla announced that it would accept bitcoin payments for its cars. In a similar fashion, dogecoin tanked about 15% after Elon Musk’s Saturday Night Live appearance in which he referred to it as a hustle. This is perhaps the biggest argument opponents have levelled against cryptocurrency. According to the UBS Chief Economist, Paul Donovan, “if one person can dramatically alter spending power, the stable store of value of a currency is not met”.
In my opinion, I do not think the naysayers are giving crypto the grace it deserves as a fairly new invention. Yes, the criticisms are valid, and they are absolutely right when they propose caution with investing in these coins but digital assets are just getting started and I believe that with time stability will be achieved. I also think a fair amount of the criticisms and bans by regulators are disingenuous and only an attempt to wrestle control of the digital assets space from the hands of private individuals. This is evidenced by the fact that many central banks are now trying to create their own digital currency and pushing for cryptocurrency to become a store of value while fiat money is used for everyday transactions. China itself recently announced the creation of its e-Yuan, a digital form of its fiat money. The US senate also in March 2020 introduced a bill to create a digital wallet and recently announced that it would start imposing tax on cryptocurrency trades. All of this indicate one thing: the big players, the governments also want their slice of the pie. Cryptocurrencies are currently not backed by any Central bank and it is only a matter of time before we will have a digital currency which will dominate the world. This interest all points to one thing, that there is promise in investing in cryptocurrency. However, it is expected that governments will likely become more involved, after all where there is money to be made, governments will be interested in joining the party. It must also be mentioned that one of cryptocurrency’s biggest attraction is that it is not controlled by a single Central Bank, however this position may be threatened with increasing government interest in the space. It remains unclear whether governments will directly get involved or simply create their own digital currency to rival existing cryptocurrencies, although the latter seems a more promising option.
The future of cryptocurrency is a promising one, however it is left to be seen how that future shapes up with government interference increasing. Regardless I strongly believe in the potential of cryptocurrency as an investment option, certainly not as huge or primary part of your total investment portfolio but it is a great place to start for young people. Just like with many other investment options, losses are sometimes inevitable and in a space where people have become millionaires over night from trading coins, it should surely not be surprising that it can also all be lost in a split second. I think it is important to carry out your personal research when investing in cryptocurrency, stick to money you can afford to lose or at least do not invest your house rent or school fees into it. So by all means, do buy the dip but as they say, this is not financial advice! I’m by no means a finance expert which means if anything happens my dear, you are on your own o. What I have is a law degree and you can consult me if you need legal services, you know if you need to sue that your crypto guru who charged you an arm and a leg for classes on trading cryptocurrency but did not inform you of the possibility of losing this much money. I’m joking please! It’s called a hustle really and if you fell for it, just know those so called gurus hustled you and even though I think they deserve heavy knocks on their heads for their deceit, it is what it is unfortunately. At the end of the day, investing in cryptocurrency is not for everybody and that is also fine, not everyone will invest in the same things and there are plenty other ways to make money. I also believe with the losses that occurred this week, a lot more people will learn to adopt caution as a principle, which in all honesty is what anyone investing money ought to do in any case. Ultimately, cryptocurrency is still young, the future is open to a lot of possibilities and the changes that will occur due to regulation are left to be seen. One thing remains sure though, cryptocurrency is here to stay and digital assets are the future.
