The one truth behind real investments - January 21, 2018
If there’s one thing to teach someone who wants to start investing it’s this: putting money in only one instrument is not investment, it’s gambling. The reason is simple. One instrument’s value can change rather fast, and if it falls rapidly, there’s no other instrument to balance it. In the era of cryptocurrencies, this rule is more obvious than ever.
Investing in only one instrument can lead to serious problems. People who don’t pay enough attention may lose some or all their savings in a short time. In the last years, we’ve seen several different examples of how fast prices can change on the market.
The ever volatile cryptos
In the last weeks, we can see again how volatile cryptocurrencies are. At the end of last year, all the news was about how Bitcoin is close or over $20 thousand, but ever since Christmas, prices are falling on the market. In the last days, we’ve seen prices around (and for a short while even under) $10 thousand, which means a 50% fall.
This is a textbook example of volatility: the news of bitcoin breaking the $10 thousand barrier, and going higher and higher, while falling under it again happened in two months. In the last week, the same was true for other important market participants, like Ethereum and Ripple. If we look at the historical models, further correction may very well come.
What could go wrong?
This rapid fall shows why diversification is important. Investors without proper attention (or even knowledge) may put huge amounts of money to one instrument, such as Bitcoin. There are people who buy Bitcoins with their whole life savings, and there was news about people who mortgaged their homes to buy cryptocurrencies.
Just imagine someone who bought cryptos for $70 thousand with a loan, and now lost 50% of their “investment”. They will still have to pay their mortgages somehow or they lose their homes. If prices stay lower than the record highs they bought their coins at, they will have serious problems.
What to do? Diversify!
In the last years, we’ve also learned again that even stocks can change fast. With the dieselgate, Volkswagen lost a huge chunk of its value for example. (Their prices went back since.) Now Intel faces a hard time, after a serious vulnerability was found in their chips. At the beginning of 2016, we also saw how individual investors’ panic gave Chinese stock markets a rather hard time when prices started to fall.
This is the reason why buying one instrument is not an investment, but gambling. No matter what kind of instrument we’re talking about, “putting all your eggs in one basket” is a bad policy. This applies to every investment, but the reason why cryptocurrencies may be even more dangerous is that most people only know about Bitcoin, therefore they only buy that.
That’s why diversifying investments is the first and most important safety protocol every investor should apply, so if anything happens to one asset, the others should keep the balance and still have returns.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.