Wealthsimple makes powerful financial tools to help you grow and manage your money. "Finance for Humans" is where we give you smart and easy-to-understand advice on navigating the financial world.
Maybe you’ve heard that bitcoin is trading north of $1,500. Or that Ethereum basically doubled in price since March of this year. Or maybe you’ve even heard that this company called Wealthsimple is launching a new cryptocurrency trading platform. You might think that all means everyone should drop what they’re doing and start buying and selling cryptocurrency immediately. If you think that’s our opinion though, you don’t know us very well. Our opinion is more like: everyone who is thinking about buying crypto should drop everything and... learn about when and how and why they should buy crypto, and the risks involved, and how it can fit into a sound financial plan geared for the long term. Because even if you don’t mind speculation (and crypto is, indeed speculative; more on that soon), there are smart ways to do it.
All we’re saying here is that there are good reasons you should be using Wealthsimple Crypto and bad reasons. And to help you tell the difference, here are five terrible reasons to trade crypto.
1. Because you think the risk is the same for crypto as it is for buying AT&T stock
Nope. Not true. Because cryptocurrencies are speculative. It’s a good word to know.
“Cryptocurrencies — relative to stocks, ETFs, and commodities like gold — are a very new thing,” says Danish Ajmeri, the product manager for Wealthsimple Crypto. “They have only been around for about a decade. It’s still unclear what the long-term prospects of this space will be.” Because of the relative newness of cryptocurrencies, they don’t yet possess a history of returns, which is a valuable metric for measuring an asset’s long-term stability. “With stocks, for example, there’s a lot of underlying financial data and economics that underpin what the valuation of a company is,” he says. With cryptocurrencies, on the other hand, there’s a higher risk that “the value could go down to zero, or go up exponentially, or end up somewhere in the middle.”
This is why many investors refer to cryptocurrencies as speculative investments. They’re new, and they’re more vulnerable to investor psychology. “The question of whether [a specific type of cryptocurrency] will even be around in a few years, and if it is, what is it actually going to be worth, makes it hard for investors — and especially people who aren’t well-informed — from making smart, educated decisions about how much of their wealth they should be putting in something like this and what kind of expectations they should have for the returns.”
2. Because I’m smart enough to keep all my crypto safe right here on my computer
Bitcoin and other cryptocurrencies are unfortunately a favoured target for scammers. Remember when Jeff Bezos, Elon Musk, and Barack Obama suddenly tweeted that they were matching any bitcoin donations sent to an attached link, and victims lost over $100,000 in assets? Crypto isn’t like a credit card, where you have some protection from bad actors. Once cryptocurrencies leave their designated “wallets,” — aka an online app that holds your currency — there’s no way to reverse the transaction. Trading platforms are vulnerable to hacking.
It’s worth noting that Wealthsimple Crypto is closed loop. Which means you can’t buy or sell anything with the crypto you hold with Wealthsimple — it’s held in “cold storage” by a third party — so there are no transactions you’d later wish you could take back. “We built a closed loop system where we ‘custody’ all the crypto assets on your behalf,” Ajmeri says. “That means it’s not even possible to interact with other wallets and parties.
3. Because you really need the money you’re investing in crypto and you’re counting on it to grow
If you have $10,000 earmarked for your kids’ college and you’re going to need it, that money probably has no business being parked in a crypto account. Likewise: if you don’t have an emergency fund, investing in crypto is probably not the thing to do with money you’re saving — if you haven’t socked away three to six months of expenses, you probably aren’t ready to invest at all, actually, whether that be in cryptocurrencies or in the low-cost ETFs in our Wealthsimple Invest portfolios.
On the other hand, if you have savings that you’re OK losing (or losing some of), a speculative investment is totally fine. Even, for some folks, fun.
4. Because you’re pretty much for sure gonna get rich off this, and quickly
If you’re pouring your hard-earned money into crypto because you think you’ll be one of those “success stories” where some lucky investor became a millionaire after investing $10 in crypto a couple of years back, then you may as well just try your luck in Las Vegas. For all those success stories, there are stories of people who bought at the peak and suffered big losses. During 2017, Bitcoin’s price surged more than 1,000% (in December of that year, one bitcoin was worth $20,000) and stories of average individuals who became millionaires were breathlessly reported everywhere. Then, within 11 months, it fell 80% from its high.
A much better reason for buying crypto is that you understand what it is, and believe in its potential. “A lot of people are investing in bitcoin because they see it as a kind of digital gold — an inflation hedge,” Ajmeri says. “Especially during the last couple of months, where we've seen trillions of dollars in stimulus being created, and some people are losing confidence in government backed-currencies. We don't either agree or disagree with that. It's up to investors. But believing in the value of something is a better reason to invest in it than, say, hype.”
5. Because you think crypto is a replacement for a highly diversified long-term investing portfolio
There’s a reason why diversification is such a popular investment strategy: when you diversify you manage your risk by making sure not all your eggs are in one basket. Especially not a super volatile basket like crypto.
If you’re diversified, it won’t be so devastating if, say, your crypto investment ends up being more of a bust than a boom. Those losses could well be covered, and then some, with your investments in stocks or bonds or real estate or what have you. If, however, 60% of your portfolio is invested in cryptocurrency, then a bust won’t just sting — it could spell real trouble.
Look, we obviously think there are totally legit reasons to trade cryptocurrency. And that if a person is going to do it, she should be using a regulated, secure, low-cost platform designed by an experienced (and beloved! Can we say that? Let’s say that) financial company. And if you’re doing it safely, and for all the right reasons? Happy crypto-ing.
Luisa Rollenhagen is a writer and editor who lives in Berlin.