Sky News, a British TV station and mainstream media outlet, reported that investors lost homes as the Bitcoin price crashed. But, the same argument can be applied to the stock market, real estate, and every other major market.
The report claimed that investors put up their homes as collateral to receive loans and invest in Bitcoin. As the price of Bitcoin dropped, their homes were taken away along with their assets.
The report read:
Married men accessed equity through their family homes, and often – whether because they felt they needed to act quickly to make the most money, or because they feared that their investment would be criticised by their spouses – did so without informing their families, only to see the value of their assets evaporate, followed by their homes.
Crypto assets like Bitcoin (BTC) and Ethereum (ETH) are still at their infancy and are a part of an emerging asset class.
In February, Vitalik Buterin, the co-founder of Ethereum, said that cryptocurrencies are a hyper-volatile asset class and it is not an intelligent investment decision to allocate more than an amount that can be lost, as cryptocurrencies could drop near-zero in a short period of time.
“Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time. Don’t put in more money than you can afford to lose. If you’re trying to figure out where to store your life savings, traditional assets are still your safest bet,” Buterin said at the time.
The phrases “the rich get richer” and “money earns money” refer to the ability of the wealthy to hold on to risky assets and survive bear markets without liquidating their assets. On the contrary, investors that invest more than they can afford to lose in a highly volatile asset class but need the money to cover short-term expenses have no other choice but to liquidate their assets and obtain cash.
In the aftermath of the 2008 financial crisis, which affected the economy of the United States throughout the following years, the suicide rate of Europe and the Americas surged. Investors, especially retail or individual investors, who lost money in the stock market found it difficult to deal with anxiety, depression, and high levels of stress acquired from previous recessions.
Wealthy investors that had not cashed out of real estate properties and assets in the stock market throughout 2008, however, recorded no losses because they were able to wait out the bear market.
Investments in hyper-volatile assets without necessary risk management which publications have focused on when reporting about Bitcoin throughout the 2018 bear market are not exclusive to cryptocurrencies.
Many investors in the stock market and real estate often rack up debt to engage in high-risk investments and deals without proper risk management, which in most cases lead to full-blown bankruptcies.
When investing, especially in emerging asset classes, it is of the utmost importance for investors to weigh the risks involved in the trade and expect to survive a long-lasting bear market if it arrives.
Featured Image from Shutterstock. Charts from TradingView.
Last modified: June 14, 2020 11:05 AM UTC