As Bitcoin and Ethereum continue their record-breaking run over the past weeks, we’d like to take a moment during this jubilation to explain the dynamics, what you should know and how to protect yourself against transactions that you might come to regret. Investments decisions don’t start with deposits or purchases, they should start with education.
The price of digital currencies like Bitcoin and Ethereum is determined by supply and demand: people who want it (buyers) and people who have it (sellers). Luno is the platform connecting these buyers and sellers; Luno does not determine the price of Bitcoin or Ethereum.
During surge periods, like over the past week, demand is much higher than supply since more and more people want digital currency and, something most people prefer not to see, just because the price is going up.
When you buy BTC or ETH on the Luno platform, you are buying it from someone else (called the “counterparty”). This counterparty is a little more complicated than just saying “someone else”, since we are often connected to multiple sources of liquidity (i.e. marketplaces where people buy and sell digital currencies). You could just be making one big purchase, but you’re buying from multiple sellers, who, depending on which country you are in, could even be from multiple other countries. However, the same rule of supply and demand still applies.
Here are some questions we are frequently asked
“Why has the price risen so much?” – The supply side is fixed, so that’s easy – on the demand side it’s a combination of increasing institutional interest (and new instruments to help them get exposure like shorting and ETF’s), people learning a lot more about how digital currencies work and why it’s an important technology, the world economy looking somewhat shaky and people looking for alternative yield and exposure, the media generally being more objective about it etc. Most of it though is just word of mouth from one user to another and a general excitement around a new technology and way of thinking about the world. We’ve built a dedicated learning portal to help on the education front and will be adding a lot more content and videos here in the next few weeks, but happy to discuss more in the meantime if needed.
“Are digital currencies a sure thing? Is it Bitcoin or Ethereum or something else? Should I invest?”
It’s a very exciting space but still super new and risky, so it’s definitely not a sure thing and never spend more money that you can’t afford to lose! But it’s worth at the very least reading up on and learning more. We think the future is a multi digital currency world, that we wrote a lot more about here
. Importantly though, as we’ve said to many others – there are many things that we don’t know about our industry and the technology as many people are still trying to figure it all out. But there is one thing we know for certain: that the way people think about and use money will change. How do we know this? Just look at the history books – it’s changed many times in form and function. Will it be Bitcoin? Will it be digital currency? Will it be in our lifetimes? We don’t know the 100% answer to this, we can only hypothesise. But we know it’s going to happen one way or another. And when it does you don’t want to be the company / person / country that is left behind.
Easy does it
Some people say that when the market is buying (moving up) that you should sell and when it is selling (moving down) you should buy. We can’t and won’t give trading advice, but it’s important to highlight a few things:
- Learn as much as you can
As the adage goes: don’t invest in anything you don’t understand. The more you want to invest, the more you should know about the subject matter. If you’re only spending the equivalent of a meal, you can probably go ahead and buy some without over-thinking it. If you lost that amount, it wouldn’t be the end of the world. But, if you’re investing a substantial amount, you must arm yourself with some information on how things work.
- Take it easy
People tend to make irrational decisions when things are moving fast. Consider slowing down and setting a few rules in place, such as:
- I will only allocate x% of my investment portfolio to digital currency each month
- I will only buy digital currency with money I can afford to lose
- I will never buy digital currency at an all-time high, only sell 😉
- I will only buy or sell after closely reviewing what the final price is
If you’re investing without a strategy, you’re not investing, you’re gambling.
This article was made available by Owenize Odia, Country manager Luno