Cryptocurrencies have become a buzzword in the financial world, and their popularity has been growing over the years. Initially viewed as a niche concept only understood by a select few, cryptocurrencies have since gone mainstream, with more people than ever before buying and investing in them. This trend is likely to continue with more people getting interested in cryptocurrencies, but it’s important to exercise caution while doing so.
According to a recent study, about 31% of people who buy cryptocurrencies are influenced by their friends. This implies that there is a social influence involved in the decision-making process. The friends who are already into cryptocurrency tend to sway their peers to do the same.
While it’s great to have a friend who knows a bit more about cryptocurrencies, it’s equally critical to perform due diligence and research the investment before putting in any money. One needs to differentiate the hype from the facts and make an informed decision. Here are some reasons for caution when it comes to buying cryptocurrencies solely on a friend’s recommendation.
Friends may not have the proper knowledge
When it comes to investing, it’s essential to base your decision on facts rather than emotions. Investing in cryptocurrencies without proper knowledge can be risky and can result in significant financial losses. Friends who are already involved in the cryptocurrency world may not have the proper knowledge and may invest based on hearsay without conducting thorough research. Investing based on rumors and hearsay is risky and not advisable.
Each investment is unique
It’s important to keep in mind that each investment is unique, and what works for your friend may not necessarily work for you. Investing without carrying out proper research can lead to significant losses.
Cryptocurrency prices are volatile
Bitcoin and other cryptocurrencies have been known to fluctuate in value, sometimes quite dramatically. Investing in crypto solely on a friend’s recommendation without considering the volatility levels can lead to financial losses.
Friends may have ulterior motives
Not everyone has your best interests in mind, and it’s essential to keep that in mind when making investment decisions. Friends who recommend a particular cryptocurrency may have an ulterior motive, like wanting to sell off their holdings, which can be detrimental to your investment.
To be on the safe side, it’s essential to conduct thorough research independently before making any investment decisions, including consulting with financial experts. It’s also important to diversify your investment portfolio to minimize risks. Remember, if something seems too good to be true, it most likely is, and investing solely on a friend’s recommendation without proper research and analysis can lead to significant financial losses.
Conclusively, it’s important to exercise caution while investing in cryptocurrencies. Making decisions based solely on peer pressure or your friends’ recommendation can lead to significant financial losses. Educate yourself and carry out proper research and analysis before making any investment decisions. Don’t let the fear of missing out (FOMO) control your decisions. Remember, invest wisely, diversify your portfolio, and minimize risks.
A recent study done by the FINRA Investor Education Foundation and NORC at the University of Chicago found that nearly a third of new cryptocurrency investors in 2022 used a friend’s suggestion as their primary reason for buying into digital assets. While friends’ recommendations may seem like a great way to get started in investing, it may not be the best idea when it comes to cryptocurrency.
Investors who buy bitcoin, ethereum, and other digital assets just on the basis of a friend’s recommendation may experience trouble, according to experts. They may not understand the risk and volatility of cryptocurrency, or how it fits in a well-diversified investment portfolio. Additionally, the sources of information on social media that their friends recommend may not be reliable.
“I don’t imagine friends are talking about when they lost money,” said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta. “The sexy sells. The upside sells. But folks don’t talk about the downside,” he added.
While buying cryptocurrency on the basis of a friend’s recommendation may seem like an easy entry into the market, it can be a “double-edged sword,” warned Gary Mottola, research director at FINRA Investor Education Foundation and a co-author of the report. On one hand, crypto can be an on-ramp to more traditional investing, which is generally a good outcome. There’s some evidence of this happening: 36% of new crypto investors said their purchase made them more interested in investing in the stock market, the study found.
However, the fear of missing out can be a powerful driver of investment decisions. Bitcoin and other digital assets rallied through 2021, a record year for the digital assets. But the tide turned quickly during a so-called “crypto winter,” when investors lost more than $2 trillion in the year following the market peak.
Celebrities, such as actress Lindsay Lohan and rapper Soulja Boy, were recently fined by the Securities and Exchange Commission for undisclosed endorsements of various cryptocurrencies. “Unless they’re some legitimately knowledgeable financial person, trust but verify,” Baker said of information you may hear from friends or from “pseudo experts” on social media.
One of the dangers of following a friend’s advice: Investors may not understand the risks and volatility associated with crypto (or other investments), or how it fits within a broader, well-diversified investment portfolio, he said. Another potential trap: You may be getting a friend’s recommendation when the market is nearing its top, when much of the growth potential has already been realized.
Baker expects he may soon be fielding more phone calls about crypto if the trend of buying on the basis of a friend’s recommendation continues. “If you’re doing some investigation [about crypto], I think it’s great,” Baker said. “If you’re just taking information blindly without doing any investigation, that’s a horrible idea.”
Overall, while a friend’s recommendation can be a good starting point for investing, it is essential to do proper research and understand the risks and benefits of any investment before putting money into it.
