There are financial instruments with which it is better not to start the adventure with investing until we have the appropriate knowledge.
There are financial instruments with which it is better not to start the adventure with investing until we have the appropriate knowledge.
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Warren Buffett has jokingly shown what he thinks of bitcoin as "next generation currency"
In recent months, it has become louder and louder about the stock exchange, cryptocurrencies and new products on the investment market. Investing, thanks to applications and the Internet, becomes easier than ever. And along with stories about crypto millionaires or friends earning on CD Projekt shares, more and more people are looking for opportunities to multiply their savings. However, before we choke on the vision of great earnings, it is worth checking whether we are aware of the risks associated with it.
Together with the experts, we indicate where a significant risk may lie in investing, if we are not familiar with it
There are instruments with which you should not start your adventure with investing
High risk is associated with, among others with instruments advertised as "profit guarantee"
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Billionaire Mark Cuban, when asked what to invest in when we do not know it, replied shortly: do not invest. In his opinion, it is better to spend this money on yourself - your education and development. A similar case was raised by the legendary investor Warren Buffett, one of the richest people in the world, arguing that the best investment is the one in yourself. But what if we are determined to invest? Then it is worth finding out which instruments are more risky.
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There is no safe investment. Educate yourself before you start investing
Together with the experts, we indicate several types of investments that are, for various reasons, characterized by a relatively high risk. To enter these markets, you must arm yourself with solid education. It should also be noted that, as the Polish Financial Supervision Authority often emphasizes in its communications, there is no such thing as fully safe investments - each type of investment is burdened with greater or lesser risk.
But while some instruments - such as sovereign bonds - are considered safer than others, some are a real financial rollercoaster.
- The greatest risk is always the lack of understanding of the instrument in which you invest - tells us Tomasz Jaroszek, financial blogger and investor, creator of the Doradcy.tv website, speaker at many conferences on investing and co-author of the book "In the footsteps of Warren Buffett".
Also Paweł Biedrzycki, individual investor and editor-in-chief of the Strefa Inwestorów industry website, points out:
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You shouldn't generally invest in instruments that you don't understand. All kinds of cryptocurrencies, NFT, art or derivatives are therefore dedicated to experienced investors and the adventure with investments should not begin with them.
There are several such instruments - before we invest in them, it is better to get a solid foundation in the form of knowledge and experience.
Cryptocurrencies
Cryptocurrencies first ignited the imagination of potential investors during the rush of 2017. In 2020 and 2021, they got loud again, especially about ethereum and bitcoin, as the media reported on the next record levels of their prices. However, it is important to remember what the Polish Financial Supervision Authority regularly warns that the crypto market is associated with high risk, for two reasons.
First, it is an unregulated market. What does it mean? As described by the Polish Financial Supervision Authority, the cryptocurrency market does not have specific regulations and is not part of the financial market within the meaning of the Act on Financial Market Supervision. Therefore, it is also not subject to the supervision of the Commission. This, in turn, is associated with a number of problematic issues in a situation where, for example, we are cheated or lose money for reasons other than our own, bad investment decisions. Pursuing your rights and claims can be highly problematic. In addition, entities from this industry do not have any disclosure obligations, so they may not warn you about, for example, extremely high risk. In the opinion of the Commission, this makes it difficult to make informed investment decisions.
If we invest in bitcoin, we are fully aware of the risk and know how to technically do it in the safest manner, settle for taxes, etc., all this is clear. It's worse when we want to earn money on bitcoin and we use a dubious website that offers bitcoin-based instruments and we are not even able to define well as clients how it really works. Risk in investments is always, but one thing is the risk of volatility of the instrument, and another thing is the security of transactions, funds and technical issues.
- points out Tomasz Jaro
Second, the cryptocurrency market operates 24 hours a day, 7 days a week and is characterized by high volatility in asset prices. The price of bitcoin can shoot up one day and collapse the next - the best example of this is the fact that at the end of 2017, bitcoin cost almost 20,000. dollars, and a year later ... 3 thousand. hole.
Over the past months, the prices of bitcoin and many other cryptocurrencies have been rising over the broader perspective, but no one can predict to what extent this is a permanent situation - as is the case with all other floating price assets on the market. Often the cryptocurrency rate was "rocked" by one tweet of Elon Musk, one decision of the company - for example Tesla, or a regulator from a distant country. Therefore, there are many risks that should be known and understood before starting the adventure with cryptocurrencies and you should not ignore them in the pursuit of profit.
NFT or digital art
In 2021, the so-called NFT, or Non-Fungible Token, became an investment hit, which is most often translated as "non-transferable" or "immutable" digital token saved on a blockchain. In this case, however, "non-transferable" does not mean the inability to sell such a token, and the non-transferability of the rights to the related work. This means that the holder of such a token is the sole rightful owner of a given work - which in the case of digital art that can be easily copied and distributed, is the ultimate confirmation of ownership.
The NFT token "represents" a given digital work - photo, video, music file, etc. - in a way that prevents it from being copied. As a result, it receives a guarantee of originality, which at the same time translates into its value. This concept has recently been rapidly gaining popularity, among others among celebrities such as Paris Hilton, Azealia Banks and Mark Cuban, translating into the development of a new market based on blockchain technology.
See also: Twitter co-founder's first tweet worth $ 2.5 million? Offers are falling apart
Many wealthy people became interested in NFT tokens, paying for them thousands, and sometimes millions, amounts. In February, the original Nyan Cat meme was sold for $ 560,000. dollars. In turn, the photo, ie Brian's Bad Luck, was sold for 36 thousand. dollars. However, these amounts pale in comparison to the record-breaking $ 69 million in NFT history someone paid for a digital collage created by an artist hiding under the pseudonym Beeple.
Investing in NFT is therefore often referred to as investing in digital art. Accordingly, NFT tokens have no "intrinsic value" as such, according to Nicholas Weaver, professor of computer science at the University of Berkeley. "They have no value other than how much someone else will pay for them," Weaver said in a commentary for the US Insider.
Moreover, the NFT market itself - like cryptocurrencies - is characterized by high volatility, points out Nadya Ivanova, Chief Operating Officer of L'Atelier BNP Paribas, a research company that issued a report on the NFT in February 2021.
- There are no mechanisms on this market yet that would be able to help people evaluate tokens or indicate the more and less reliable ones. Contrary to the traditional art market, there are no recognized "artists" here yet, and anything - a tweet, a song, or even a meme from the Internet - can become an asset assigned to a token. Anyone can make an NFT out of anything, and so there are a lot of "really bad" tokens, says Ivanova. According to her, as in the case of "physical" arts, the NFT market is a space for people with a lot of knowledge. And there is no rule as to which of these assets will win the hearts of investors enough to make a profit on it. This means that in the case of NFT, the risk is not only high price volatility and possible frauds or lack of market supervision, but also liquidity, i.e. the possibility of reselling the token.
Ivanova emphasizes that one day the NFT market will probably mature and enter the mainstream, but there are many risks and uncertainties there.
Instruments described as giving "guaranteed returns"
Often in advertising, especially on the web, you can find the terms "guaranteed profit". Such slogans were advertised, for example, by some condo hotels, against which the Polish Financial Supervision Authority and the Office of Competition and Consumer Protection are now warning. Sometimes financial pyramids cleverly combine the words "rate of return" or "profit" with the word "guarantee". Exactly as in the case of the famous Amber Gold, where next to the large number "13%" was the slogan: "guarantee of security of deposits". Only that "guarantee" was written in a larger font than the other two words.
As Paweł Biedrzycki tells us, "contrary to appearances, the greatest risk awaits average investors in the group of relatively simple and seemingly safe investments".
You should be very careful with all types of bonds, loans, or real estate investments that guarantee even a few percent profits. There is no above-average profit without risk, and in the case of such investments, it should be identified, especially as frequent we invest amounts that are insignificant from our point of view
- warns the editor-in-chief of the industry website Strefa Inwestorów.
Stocks and derivatives
The stock market is usually mentioned as one of the more risky ones, and if you intend to invest there, you should learn about all the risks involved and gain the necessary knowledge. Even experienced traders or investors can lose a fortune on the stock markets for reasons that are sometimes independent of each other, such as macroeconomic turmoil or unexpected events such as a pandemic.
Prof. Krzysztof Jajuga, economist and one of the most recognized authorities on the Polish financial market, author of over 18 books on this subject, in his educational publication for the Polish Financial Supervision Authority, indicates that shares and derivatives (futures and options) are investment instruments with higher risk than e.g. bonds.
It is worth emphasizing that the current regulations require that, before opening an account with a brokerage house, we must complete a special test determining our competencies and knowledge regarding investing in various instruments. If we think about investing in the stock market, it is worth completing such a test and checking whether we have at least the basic knowledge necessary to be active on the stock market.
The mentioned publication by prof. Jajugi can be a good introduction to understanding "what investing is all about" in the stock market and what the risks are.
Leveraged instruments, i.e. on credit
As Tomasz Jaroszek points out, during a hot boom, driven, among others, by fear of inflation, our own greed can be a danger.
- In order to take advantage of the boom to the maximum and accelerate earning, we reach for instruments with a lever, i.e. we artificially increase our exposure to the market. The instrument is of secondary importance, the investment leverage mechanism, which we do not know how to use, maybe more dangerous. For example, when investing 10 thousand. PLN with leverage of x5, I have an exposure five times greater than my capital - explains the investor.
It works in such a way that when investing with a lever, the so-called lever, we put in, for example, 10 thousand. PLN, but we buy instruments worth five times more. This purchase is credited by the broker with whom we make the transaction. If the investment is not successful, the loss is calculated from the levied amount.
Leverage is always a double-edged sword, and many market beginners are not ready for the sharp corrections that can always happen in the market. Following my example, 10 thousand. PLN, only 10 percent. adjustments with such leverage are worth 5 thousand. PLN, or literally half of the invested capital. For a novice investor, starting from leveraged instruments, even during a strong bull market, can be very risky
- warns Tomasz Jaroszek, author of the book "In the footsteps of Warren Buffett".
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