There’s no doubt that huge fortunes have been made on cryptocurrency markets. Now that these digital assets have entered the mainstream, should you be investing in cryptocurrency? Duncan Taylor, Infinity’s Head of Compliance takes a look at the pros and cons.
You don’t have to google very hard to find cryptocurrency success stories. The internet is awash with tales of successful investors showing off their luxury cars and multi-million-dollar mansions bought with the proceeds of investments in Bitcoin.
There’s no doubt that some people have got rich very quickly by investing in crypto. So, it’s natural to wonder if you too could make a fast buck by jumping on the bandwagon. But think very hard before taking the leap – despite all the hype, all that glitters is not gold.
What are cryptocurrencies?
Cryptocurrencies are decentralized currencies that exist digitally, using cryptography to secure transactions. Whereas paper currencies have a central issuing and regulating authority, cryptocurrencies like Bitcoin and Ethereum (these are just two of the more well-known among the thousands now in existence) rely instead on an anonymous peer-to-peer distribution network called the blockchain. For those interested in a detailed description of how this works, there’s a beginner’s guide here.
Cryptocurrencies are gaining traction and are certainly here to stay. Since October 2020 Paypal users in the US have been able to buy, sell and hold cryptocurrency via the platform and increasing numbers of retailers are turning to crypto with nearly a fifth of Americans wanting to make a purchase with a digital currency.
But beware of the risks.
Crypto was riding high at the end of 2021, with Bitcoin peaking at an astounding $68,789 in November.
Fast forward 10 months or so (I’m writing this in September 2022), and the value of Bitcoin has plummeted to less than a third of that amount. Which is some tumble!
Clearly, this is a volatile asset.
And volatility is not the only issue with cryptocurrencies.
Cryptocurrencies are unregulated
For me, the lack of regulation of cryptocurrencies is a major red flag. Many eminent individuals within the financial industry are of the same opinion. The deputy governor of the Bank of England, Jon Cunliffe, recently added his voice to those calling for regulation.
He pointed out that while blockchain technology changes the way risks are managed compared to non-digital assets, it cannot eliminate risk altogether. He explained “Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse.”
He gave the example of terraUSD, a stablecoin that collapsed in June 2022. At its peak, terraUSD was the 10th largest cryptocurrency in circulation yet the algorithm that pegged it to the US dollar failed. The stablecoin proved to be not such a safe bet as its name would suggest.
Regulatory standards and frameworks exist to mitigate risk. While many innovators, including regulators and public authorities in many countries, are working to put some kind of international standards in place, for now cryptocurrencies remain an unregulated and high-risk investment when compared to a balanced portfolio of traditional assets.
Cryptocurrency: to invest or not to invest
While I wouldn’t rule out cryptocurrency investments altogether, I would advise prudence if you’re wanting to test the crypto waters.
If your investment goal is to save for a worry-free retirement, or indeed, if you want an investment that is anything other than high risk, cryptocurrency is not the way to go. These investments have yet to prove themselves over the long term and you are better off following a more conservative investment plan of diversified investments comprising stocks, bonds, cash, commodities and property.
Cryptocurrency could perhaps play a small part in your overall financial plan if you can afford to be at the riskier end of the investment spectrum. And that’s the crux of putting money into crypto – only invest if you can afford to lose the money.
Cryptocurrency is as state-of-the-art as it gets in terms of investments, but the age-old Latin warning that applies to many financial transactions is as relevant as ever: caveat emptor – let the buyer beware.
I have over 20 years of experience in the financial services industry and hold a Chartered FCSI qualification. I ensure that our operations are fully compliant with the rules of our most stringent regulators.