Cryptocurrency is a hot commodity and so many have become intrigued by it. It’s trendy, it’s exciting, and it’s easy to purchase. But these qualities do not mean it is a good investment.
Let’s take a closer look at crypto.
Cryptocurrency
What exactly is cryptocurrency? It can be a difficult concept for some to understand. Crypto is a digital or virtual form of currency whose value is stored through cryptography.
Traditionally, we think of currency as paper money and coins. We do not consider currency checks, debit cards, and credit cards as they are tools used in the exchange of money.
Cryptocurrencies are not issued by a bank, government, or central authority. As a result, there is no government oversight or regulation. Crypto operates outside the jurisdiction of most financial and judicial infrastructures.
Who issues cryptocurrencies? No one person or group issues them. It is created, stored, and distributed on a record-keeping system called blockchain by a worldwide peer network.
These virtual currencies can be purchased on cryptocurrency exchanges where you can buy, sell, and store them online. Crypto is sometimes used for regular retail transactions, but most companies still do not yet accept them as a form of payment. The currency is traded and sometimes used for international transfers.
Currently, there are over 20,000 types of cryptocurrencies in existence and dozens of blockchain networks. The oldest and most well-known currency is Bitcoin.
So, why do we advise to stay away from crypto? There are several reasons.
Regulation
The crypto market is a bit like the wild, wild west. There is currently very little to no regulation. Anyone can set up their own made-up currency.
In contrast, a federal agency oversees the U.S. securities market and stock, called the U.S. Securities and Exchange Commission (SEC) . This agency helps maintain fair practices, public disclosure, and investor protection in the stock market.
The average investor can lose big in the stock market when they are uninformed. Stocks, however, are a well-established investment vehicle with over 100 years of regulatory practices and legal recourse should something go afoul. There are rules and regulations in place that can be enforced.
Crypto has no regulatory framework around it. There is no rule book and no governance. You are on your own.
Volatility
Any currency will fluctuate in value. Our own U.S. dollar experiences highs and lows, depending on inflation, debt levels, and money in circulation. It is expected and foreseen.
The price of crypto, however, can fluctuate from very high to very low in a matter of days.
Factors that can affect the price include supply and demand, consumer feelings, market hype, and possible emerging government rules. These currencies can lose 30 to 40 percent of their value, sometimes in as little as 48 hours, when investors are triggered by something they’ve read in the media or heard through the grapevine.
While the prices of stocks and value of currency can be tied to GDP growth and other measurable factors, the prices of crypto are not predictable. The factors that can influence their pricing don’t follow a pattern and are random.
Environmental
Cryptocurrency mining uses up a huge amount of energy. How much? One transaction eats up an equal amount of energy as the average U.S. household does in 30 days.
Most transactions come from crypto mining. Creating and accounting for cryptocurrency uses specialized computing devices called mining rigs. These mining operations consume mass amounts of electricity.
The transactions create carbon footprints larger than those of some countries. Cheap electricity and server farms for these mining rigs are all over the globe (mainly China, Russia, and Iran) and are driving up carbon emissions in a world that is trying to reduce that very thing.
Fraud
The potential for fraud is high with cryptocurrency. Traditional currency has a value that is tied to either a tangible asset, such as gold or silver, or from a guarantee backed by an established government. Crypto is not tied to anything.
Nothing backs the value of crypto, and there are many frauds and scams that take advantage of that. The Securities and Exchange Commission released a crypto scam alert last year that warned investors against getting involved in a Ponzi-like scheme with $2 billion in fraud.
Crypto has also been used for money laundering, drug sales, and illegal activity on the web. Hackers use crypto for ransomware payment demands because they can remain anonymous. While not all crypto is illegitimate, there is a heightened potential for deceit.
Cash Flow
Investments normally provide the investor with some type of cash flow. Some have labeled it as the lifeblood of a business, and others have said cash flow is king. At the end of it all, you want your investments to produce a positive cash flow for you.
Real estate investors receive money as rent. Business owners receive profits from their share of the business. Stock and bond investors receive dividends from owning securities that increase in value.
With crypto, there is no generation of cash. To make money, the investor must find someone to purchase their currency for a higher price than what they paid. People have called it the greater fool theory.
Final Thoughts
Someday crypto may become a less volatile, more regulated, more environmentally sustainable, safer investment that produces a positive cash flow to investors. However, that is not in the foreseeable future. Steer clear of crypto. If you are still curious, we are happy to discuss it further.
Written by Matthew Delaney