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With cryptocurrencies so much in the news, you might be wondering if you should invest in them. But “invest” may not be the right word – because, in many ways, cryptocurrencies, or “crypto” for short, are more speculation than investment.
But what’s really the difference between a speculator and an investor? Probably the main factor is the differing views of time. A true investor is in it for the long term, building a portfolio that, over many years, can eventually provide the financial resources to achieve important goals, such as a comfortable retirement. But speculators want to see results, in the form of big gains, right now – and they’re often willing to take big risks to achieve these outcomes.
There’s also the difference in knowledge. Investors know that they’re buying shares of stock in a company that manufactures products or provides services. But many speculators in cryptocurrency don’t fully comprehend what they’re buying – because crypto just isn’t that easy to understand. Cryptocurrency is a digital asset, and cryptocurrency transactions only exist as digital entries on a blockchain, with the “block” essentially being just a collection of information, or digital ledgers. But even knowing this doesn’t necessarily provide a clear picture to many of those entering the crypto world.
In addition to time and understanding, two other elements help define cryptocurrency’s speculative nature:
- Volatility – Cryptocurrencies are subject to truly astonishing price swings, with big gains followed by enormous losses – sometimes within a matter of hours. What’s behind this type of volatility? Actually, several factors are involved. For one thing, the price of Bitcoin and other cryptocurrencies depends heavily on supply and demand – and the demand can skyrocket when media outlets and crypto “celebrities” tout a particular offering. Furthermore, speculators will bet on crypto prices moving up or down, and these bets can trigger a rush on buying and selling, again leading to the rapid price movements. And many purchasers of crypto, especially young people, want to see big profits quickly, so when they lose large amounts, which is common, they often simply quit the market, contributing to the volatility.
- Lack of regulation – When you invest in the traditional financial markets, your transactions are regulated by the Securities and Exchange Commission (SEC), and the firms with which you invest are typically overseen by the Financial Industry Regulatory Authority (FINRA). Other agencies are also involved in regulating various investments. These regulating bodies work to ensure the basic fairness of the financial markets and to prevent and investigate fraud. But cryptocurrency exchanges are essentially unregulated, and this lack of oversight has contributed to the growth of “scam” exchanges, crypto market manipulation, excessive trading fees and other predatory practices. This “Wild West” scenario should be of concern to anyone putting money in crypto.
The cryptocurrency market is still relatively new, and it’s certainly possible that, in the future, crypto can become more of an investment and less of a speculation. In fact, Congress is actively considering ways to regulate the cryptocurrency market. But for now, caveat emptor – “let the buyer beware.”
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC
Sean Payne, CFP® can be reached at (562) 596-3722.
