Not a week goes by without an email in my inbox inviting me to chat with the latest cryptocurrency expert. The number of new digital currencies popping up is staggering as the hype over bitcoin, Ethereum, Litecoin and other cryptocurrencies explodes.
If hype is the driver for investing, then cryptocurrency is the Hamilton of the investment world — the hottest ticket on Broadway.
Investing to compound your wealth is a solid way to profit, with proven investments that are regulated and have a history of success behind them. Right off that excludes investing in cryptocurrency.
What is Cryptocurrency?
Type “what is cryptocurrency?” into a Google search box and you’ll get 67 million responses. Nasdaq.com does a good job of explaining the topic.
True currency issued by governments is valuable because it represents the full backing of the issuing country. Nothing but computer code is backing cryptocurrency.
Cryptocurrency is not issued by the government, like our typical currency, and it’s not physical like the $20 bill in your wallet. Yet you can use cryptocurrency to buy things.
Digital or cryptocurrency is created and controlled by computer algorithms. The computer programs decide how transactions are made, recorded and how new tokens, or coins, are released. Miners comprised of individuals and organizations record every transaction. While there are more than 1,300 cryptocurrencies in existence, the most commonly used are bitcoin, Ethereum, Ripple and Litecoin.
You don’t store your cryptocurrency in a bank, but in a wallet on a cryptocurrency exchange or a USB drive with your private key, offline.
If this all sounds a bit risky, that’s because cryptocurrency is a speculative investment. Be prepared to lose all or part of your investment should you decide to venture into digital investing.
Coindesk, a digital currency firm, reports the price of bitcoin and other digital currencies. On July 16, one bitcoin token’s value was $7,306. On Dec. 11, the same bitcoin peaked at $17,549 while a year earlier, on July 17, 2017, you could snatch a token for $2,577.
Invest Money You Can Afford to Lose
There’s a reason why institutional investors aren’t investing in digital currency.
With prices up and down in short periods of time, investing in cryptocurrency is very risky. And digital currency doesn’t offer any downside risk protection.
For successful investing, you need a robust liquid market, or the ability to buy and sell easily. Those trading in cryptocurrency tokens are hundreds of relatively small, unregulated exchanges -– not the New York Stock Exchange or the popular NASDAQ electronic exchange. So, digital currency investors open themselves up to a fragmented market with a history of hacking, theft and insider trading. That’s not a great place for the typical investor’s money.
A recent Ernst and Young report estimates that approximately 10% of funds raised through initial coin offerings (ICOs) has been lost or stolen via hacks. That equates to roughly $400 million stolen from $3.7 billion raised in more than 372 international coin offerings.
The chairman of the Securities and Exchange Commission (SEC), James Clayton, warned that no ICOs have been registered with the SEC.
San Francisco attorney Irwin Stein, on his website LawEconomicsCapital.com, writes the following about his experiences reading the white papers for 10 ICOs: “What you will find are the same ‘fly-by-night’ companies that claim that they are going to disrupt this or that multibillion-dollar industry without so much as a bookkeeper on staff. Almost every white paper I read clearly violates both state and federal law because they do not make full and accurate disclosures.”
Cryptocurrency’s Lack of Value
Another reason to avoid investing in digital currency — it has no intrinsic value. Buy shares in Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Oracle (NYSE:ORCL), Pfizer (NYSE:PFE)or any public company and you own a portion of that company. If the company prospers, your share values will rise, and you’ll make money. Without underlying backing, cryptocurrency is susceptible to tremendous price swings and chances for huge losses.
As recently as January, the SEC shut down the allegedly fraudulent ICO from AriseBank and called it an “outright scam.” The company falsely claimed that it would offer FDIC-insured bank accounts through non-existent banks. AriseBank also forgot to disclose to investors the criminal backgrounds of many of the company executives.
And, this is a cryptocurrency scam that was uncovered. You can bet there are other scams, yet to be unveiled.
Bottom Line on Cryptocurrency
Are you willing to put your money in an untested investment, with the chance of a big score? If so, digital investing is your answer.
For the typical investor, cryptocurrency markets are volatile, unregulated and fraught with unscrupulous players.
But if you’re hungry to dive in, watch the market for a while and wait for regulations. If investing in cryptocurrency is a good investment opportunity, then it won’t go away. But it will become safer. Now is the time to view the digital currency investment markets with skepticism.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of “Personal Finance; An Encyclopedia of Modern Money Management” and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on Twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.