With cryptocurrencies being in the news so much, you might be wondering if you should invest in them. But “invest” might not be the right word – because in many ways, cryptocurrencies, or “crypto” for short, are more speculation than investment.
But what is really the difference between a speculator and an investor? Probably the main factor is the different conceptions of time. A true investor is there for the long term, building a portfolio that, over many years, can eventually provide the financial resources to achieve important goals like a comfortable retirement. But speculators currently want to see results in the form of big profits – and they’re often willing to take big risks to get those results.
There is also the difference in knowledge. Investors know that they buy shares in a company that produces products or offers services. But many cryptocurrency speculators don’t fully understand what they are 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 books. But even knowing this offers many who enter the crypto world, not necessarily a clear picture.
In addition to time and understanding, two other elements help define the speculative nature of cryptocurrency:
• Volatility – Cryptocurrencies undergo truly amazing price swings with huge gains followed by huge losses – sometimes within hours. What is behind this type of volatility? In fact, several factors play a role. For one, the price of bitcoin and other cryptocurrencies is highly dependent on supply and demand — and demand can skyrocket as media and crypto “celebrities” promote a particular offering. Additionally, speculators will bet on crypto prices to move up or down, and these bets can trigger a rush to buy and sell, which in turn leads to rapid price movements. And many buyers of crypto, especially young people, want to see big profits quickly. So when they lose large amounts, which is common, they often just exit the market and add to the volatility.
• Lack of regulation – When you invest in traditional financial markets, your transactions are regulated by the Securities and Exchange Commission (SEC) and the companies you invest in are usually regulated by the Financial Industry Regulatory Authority (FINRA). Other authorities are also involved in regulating various investments. These regulators work to ensure the fundamental fairness of financial markets and to prevent and investigate fraud. However, cryptocurrency exchanges are essentially unregulated, and this lack of oversight has contributed to the growth of “scam” exchanges, crypto market manipulation, inflated trading fees, and other predatory practices. This “wild west” scenario should worry anyone investing money in crypto.
The cryptocurrency market is still relatively new, and it’s certainly possible that crypto can become more of an investment and less of a speculation in the future. In fact, Congress is actively considering ways to regulate the cryptocurrency market. But for now, let the buyer beware.
This article was written by Edward Jones for use by your local Edward Jones financial advisor.
Edward Jones, Member SIPC
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