With cryptocurrencies so much in the news, you may 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 exactly is the difference between a speculator and an investor? Probably the main factor is the different views of time.
A true investor is in it for the long term, building a portfolio that over many years can ultimately 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 are often willing to take big risks to achieve those results.
There is also the difference in knowledge. Investors know that they are buying shares in a company that produces products or provides services. But many cryptocurrency speculators do not fully understand what they are buying – because crypto is just not that easy to understand.
Cryptocurrency is a digital asset, and cryptocurrency transactions exist only as digital entries on a blockchain, with the “block” essentially just a collection of information, or digital ledgers. But even knowing this does not necessarily give 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 huge gains followed by massive losses – sometimes within hours. What is behind this kind of volatility? In fact, several factors are involved. First, the price of Bitcoin and other cryptocurrencies depends heavily on supply and demand – and demand can skyrocket when media and crypto “celebrities” present a particular offer.
Furthermore, speculators will bet that crypto prices will move up or down, and these bets can trigger a rush of buying and selling, again leading 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 leave the market, adding to the volatility.
Lack of regulation
When you invest in the traditional financial markets, your transactions are regulated by the Securities and Exchange Commission, and the firms you invest with are usually overseen by the Financial Industry Regulatory Authority. Other agencies are also involved in regulating various investments.
These regulatory bodies work to ensure fundamental fairness in 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 into crypto.
The cryptocurrency market is still relatively new, and it is certainly possible that in the future crypto may 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.”
Neal Logan is an Edward Jones financial advisor who can be reached at [email protected]. This article was written by Edward Jones for the use of your local Edward Jones Financial Advisor.
