Cryptocurrency is controversial, risky, wildly volatile — and that’s especially evident from Thursday’s crash, when the crypto market plummeted more than $200 billion, spurred on by the collapse of the massive stablecoin TerraUSD (UST). And this week’s drama didn’t come out of nowhere: The crypto market has trended downward since hitting an all-time high last November due to broader economic woes.
Highs and lows are nothing new in the crypto markets, and skeptics have been long characterizing crypto as an empty bubble destined to burst. Critics have called bitcoin, stablecoins and NFTs simply a new, digital form of an old con primed to swindle and scam. But investors see the world of digital coinage as a step forward — a kind of “Money 2.0” that’ll democratize finance and power the metaverse.
In simple terms, cryptocurrency is a digital token ownership of which is recorded on a blockchain, a distributed software ledger that no one controls — this is designed to make it more secure, in theory. Bitcoin and ethereum are the two most widely known flavors of crypto, but more than 18,000 tokens are traded under different names (dogecoin is one famous example).
Despite seesawing prices and a relative lack of regulation, cryptocurrency has made great inroads as the next financial frontier. Developments like President Joe Biden’s desire to explore a digital US dollar to multimillion-dollar Super Bowl ads underscore a growing desire from powerful government and corporate institutions to quickly legitimize crypto in much the same way as stocks and bonds.
But it’s worth considering whether cryptocurrency is a smart investment for you — especially in light of the current downturn and the ever-present potential for a major crash.
“Cryptocurrency is one of those categories of investing that doesn’t have those traditional investor protections,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority. “They’re outside the realm of securities trading. It’s an area that’s in flux, as far as regulations go.”
Professionals caution that investors shouldn’t put more than they can afford to lose into crypto, which offers few safeguards, plenty of pitfalls and a spotty track record. If you’re thinking about adding crypto to your portfolio, here are five key considerations before you begin.
Risks In Investing In Crypto Today
Before investing in crypto, you should know there’s almost no protection for crypto investors. And since this virtual currency is extremely volatile and driven by hype, that’s a problem. It’s easy to get caught up in tweets, TikToks and YouTube videos touting the latest coin — but the adrenaline rush of a market spike can easily be washed away with a dramatic crash.
You should be on the lookout for crypto scams. One often-used scheme is a pump and dump, in which scammers encourage people to buy a certain token, causing its value to rise. When it does, the scammers sell out, often pushing the price down for everyone else. These scams are prominent, and they took in more than $2.8 billion worth of crypto in 2021.
From the US government’s current policy perspective, you’re on your own. At this time, the government provides no deposit protection for crypto as it does for bank accounts. This may change following Biden’s March executive order, which directed government agencies to investigate the risks and potential benefits of digital assets.
So far as we can tell, only one company offers crypto insurance: Breach Insurance, whose Crypto Shield promises to cover your accounts from hacks. Other companies, such as Coincover, provide theft protection, which alerts you if there’s suspicious activity on your account. Coincover maintains an insurance-backed guarantee that if its technology fails, it will pay you back up to the amount you’re eligible for, which depends on the level of protection the wallet you use offers. (Neither Coincover nor Breach Insurance will cover you against scams.)
Despite all the hype, scams, periodic crashes — and persistent risks — in this market, Fracassi still thinks crypto has a viable future.
“I think crypto holds a possible solution to some of the problems of the traditional financial sector,” Fracassi said. “The current, traditional financial system is noninclusive, it’s slow and expensive and incumbents, including large banks and financial institutions, basically have a lot of control. I think crypto is a venue through which you can actually break the system.”