The Crypto Craze — Goldmine or Landmine?
Cryptocurrency — or crypto — is digital currency that’s decentralized as opposed to backed by any central authority, such as a government or financial institution. Vast computer networks maintain crypto ownership records in a digital ledger that’s open and accessible to anyone. This digital record management system — or blockchain — consumes a vast amount of energy as it processes and verifies transactions. Like other forms of decentralized finance (otherwise known as DeFi), crypto is part of a growing trend to remove third-party operators from financial transactions. As the world’s first and predominant cryptocurrency, however, Bitcoin tends to grab most of the attention and headlines.
Fidelity recently announced that it will soon become the first major 401(k) provider to offer cryptocurrency as an investment option to its retirement plan participants. And a development like this may have you wondering whether crypto should have a place in your own investment portfolio. After all, Bitcoin valuations climbed almost 1400% in 2017 — and those kinds of returns can add a lot of fuel to your FOMO fire. But here are some reasons to tread carefully when it comes to crypto — if at all.
Prepare for extreme volatility. Along with rapid and thrilling upswings, crypto has experienced severe and punishing declines. According reporting by CNBC, as of May 2022, 40% of Bitcoin investors are underwater — not so thrilling.
Expect the unexpected. Despite the optimism that cryptocurrencies could serve as an effective hedge against inflation, recent events have failed to bear that hope out. And because Bitcoin doesn’t react predictably to known market and economic conditions, it can be a risky bet for investors.
Heed DOL concerns. The Department of Labor (DOL), which is charged with regulating many aspects of 401(k) plans, has issued cautionary language for employers regarding the inclusion of crypto in the retirement plan options they make available to participants. It may be prudent for you, too, to heed its warning.
Speculator beware. Crypto is a decentralized asset. As such — and with no government or asset backing and the inability to generate income or earnings — its value is ultimately driven by little more than supply and demand. And as a result, investor sentiment alone can have an outsized impact on cryptocurrency valuations relative to other asset classes.
And … which crypto exactly? Bitcoin, Etherium, Dogecoin, Cardana, Tether or Binance Coin — you’ll have to choose among these, or about 17,000+ other forms of cryptocurrencies, if you want to dip your toe in this particular investment pool. As in any competitive field, not everyone can come out on top. So, which one will you choose?
What’s an Investor to Do?
If you decide to take a leap into crypto despite all these concerns, it would be prudent to limit your investment to only as much as you’re willing to lose. And be sure to do your homework, consult with a financial advisor and stay on top of any regulatory changes and market conditions that could affect your crypto investment valuations over time.
Sources
https://finance.yahoo.com/finance/news/bitcoin-isn-t-inflation-hedge-182941333.html
https://www.dol.gov/newsroom/releases/ebsa/ebsa20220310
