Many of you may remember your parents and grandparents saying, “If it sounds too good, it must be.” Cryptocurrencies have a relatively short history compared to traditional investments. Bitcoin is generally considered the first cryptocurrency introduced in 2009. Bitcoin was revolutionary because it is considered the first cryptocurrency to combine blockchain record-keeping technology, user privacy, and decentralized control all with built-in security.
The value of a single Bitcoin surpassed $1,000 for the first time in 2014 and hit a new all-time high of just over $68,000 in November 2021. As popular culture started writing more about digital currencies, more investors and tokens or coins entered the market. Ethereum, Tether, Dogecoin, and US Dollar Coin to name a few.
As with many things that present tremendous benefits, everyone wants to get in on the action. This often happens when the lottery hits his $400 million+ potential and we all rush to buy tickets. The difference is that most of us understand the odds of actually buying a winning ticket. Investing in cryptocurrencies looks a little different. Many people seem to believe that cryptocurrencies are just an alternative to traditional stocks and bonds. And why not put some money into cryptocurrencies with huge payout potential?
Let’s look at some real numbers. For those who invested in Bitcoin at $1000 per coin in 2014, the coin is currently valued at $16,836, giving him an average return of 16.97%. Crypto investors have an advantage of about 3% compared to the inflation-adjusted stock market return of 14.15% over the past decade. But just looking at the numbers doesn’t tell the whole story.
In 2014, the year Bitcoin first broke through $1000 per coin, investors lost 850,000 coins when Bitcoin exchange Mt. Gox went down, which was never recovered. These coins are worth about $14.3 billion today. The Squid Game coin, named after his Netflix hit series, hit the cryptocurrency market around October 2021, priced at one penny per dollar. The price rose to over $2800 per coin, but there was a problem. Investors were unable to sell his Squid Game tokens and on November 1, 2021, his $3.36 million was removed from the Squid Game coin by its creator and the coin. Not worth it. FTX’s latest scandal is similar to the 2001 Enron scandal, costing investors millions of dollars.
So here are a few things we all need to remember about cryptocurrencies. First, unlike traditional stocks and bonds, there are few, if any, regulations associated with cryptocurrencies. The Securities and Exchange Commission (SEC) is likely to become the cryptocurrency regulator, but is not currently in such a position. The IRS continues to consider cryptocurrency transactions taxable and, in my opinion, will increase scrutiny of these transactions. Second, there are significant risks associated with cryptocurrencies. This is true for all new assets on the market. The number of failed initial public offerings (IPOs) is a staggering 80%, but we generally only hear about winners. Third, cryptocurrencies are now being promoted through social media and a variety of unconventional sources, often targeted at young people. The idea of many of these ads is that it’s the next big thing. Owning a cryptocurrency can make you cool, unconventional, and make money. This is not a boring financial services ad with fine legal print at the bottom.
The start of a new year is the perfect time to reflect on the lessons of the past year. The lesson for 2022 is that what goes up must come down. Ponzi schemes and scams still exist and boredom is a good thing when it comes to investing for the future. As our grandparents used to say, “If that sounds too good to be true, it probably is.”
