I'm an advocate for cryptocurrencies. From what I can tell, it's a technology with a promising future. But in the midst of all the crypto-hype I get the sense that many people are viewing this new technology through only rose colored glasses. Here are some facts you should consider for a more well-rounded and informed perspective.
1) Buying cryptocurrencies is not an investment. It's speculation.
A well-diversified portfolio of value-adding equities is an investment. We have decades' worth of investment science and an established track record that provides an expectation of return vs risk in the capital market.
Speculation is the act of conducting a financial transaction in hopes of large capital gains at the risk of losing most or all of your initial cost basis. It is infinitely more likely that the value of the bitcoin goes to zero versus the likelihood of the S&P 500 going to zero. On the other hand, many people have already made millions of dollars from cryptocurrencies.
2) You probably do not understand cryptocurrencies.
It's a complex topic. But one of the most important rules of investing is to never invest in something you do not understand. Large numbers of people investing in something they do not understand nor use as intended is one warning sign of a bubble.
Here's a whitepaper from the original bitcoin creator, Satoshi Nakamoto. Unless you have a background in programming it will be difficult to understand. All the more reason to not speculate on this one.
3) There are 1,426 different cryptocurrencies worth a combined total of $750 billion dollars.
Bitcoin isn't the only game in town. It's just benefiting from first-mover advantage. Other cryptocurrencies are beginning to take significant market share from Bitcoin. They all claim to be superior in one form or another. 43 of these 1,426 cryptocurrencies are currently worth $1B or more, and they all can't be winners in the long run.
4) 2.5% of Bitcoin owners have 95.5% of the total Bitcoin wealth.
We know it takes a relatively small amount of trade volume to drive Bitcoin up or down in price. If 2.5% of users own 95.5% of the wealth, what could happen to the price if any of those users decide to cash out? Additionally, does it intuitively make sense that being an early adopter of a new currency idea should entitle you to disproportionate amounts of that currency?
5) Multiple major cryptocurrency exchanges have been either been hacked or claimed bankruptcy in the last few years, resulting in the loss of untold amounts of money.
Mt. Gox suffered multiple security breaches across several years culminating in the eventual bankruptcy of the company. Creditors of the company have claimed over $2 Trillion in losses when the company went bankrupt. They were reimbursed a total of $91 Million.
As recently as December another major exchange filed for bankruptcy in South Korea due to hacking incidents and multi-million dollar losses.
6) Individual cryptocurrency accounts are hacked frequently, with little to no recourse for the victims.
One of the touted benefits of bitcoin and many other cryptocurrencies are that transactions are anonymous, and the world's governments are more or less hands-off at this point. Unfortunately, This means that people can anonymously steal from you, and there is little you can do if this happens. And it happens all. the. time.
In the last 24 hours here is one report. And here is another. And one more for good measure. Plenty more where those came from.
7) Coinbase, the #1 broker for cryptocurrencies, charges relatively high fees to make trades.
Regardless of how much you would like to purchase of any publicity traded equity on the major stock exchanges, it will cost you roughly $7 to make that trade with most brokers.
Coinbase, by comparison, charges a fee of 1.5% to exchange USD to bitcoin. This means that $1,000 worth of bitcoin will cost you $15 in exchange fees. Not terrible, but consider if you are after a larger investment of, say, $10,000. You'll pay $150 once to make the initial exchange, and another 1.5% to exchange it back to USD when the time comes. This means that just to break even on a bitcoin trade, you need your speculation to appreciate by 3%. Basically, you're immediately in an unrealized loss position of 3% when you purchase bitcoin.
In Summary,
You should invest in cryptocurrencies only if you understand them. Few people understand them. Until cryptocurrencies become more stable, purchasing them is a speculation and not an investment. This speculation may result in significant loss or gain. Exchanges are still highly unregulated and have proven to be vulnerable to hacking and other nefarious activities. At least hundreds of millions of dollars of cryptocurrencies have already been stolen.
Speculate at your own risk.
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