By Craig Erwin, Ph.D.
Cryptocurrencies were supposed to have two distinct advantages over investments like stocks. Like gold, crypto was supposed to help owners fight inflation. It was also supposed to be uncorrelated with other assets like stocks, with stable prices when stock prices tumbled. It has failed miserably at both. Many of the roughly 19,000 cryptocurrencies have become worthless. In just 2022 alone, over $400 billion has been lost in the most widely held cryptocurrencies. The price of Bitcoin, one of the most stable cryptocurrencies, has fallen from its all-time high of $68,789 on November 10, 2021 to just under $19,000 this morning.
Brutal price declines are not the only way to lose money in crypto, though. In 2021 and 2022 over 46,000 crypto buyers have reported losing a total of over $1 billion in crypto scams. Since there is no governmental oversight of crypto markets (unlike for stock, bond, and commodity markets), risk is sky high and fraud is rampant. Although some crypto firms touted themselves as safer than banks, they are anything but. Some have vanished, leaving billions of dollars-worth of losses in their wake.
Almost everyone who buys and sells crypto uses an exchange or broker. It is not uncommon for crypto exchanges to fail, often in a cloud of scandal-laced intrigue, with hordes of angry clients. In some cases exchange founders have been accused of vanishing with all of their clients’ assets, worth billions in some cases. Sometimes exchanges just disappear after a few hacks or other problems and investors’ holdings disappear with them. Hacking is very common. Crypto exchanges are juicy targets for hackers, who can steal all clients’ holdings, and vanish without a trace. There are many crypto horror stories and, in 2022, they are becoming more common. Three Arrows Capital, a crypto hedge fund, was just ordered by a court to liquidate (cease operations) after it failed to repay debts. And overnight, LUNA, a widely held cryptocurrency, has become practically worthless, with $40 billion in client holdings evaporating.
Where can you complain if your cryptocurrency disappears? Good luck. There is no governmental oversight, so, unlike for stocks and bonds, there is no one working to protect your interests. Crypto is like the wild west, with no laws or law enforcement.
Before you put your hard-earned money into crypto, ask yourself if it is worth the risk. If you lose everything (not unlikely), how much will it hurt? There are good reasons why most retirement savings are invested in stocks and bonds, including governmental oversight and a track record that goes back centuries. Stocks may have fallen in price recently, but very few have fallen as far as Bitcoin, one of the most stable cryptocurrencies. After price declines, stock indexes (collections of stocks) like the S&P 500 have always bounced back and gone on to new highs. No one knows the future of cryptocurrencies, but they look like anything but a sure bet.
Do you own cryptocurrencies? If so have you had any problems with your account? Do you think cryptocurrencies are safe and stable?
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