A Tale of Two Cryptos
An opinion about if an individual should invest in digital currencies. Advice on whether to invest in cryptocurrency (crypto) should be based on risk appetite and capital availability. However, be forewarned that any investment in this sector is neither for the faint of heart nor the wallet.
Imagine if your friends, grandmother, or financial advisor suggested you deposit fiat with an exchange ten years ago. You’re told your funds will be stored on multiple nodes in a decentralized peer-to-peer network as a series of electronic bytes. Further, the exchange offers no guarantees of the perpetual existence of these bytes of data. All of your crypto bytes could go “poof” in a single hack, and you’d have no recourse. You had read about crypto exchange bankruptcies. No FDIC to back you up. No promises are made about return on investment, and the exchange may or may not be regulated. You have read about the dark web “Silk Road” as the market for everything illegal and payable in crypto. You read plenty of statements about crypto’s “investment” potential but receive no assurance that the transactions aren’t scams. Wow! Where do I sign up?
Throwing caution to the wind, you leap off the investment cliff. We’ll assume that ten years ago (March 2012), you exchanged USD 1,000 for Bitcoin. Then in September 2015, you received a small bonus from your employer and exchanged USD 1,000 for Ethereum. You decide to “HODL” (if you know, then you “know”). You had almost forgotten about your $2,000 investment. But your memory is jogged when your email spam folder keeps filling with messages about cryptocurrency. After multiple attempts to log in to your exchange that fortunately still exists, you change your password, log in, and gasp. Your balance is $15,262,426.56. Pretty good return for a $2,000 investment. As your smile widens, the doorbell rings. It’s an Internal Revenue Service Special Agent.
You notice your neighbor peering through the curtain at all the black vans in your front yard. After paying IRS, you visit your neighbor to share news about your good fortune. She tells you about her experience in crypto investing. About a year before you bought Bitcoins, she had invested her total savings, an inheritance of $2,000,000, in crypto with an exchange called Mt. Gox. Two months later, she lost everything when the exchange was hacked and bankrupted.
Two very different outcomes. Both are very plausible. Thousands of different crypto coins have been minted since 2009. Regardless of the investment class, keep in mind the old Wall Street adage that “in every stock transaction, 50% of the investors are wrong.” It also applies to crypto.
