Over the past year, cryptocurrencies soared in popularity as superstar endorsers told would-be investors they didn’t want to miss the crypto train.
But by June, bitcoin had shed roughly 70% of its value from its all-time peak of $69,000 last November, and several so-called stable coins whose value was pegged to the dollar were worth a fraction of their advertised value.
Academics and others caution that cryptocurrencies are wildly volatile assets that are far riskier than investments like stocks or bonds, which are regulated, and add that anyone who puts money into the space should be prepared to lose everything.
But a number of proponents, from some financial advisers to influencers, say cryptocurrencies are still worth a look, particularly if it is a small part of your portfolio, you’ve invested money you can afford to lose, and you can let your investment sit for several years.
“Given that a lot of these cryptocurrencies are essentially unregulated… these are obviously going to be really high risk, high volatility investments,’’ says Christine Parlour, a senior professor of finance at the University of California, Berkeley’s business school. “So some of these are going to be very good investments. Many of them are not.”
Even experts like Parlour who caution against investing in cryptocurrencies agree with enthusiasts that the underlying technologies, particularly blockchain, have broader applications that will be globally transformative.
But they add that the day when blockchain technologies are widely adopted may be years off, thanks in part to this year’s cryptocurrency crash which burned many newer investors who were not fully aware of the risks they were taking on.
For those who are still unclear on what cryptocurrencies are, here’s the gist: cryptocurrencies do not rely on a central authority such as a bank or a government.
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Instead, transactions are stored using what’s called a blockchain, which is a distributed, digital ledger that allows a network of computers to record and verify transactions.
NFTs, or non-fungible tokens, are another popular crypto asset class. NFTs are digital assets with unique identities that are often traded like traditional pieces of art or other collectibles. There are also other applications of the technology that could one day allow for a myriad of other uses.
Today, there are thousands of NFT projects and cryptocurrencies, including many like dogecoin, which were created as jokes but later gained value and mainstream credibility. Bitcoin, created in 2009 by a man whose identity remains shrouded in mystery, is the first digital currency and the most widely owned. It has gained billions of dollars in value since its inception.
Still, tens of thousands of bitcoin millionaires were wiped out during this year’s $2 trillion cryptocurrency free-fall. The so-called “stablecoin’’ Terra collapsed due to programming errors that led it to lose its peg to the dollar and $40 billion of associated digital assets to become effectively worthless. And as of mid-August, dogecoin had lost more than 60% of its value this year, leaving one coin worth less than 7 cents.
This year’s drop was also not the first crypto collapse. It’s one of several since bitcoin was created. In 2018, for instance, after an unprecedented boom the previous year, the “great crypto crash” saw the price of bitcoin fall more than 60% in two months.
But the latest plunge hasn’t kept proponents like Richard Griffin, whose investment firm RICKSTAR Financial manages more than $550 million in assets, from continuing to recommend cryptocurrencies to his clients.
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“I’ve seen industries correct, but if they’re solid, they consolidate and the strong ones are still standing when things shake out – and that’s bitcoin,” says Griffin, 55, whose firm works with a mix of professional athletes and entertainers as well as everyday people. “I would advise my clients to buy bitcoin in at least a small percentage right now. But be able to hold on for the long term, like three to five years, and be able to handle the volatility.”
Like a number of cryptocurrencies, bitcoin has struggled to make the case this year that it can live up to its advertising as a digital store of value similar to gold. And the widespread instability in the crypto market had a sometimes grave impact on ill-informed investors who didn’t limit their exposure as Griffin and others recommend.
“You would see it all over Twitter. People would be like ‘Yo, I’m down bad,” says Michael Jacobs, a 30-year-old NFT investor, influencer and blockchain enthusiast who goes by the Twitter name “Fxnction” and has more than 100,000 Twitter followers.
Jacobs says he even saw some people post on social media that they were going to take their own lives because of their losses.
More conservative investors who have been in the crypto space for years say they’re glad they didn’t put too much money into it. The implosion of Terra, which collapsed even though it was designed to reduce volatility by maintaining a fixed value over time tied to the dollar, is one example they point to.
“Some of the stablecoins had no ability to adjust to scenarios nobody had predicted, so they broke,” says Shawn Kemp, a 49-year-old NFT artist who uses both coding and real-life woodwork to create digitally distinctive pieces of art.
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The former Microsoft employee and father of two said that while he has friends who made far more investing in crypto assets than him, he’s glad his financial exposure has never exceeded 2%.
“In crypto, most people don’t even know where they are vulnerable, so there’s more opportunity to take something from them,” says Kemp, who lives just outside Seattle. “So, you have a number of players that are using an unregulated market to manipulate it … and pull money out of everyday people who are not informed.’’
Even though cryptocurrencies are risky, Parlour is one of several experts who agree with enthusiasts that the underlying, emerging technologies – such as cryptography and blockchain – can positively reshape people’s everyday lives. For instance, they could allow consumers to pay for products without using banks, a potentially significant benefit for the 6%, or roughly 14 million Americans, who don’t have a bank account.
“One thing that’s going to be enduring is some of the technological infrastructure that is now being developed,” says Parlour, who has advised central banks in Europe, Canada and the United States and co-directs The Center for Responsible, Decentralized Intelligence, which aims to make crypto’s underlying technologies safe and more accessible. “But one of the things that’s really, really important for successful innovation is to have a really clear regulatory structure.”
Officials with the Security and Exchange Commission have indicated that many cryptocurrencies are securities, or tradeable financial assets, which are bound by a set of broadly fleshed-out laws.
But Parlour says the regulatory process is moving slowly in part because central banks and other institutions in the U.S. and abroad don’t want to stifle a new, innovative space.
Griffin points out that even though cryptocurrencies aren’t fully regulated yet, there are products on the market, such as the Grayscale Bitcoin Trust and the Grayscale Ethereum Trust, that are.
Both are securities that are solely invested in and derive their value from investments in bitcoin and ethereum, the blockchain network that supports ether, the second most widely traded cryptocurrency. People can invest in them via mutual funds or individual retirement accounts that are managed by professional fund managers.
Ethereum is an open-source blockchain network that supports ether, the world’s second most widely traded cryptocurrency. It also is a public resource that allows entrepreneurs to build applications such as NFT projects.”
“A lot of people are afraid of bitcoin because of what they read or hear,’’ says Griffin, a former financial adviser for Merrill Lynch. “They hear about accounts being hacked … They hear about the dark web where bitcoin is used to buy drugs. What they don’t understand is that the underlying technologies behind bitcoin and ethereum are revolutionary.”
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Kannan Srinivasan, a professor of management, marketing and business technologies at Carnegie Mellon’s Tepper School of Business, agrees blockchain technologies have great potential.
However, bitcoin “is still too speculative to be invested in right now,” he said. “The lesson from this year… is crypto is still a work in progress. The concepts behind these technologies are really good and powerful, but it’s going to take time to translate into practical applications. That means that until some serious kinks are worked out, any investment in crypto is based on speculation about future potential.”
Scams are another concern both in the cryptocurrency and the NFT space. A good number of crypto fans admit to being gamed early on in their crypto journeys when they invested in projects that turned out to be too good to be true.
Jacobs’ story embodies both the highs and lows of investing in crypto. He says he’s made several million dollars buying and selling NFTs, but he also lost a big chunk of his earnings not only because of the price fluctuations of his investments but because of two hacks where thieves stole a total of a half million dollars from him earlier this year.
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Other NFT investors have shared stories of losing smaller sums but amounts still in the thousands of dollars.
“I’ve never seen wealth being generated like I’ve seen in the NFT realm,” says Jacobs, who like some other crypto investors sees the risk of theft or fraud as coming with the territory. “But there’s not one person I know who has bought crypto and hasn’t lost money at least once. What people need to understand is your bad trades are going to outweigh your good trades in the beginning.”
Despite the potential pitfalls, some crypto enthusiasts point out there are many ways to make money in the blockchain space including starting a new business that uses the technology.
“The mood is still mostly upbeat where I am,” says Morgan Stone, an American currently living in Australia who is the founder and CEO of Roo Troop, an NFT project which advertises itself as the first job marketplace where both job seekers and companies looking to fill positions are verified using blockchain technology.
Roo Troop employs a staff of 17 full and part-time workers, and Stone says that it has already helped more than 100 people land jobs even though the project isn’t fully launched.
Still, novice investors as well as those stung by this year’s crash may understandably remain wary of cryptocurrency’s wild swings.
“Crypto is a much more exaggerated cycle, so you’re going to see much more exaggerated highs and much more exaggerated lows,” says Jacobs. “You’re talking about a level of volatility that’s extremely normal for the crypto world, and extremely … unnatural for anyone else.”
Alex P. Kellogg is a public-relations professional and journalist who splits his time between Atlanta and his hometown of Ann Arbor, Michigan.
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