IS CRYPTOCURRENCY A SMART INVESTMENT?
No matter how new you are to trading as a whole, you’ve probably heard of cryptocurrencies. In the past few years Bitcoin has been everywhere on the news, with some people hailing it as the new future alternative to all other world currencies.
In terms of Forex trading, cryptocurrencies are treated like every other asset – you need to buy it when it’s low, and sell it when it’s high to make a profit. The question is – is it a worthwhile asset to invest in?
Well, it depends who you are and what you are trying to get out of it.
- If you are in an economy that has very strict or prohibitive foreign exchange trading laws
- If you are tied to a national currency that is experiencing high inflation
- If you are looking for an investment that experiences huge volatility
- If you don’t want to be hampered in your trading activity by regulation
- If you want to be able to transfer funds anonymously
So, if you’re living in the third world or are characteristic of a criminal and these circumstances relate to you, plus, you love the adrenaline rush that comes with a high risk security, then sure, cryptocurrency may be your thing.
However, if you compare cryptocurrency to other investment securities, such as stocks or forex than you may want to think twice as there are several factors that make it a much more precarious security.
- Outright Exposure to Insider Trading
With any asset there is a huge informational disparity between insiders and outsiders. Insiders are the mutual fund executives who sit in boardrooms and who have unfettered access to the latest financials, meeting minutes and reports. This gives them an unfair advantage over outsiders, who are not getting this information. In the cryptocurrency market insiders are
- Executives of cryptocurrency tokens
- Miners and;
- Large holders (aka whales)
Their greater access to information, and way before everyone else, gives them the chance to buy before rallies and sell before sell-offs.
In an unregulated market such as cryptocurrency this informational disparity is even worse. There are no laws protecting outsiders, because there is no regulatory body that has the means to supervise the decentralized system, that takes place across national borders. Also, cryptocurrency trading takes place anonymously, so it’s hard to trace the movement of funds to insiders or outsiders. And because there isn’t any regulatory body, even if there was suspicious activity occurring, there would be no one to report it to. In contrast, stocks have strict insider trading laws that seek to protect outsiders. While these restrictions are not bullet proof, they do provide some level of deterrence (like time behind bars).
- No Security Insurance
When an investor buys stocks from a US broker, both the cash and stocks are insured up to $500,000 each. This means that if a brokerage goes under, either the FDIC or the SIPC will reimburse you.
Unfortunately, cryptocurrency exchanges do not offer this same peace of mind. Admittedly, there are some exceptions, for example Coinbase and Gemini both insure cash deposits. But even still cryptocurrencies are not treated as legal securities in the US, making it the equivalent of investing in basketball cards or paper clips.
- Lacks any Fundamental Value
Despite fluctuations in the market, stocks will always hold some level of value. This value is based on the revenue and assets accrued by the company. Cryptocurrency however is just a value literally created out of thin air. The fluctuations in price are purely based on market trends and resulting sentiment, that has been proven to drive hysteria towards both bull and bear markets.
- Risk of Permanent Loss
If a cryptocurrency exchange is hacked, the keys to your cryptocurrency account can be stolen, and any money that was there is gone for good. Furthermore, there is no recourse as cryptocurrency transactions are irreversible and there is no authority in which to appeal to.
In case you’re wondering the probability of an exchange being hacked. The odds are not in your favor. Counting just the high profile hacks in 2017, more than $150 million in cryptocurrency value was stolen.
In contrast, while attempted scams do happen with stocks and in regular frequency. Funds cannot just disappear entirely, there is always a trace. But even if a hacker was successful, transactions can always be reversed.
- No Price Consistency
When you buy or purchase other securities, there is always the guarantee that your limit order isn’t filled by a worse price than the best offer or best bid across all exchanges. Yet when you buy and sell cryptocurrency, there is little consistency on the best bid offer and there is no incentive for an exchange to offer it to you.
To sum up, if there is one thing that a cryptocurrency trader should know, it is that trading tokens is nothing like trading other securities. In fact, It’s a different beast altogether and it’s important to know how.