Crypto Assets - A Cautionary Tale

by Michael McCormick, CPA

In recent years, the world of cryptocurrencies has captivated the imagination of investors, tech enthusiasts, and grandparents alike. With promises of astronomical gains and decentralization, crypto assets have become the talk of the town. However, amidst the hype and fervor surrounding these digital currencies, it is important to take a step back and examine the potential deleterious benefits of owning crypto assets. Buckle up, because we’re about to embark on a cautionary journey through the wild world of cryptocurrencies.

Volatility - A Rollercoaster Ride:

One of the features of cryptocurrencies is their notorious volatility. The value of crypto assets can experience drastic swings in a matter of hours, leaving investors on an emotional rollercoaster. While these price fluctuations offer the potential for quick gains, they also pose significant risk. It’s like playing a game of financial roulette, where one wrong move can leave you financially bruised and battered or destitute.

Lack of Regulation - The Wild West:

Crypto assets operate in a realm largely devoid of regulation and oversight. While some proponents view this as a positive aspect, the absence of regulation creates a breeding ground for fraud, scams, and market manipulation. The “Pump and Dump” has become common. Public figures promote a particular crypto brand influencing the price only to get out at a market high. Investors are left vulnerable to unscrupulous actors seeking to take advantage of the crypto frenzy. It’s like navigating a treacherous sea without a compass, where even the most experienced sailors may get lost.

Security Concerns - The Achilles’ Heel:

Cryptocurrencies rely on complex cryptographic algorithms to secure transactions. However, this does not make them immune to security breaches and hacking attempts. Countless stories have emerged of individuals losing their life savings due to hacks or forgotten passwords. It’s like burying your treasure in a virtual vault, only to discover that the lock was flimsier than a suitcase lock.

Environmental Impact - Energy Guzzlers:

The process of mining cryptocurrencies requires substantial computational power, leading to an enormous energy consumption. Bitcoin, for example, has been criticized for its carbon footprint, as mining operations often rely on fossil fuels. It’s like watching your digital wealth grow at the expense of the planet’s health—a trade-off that’s difficult to quantify.

Psychological Toll - Stress and FOMO:

The crypto market operates 24/7, and the fear of missing out (FOMO) can take a toll on investors’ mental well-being. Constantly monitoring prices, staying up late to catch market shifts, and succumbing to the fear of missing out can lead to stress and anxiety. It’s like being trapped in a virtual casino, where the stakes are high, and the adrenaline rush is never-ending.

There’s no there, there. When you buy a stock you own a fractional interest in the corporation the stock represents. You own a portion of the net assets and cash-flow of that business. In other words the value of a stock is backed by the value of the company it represents. Crypto currency is not backed by any- thing. You own the possibility that the currency could increase in value or go to zero. Put another way, you own air that you hope someone will be willing to pay more for than you did. (The Greater Fool Theory) It’s like investing in a digital mirage that can disappear in the blink of an eye.

While cryptocurrencies may hold the potential for innovation and financial freedom, but they also come with a host of challenges that cannot be ignored. Proceeding with measured steps and a clear understanding of the potential downsides will help navigate the treacherous waters of the crypto world. Remember, it’s better to tread carefully than to get swept away by the allure of quick gains.

As the saying goes, “Not all that glitters is gold,” and the same can be said for cryptocurrencies. It’s important to approach the crypto market with skepticism and a critical eye to avoid getting swept up in the hype and promises of overnight riches. Here are a few additional factors to consider when assessing the potential deleterious benefits of owning crypto assets:

Limited Acceptance: While cryptocurrencies have gained popularity in recent years, their acceptance as a mainstream form of payment is still limited. Most businesses do not accept cryptocurrencies, making it challenging to utilize them for everyday transactions. This lack of widespread adoption hampers their practical utility and restricts their value to primarily speculative trading. It’s like owning a currency that can only be spent in a select few shops in a remote village.

Regulatory Uncertainty: As the popularity of cryptocurrencies grows, regulators worldwide are grappling with how to effectively oversee and regulate this nascent industry. The lack of clear guidelines and regulatory frameworks creates uncertainty and exposes investors to potential legal and compliance risks. It’s like participating in a financial experiment without knowing the rules of the game.

Market Saturation: The cryptocurrency market is crowded with thousands of different digital currencies, each vying for attention and investment. With new coins and tokens popping up regularly, it becomes challenging to differentiate between genuine innovations and speculative projects. Navigating this sea of options requires careful research and due diligence to avoid falling prey to scams or worthless investments. It’s like sifting through a digital haystack in search of a needle.

Overreliance on Technology: Cryptocurrencies heavily rely on technology, specifically blockchain technology, for their existence and security. However, technological advancements come with their own set of risks. Software bugs, hacking attempts, or even the failure of underlying blockchain networks can have catastrophic consequences for crypto assets. It’s like building a financial empire on a foundation of digital sand.

In conclusion, while the allure of owning crypto assets can be enticing, it is important to approach them with a critical mindset. The deleterious benefits of cryptocurrencies, including their volatility, lack of regulation, security vulnerabilities, environmental impact, psychological stress, lack of intrinsic value, limited acceptance, regulatory uncertainty, market saturation, and technological risks, all warrant careful consideration before diving in.

When investing in anything, diversification and a balanced approach are key. Rather than putting all your eggs in the crypto basket, it is advisable to spread your investments across different verifiable asset classes to mitigate risks. Remember, financial decisions should be based on sound research, thorough understanding, and a long-term perspective. By doing so, you can avoid the crypto landscape with greater confidence and make informed decisions about the role cryptocurrencies should not play in your overall financial strategy.

Class of 2023