Crypto: Investment or speculation? | Milton, MA Business Listings, Business Directory | Milton time
With cryptocurrency news, you may be wondering if you should invest in them. But “invest” may not be the right word – because in many ways cryptocurrencies, or “crypto” for short, are more speculation than investment.
But what is the real difference between a speculator and an investor? The main factor is probably the different views of time. A true investor is in it for the long haul, building a portfolio that, over many years, can eventually provide the financial resources needed to achieve important goals, like a comfortable retirement. But speculators want to see results, in the form of big wins, now – and they’re often willing to take big risks to get those results.
There is also the difference in knowledge. Investors know they are buying shares of a company that manufactures products or provides services. But many cryptocurrency speculators don’t fully understand what they’re buying because crypto just isn’t that easy to understand. Cryptocurrency is a digital asset, and cryptocurrency transactions only exist as digital inputs on a blockchain, with the “block” being essentially just a collection of information or digital ledgers. But even knowing this does not necessarily provide a clear picture for many entering the world of crypto.
In addition to time and understanding, two other elements help define the speculative nature of cryptocurrency:
Volatility – Cryptocurrencies are subject to truly amazing price fluctuations, with big gains followed by huge losses – sometimes within hours. What is behind this type of volatility? In reality, several factors come into play. For one thing, the price of Bitcoin and other cryptocurrencies is highly dependent on supply and demand – and demand can skyrocket when the media and crypto “celebrities” tout a particular offer. Additionally, speculators will bet on rising or falling crypto prices, and these bets can trigger a buying and selling rush, again leading to rapid price movements. And many crypto buyers, especially young ones, want to see big profits quickly, so when they lose big bucks, which is common, they often just exit the market, which contributes to volatility.
Lack of regulation – When you invest in traditional financial markets, your transactions are regulated by the Securities and Exchange Commission (SEC) and the companies you invest with are generally supervised by the Financial Industry Regulatory Authority (FINRA). Other bodies are also involved in regulating various investments. These regulators work to ensure the fundamental fairness of financial markets and to prevent and investigate fraud. But cryptocurrency exchanges are essentially unregulated, and this lack of oversight has contributed to the growth of “scam” exchanges, manipulation of the crypto market, excessive trading fees, and more. predatory practices. This “Wild West” scenario should be of concern to anyone putting money into crypto.
The cryptocurrency market is still relatively new, and it is certainly possible that in the future crypto will become more of an investment and less of a speculation. In fact, Congress is actively considering ways to regulate the cryptocurrency market. But for now, caveat emptor – “buyer beware”.
This article was written by Edward Jones for use by Joe Parlavecchio, CFA, CFP®. Visit https://www.edwardjones.com/joseph-parlavecchio for more information.