Saturday, January 28, 2023
HomeMarketA Crypto Lesson: Don't Invest In Things You Don't Understand

A Crypto Lesson: Don’t Invest In Things You Don’t Understand

Cryptocurrencies have proven to be volatile—to say the least.

- Advertisement -


Barron’s staff; Dreamstime (3)

Warren Buffett told attendees at the annual
Berkshire Hathaway
shareholders’ meeting this spring that he wouldn’t buy all the Bitcoin in the world for $25. While it might have sounded out of touch back then, the remark feels more resonant today as the price of digital assets has crated and upheaval rocks the larger crypto industry.

The sector has been plagued by both market declines and malfeasance. Bitcoin has fallen about 73% off its all-time highs of November, 2021. On Monday, Sam Bankman-Fried, founder and former CEO of the crypto exchange FTX, was arrested in the Bahamas and detained on criminal charges including wire fraud. On Tuesday, the Securities and Exchange Commission charged the former industry darling with defrauding investors. Meanwhile, concerns are mounting over the health and integrity of Binance, the world’s largest cryptocurrency exchange. 

The struggles of the cryptocurrency industry underscore an important lesson for individual investors: be wary of investing in anything you don’t understand. Cryptocurrencies are not like, say, stocks, which represent part ownership of a company that produces a good or service. Bitcoin, by contrast, “Isn’t going to do anything,” Buffett said.

Unlike a business, cryptocurrencies like Bitcoin have no cash flow. Therefore, it’s hard to say how much they’re worth, said Christine Benz, director of personal finance for
Morningstar.
“It’s just a guess,” she said.

That makes Bitcoin and other digital currencies a speculative asset, Benz said. If you chose to invest in speculative assets at all, you should only invest an amount that you would be comfortable losing, she added. And that’s just in relation to market declines. 

Investors should also be mindful that cryptocurrencies are not regulated like mutual funds, stocks, and bonds, Benz added. Under the Securities Investor Protection Corp., investors are protected up to $500,000 if securities go missing from their brokerage accounts due to theft or brokerage insolvency. (It doesn’t protect against losses in market value.) With cryptocurrencies, there are no such safeguards in place. 

For those who believe in cryptocurrencies’ long-term prospects, now is a better time to enter the market than earlier this year, when prices were more inflated. Just don’t go overboard. 

You don’t need to get fancy to build wealth. In fact, the simplest types of investments often work best over the long haul, like low-cost index mutual funds or ETFs that track the broad stock market.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com

Credit: marketwatch.com

RELATED ARTICLES
- Advertisment -

Most Popular