Cryptocurrency has been one of the biggest financial stories of the year so far, with prices soaring amid wider industry acceptance.
Prices have increased, too. Bitcoin was worth around $30,000 at the start of the year, but reached a high of nearly $65,000 earlier this month. Dogecoin has been another success story, spiking suddenly in price to be worth more than $0.40 earlier this week from less than $0.10 just a week before. And SafeMoon, a new token released only last month, has rapidly become one of the most-viewed around.
At the same time, cryptocurrency is widely regarded as a volatile asset, and prices can swing down as sharply and drastically as they swing up. By Friday morning, Dogecoin had halved in value from its Tuesday high.
Speaking to Newsweek, experts including crypto investors have explained the risks behind trading the digital assets.
What about that price volatility?
Andreas Park, associate professor of finance at the University of Toronto, told Newsweek it is important to differentiate between cryptocurrencies because some have more utility than others. At the same time, he added: “The volatility of many crypto-assets is staggering: it is not uncommon that prices fluctuate by plus or minus 10 percent or more over just a few hours.”
He said volatility can be driven by a number of factors including a lack of fundamental value and the fact that trading happens on hundreds of markets.
“Many stock markets operate circuit breakers that would halt trading when there are sudden price drops. There are hundreds of crypto-markets, and so such protections are simply not feasible.”
Menachem Brenner, professor of finance at New York University’s Stern School of Business, added another point. He said: “The use of these currencies is based on trust and any breach of it will cause a flight out of the currency. That is the main reason these currencies are so volatile.”
Alex Krüger is an economist and crypto trader who told Newsweek on Thursday he thinks the price of Dogecoin will go up. He added: “Investors for whom high volatility is an issue can simply adjust the size of the position by relative volatility, and problem solved. High volatility is unavoidable in illiquid assets or assets that suddenly attract heavy attention from speculators.”
What’s the risk?
Glen Goodman is author of The Crypto Trader and a former TV business correspondent. He told Newsweek: “Sensible cryptocurrency investing is about making profits while keeping your risk level strictly under control. I saw many traders who’d enjoyed overnight success destroy their accounts when Bitcoin crashed in 2018. No doubt the same thing will happen again to all those who don’t take care.”
Krüger said assessing safety is complicated, but agreed on avoiding high-risk exposure. “There is no single sensible crypto investing approach. There are many ways to peel this orange. I would need to write a full book chapter to briefly go over various approaches that are sensible.
“Staying away from leverage is definitively important for the inexperienced. When highly levered a single mistake can result in catastrophic loss. It is sensible to never expose oneself to catastrophic loss.”
Park added: “For the average person, ‘responsible investing’ means to be balanced: you invest in a broad portfolio of assets, some more and some less risky. Crypto-assets are at the very high-risk end of the spectrum and it is entirely possible that many of these assets will disappear within a few years. One can make the case to include a very, very small portion of these in an investment portfolio.
“If someone wants to allocate 1 to 2 percent of their portfolio to crypto-assets, so be it. If many people go all in, then society as a whole may pay a price eventually when these folks lose their retirement savings. For many, though not all, of these crypto coins, somebody will be holding the bag when all is said and done.”
Gary Shilling is a long-time Forbes columnist, finance author and investment advisor. He’s a crypto skeptic and compared the technology to a casino, telling Newsweek: “It’s kind of like going to Las Vegas. It’s what a statistician would call an unfair bet.
“The odds are against the gambler. If people go there, and they say, ‘well, this is recreation, and I’m very happy to go there for a weekend and blow 1,000 bucks, that’s my entertainment,’ hey, fine. And I think the same thing is true of these cryptocurrencies.”
The future of crypto
Some critics of cryptocurrency say the technology has no future. Enthusiasts say it could literally change the world and become the next financial standard, spurred by greater institutional acceptance.
Shilling is skeptical. “I think if we look down a couple of years, we’re gonna find that the whole thing has collapsed and that you wake up one morning and there’s been some disaster,” he fears.
Brenner is not so sure that cryptocurrencies themselves will replace traditional, or “fiat” currencies unless regulators allow it to happen, but the underlying technology could win out.
“In principle, in the long run, these currencies will not replace existing currencies
unless governments will be willing to give up monetary policy, which I don’t believe
will happen,” he said.
However, he said that blockchain technology—effectively the public record network on which cryptocurrencies exist is a benefit to the markets. “That will survive and take over,” he thinks.