Crypto: Long-Term Investment Or Risky Gamble?

Investing in crypto is risky due to its volatility, unproven rate of return, and fraud. However, it can be a good investment if you do it properly and as part of a diversified portfolio. Some cryptocurrencies, like Bitcoin and Ethereum, are launched with lofty objectives that may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, early investors in a crypto project that reaches its goals can be richly rewarded over the long term.

Volatility

The extreme volatility of the cryptocurrency market can be a double-edged sword. While it can lead to substantial losses, it also offers the potential for large rewards for both long and short positions. For investors who are concerned about short-term volatility, a long-term investment strategy can be an effective approach. By focusing on the potential of high-quality cryptocurrencies over the long term, investors can minimize the impact of short-term price movements.

The volatility of the crypto market is influenced by various factors, including market chaos, inflation, and increased regulation on crypto mining. Additionally, the lack of regulation in the crypto space contributes to the unpredictable nature of crypto prices. Without a clear pattern or historical data to rely on, it is challenging to make informed investment decisions.

The speculative nature of crypto investing also attracts seedy characters and fraudulent activity. The decentralized nature of crypto, while intended to remove single points of failure, also makes it easier for criminals to launder money, make illicit purchases, and carry out ransomware activities. The anonymous nature of crypto transactions can provide a level of cover for these illegal activities.

Another factor contributing to the volatility of the crypto market is the impact of influential individuals and organizations. Market manipulation remains a substantial problem, with these entities acting unethically and further contributing to unpredictable price movements.

Despite the high volatility, some investors view crypto as a hedge against inflation. With a limited supply of coins and a decentralized nature, cryptocurrencies like Bitcoin are seen as a store of value similar to gold. As fiat currencies lose value due to inflationary policies, crypto is expected to hold its value or even increase in price.

While the extreme volatility of the crypto market can be a cause for concern, it also presents opportunities for investors who are willing to take on the risk. The potential for high returns and the early adoption advantage are attractive prospects for those considering a long-term investment in cryptocurrencies.

Security and fraud

The volatile nature of cryptocurrencies, their complexity, and the regulatory uncertainty surrounding them make the crypto market a breeding ground for scams and fraud. The FBI reported that in 2023, Americans lost more than $5.6 billion through fraud involving cryptocurrency, a 45% increase from 2022.

Types of Cryptocurrency Fraud

Scam Initial Coin Offerings (ICOs)

Many ICOs are completely fabricated, with phony bios of non-existent team members and technical whitepapers copied from legitimate cryptocurrencies.

Pump and Dump Schemes

Owners of a stock try to drive up the price before selling off their holdings at an artificial peak. In the crypto world, this often happens at the ICO stage, whenever false claims can hype up demand and allow the dominant holders of the cryptocurrency to earn massive profits.

Market Manipulation

Fraudsters manipulate the markets where cryptocurrencies or related derivative products are traded. Improper market manipulation may include spoofing, front-running, churning, and other schemes.

Ponzi Schemes

Crypto investments can be used as the vehicle for a traditional Ponzi scheme, where new adopters are necessary to give artificial returns to early adopters.

Crypto Wallets and Exchanges

Criminals can hack investors' crypto wallets and steal their currency, or set up fake wallets and phony crypto exchanges to steal customers' money.

Phony Investment Managers

These scammers contact potential victims out of the blue, promising to grow their money if they buy cryptocurrency. They guide the victims to an investment website that looks real but is a clever fake. When the victim tries to withdraw their earnings, they are told they first need to pay high fees.

Celebrity Impersonations

Scammers impersonate celebrities, contacting fans through social media to offer a chance to make a killing on a cryptocurrency investment. They ask the victim to send cryptocurrency by clicking on a link or using a QR code that supposedly belongs to the celebrity. The cryptocurrency goes straight to the scammer.

Financial Grooming/Romance Scams

Scammers use dating websites to make unsuspecting individuals believe they are in a real relationship. Once the scammer gains the trust of the individual, they shift the conversation to lucrative cryptocurrency opportunities and the transfer of either coins or account authentication credentials.

Payment Scams

In this category, scammers running some fraud will pressure you to pay them in cryptocurrency, something no legitimate business or government agency would do.

How to Protect Yourself

• Understand the risk: The virtual currency trade is speculative and volatile.
• Resist pressure to buy right now: Criminals often try to create a false sense of urgency around a supposedly red-hot cryptocurrency.
• Do your research: Research any virtual currency platform or digital wallet provider before providing any credit card information, wiring money, or disclosing sensitive personal data.
• Never share your "private keys": If you own crypto, never share your private keys with anyone. Keep them in a secure place.
• Be wary of "celebrities" contacting you: A real celebrity won't reach out to you about buying cryptocurrency.
• Meet in person any romantic interests you connect with on an online dating website or app: Don't give them money.

What to Do if You've Been Targeted

• Submit a report to the FBI Internet Crime Complaint Center (IC3) or contact your local FBI Field Office and provide as much information about the transaction as possible.
• Report it to your local police.
• File a report through the FTC's online form.

Regulatory uncertainty

For example, El Salvador and the Central African Republic have adopted Bitcoin as legal tender, while China has banned cryptocurrency exchanges, transactions, and mining within its borders. In the United States, the regulatory landscape is still evolving, with the Securities and Exchange Commission (SEC) cracking down on the industry and Congress considering creating a regulatory framework. The Financial Action Task Force (FATF) has also recommended that wire transfers of cryptocurrencies should be subject to anti-money laundering (AML) compliance rules.

The lack of clear and consistent regulation across the globe creates uncertainty for investors, as a sudden regulatory change could make it difficult to sell cryptocurrencies or cause a market-wide price drop. It also raises concerns about the potential for fraud and theft, as the decentralized nature of cryptocurrencies makes them attractive for criminal activities and makes it challenging to recover lost or stolen assets.

Additionally, the regulatory uncertainty around cryptocurrencies can impact their long-term viability and acceptance as a mainstream form of payment. While some major companies, such as Tesla, Square, and PayPal, have started accepting Bitcoin, others may be hesitant to adopt it due to the regulatory risks and potential volatility.

Overall, the regulatory landscape for cryptocurrencies is complex and constantly evolving, which makes it a significant factor for investors to consider when evaluating the risks and potential rewards of investing in this asset class.

Inflation hedge

An inflation hedge is an investment that offsets the effects of inflation. For example, if inflation rises, the hedge might rise too, thus offsetting the decline of stocks. Alternatively, the hedge might be resistant to inflation, offering stability to a portfolio.

Some people argue that crypto can act as a hedge against inflation, but not until it establishes its fundamentals and achieves mass adoption. Crypto has some of the characteristics of an inflation hedge. For example, it's easy to access, its supply is finite and predictable, and it can't be manipulated by central banks.

However, crypto is a highly volatile asset class, and its value is largely based on consumer sentiment. It has not been proven to be a reliable, long-term store of value. For example, the value of the cryptocurrency market overall plummeted alongside rising inflation in 2022.

If you want to hedge against inflation, you need to choose an asset that tends to be more stable or has been known to rise in value over time. Some of the top options for hedging against inflation include precious metals (like gold, silver, and palladium), historical artifacts, housing, and cryptocurrency.

One way to hedge against inflation with crypto is to use a crypto savings account or growth account. You can take your fiat currency, convert it to a cryptocurrency, and then enter it into a savings or growth account. This way, you are not only holding your wealth in the hopes that the asset will rise, but you are also making returns in the form of interest.

However, it's important to note that cryptocurrencies could depreciate in value while hedging, and you may need to access your funds before your period of hedging is over.

Blockchain technology

The advantages of blockchain technology include faster and cheaper money transfers, increased security, and the removal of single points of failure. It also enables direct control and ownership of one's assets, removing the need for third-party intermediaries such as banks. Blockchain technology has the potential to disrupt multiple industries, including finance, law, and supply chain management.

However, there are also challenges and risks associated with blockchain technology. The technical complexity of using and storing crypto assets can be a significant hazard, especially for new users. The energy consumption required for mining activities is high, and there are concerns about the use of cryptocurrencies in criminal activities. Additionally, the lack of regulation in the cryptocurrency space can make it vulnerable to market manipulation and scams.

Despite these challenges, blockchain technology has evolved rapidly, with new applications and use cases emerging across various industries. It has the potential to revolutionise the way we conduct transactions and interact with digital assets, but it is still a relatively new technology, and its long-term impact remains to be seen.

Frequently asked questions