Crypto Investing: Why I Stopped And You Should Too

Investing in cryptocurrencies is a risky business. The field presents many risks, and while it has produced jaw-dropping returns for some, it is also very possible to lose all your money. One of the creators of Dogecoin, Billy Markus, has not invested in crypto for nine years, believing that crypto investing is the equivalent of gambling.

Crypto investing is like gambling

Cryptocurrency has been a hot topic in the investing world in recent years. While some people have made millions, others have lost everything. So, is crypto investing more like gambling than traditional investing? Let's explore the similarities and why some people choose to avoid it.

High Risk and Volatility

One of the main reasons why crypto investing is often compared to gambling is the high level of risk and volatility involved. The value of cryptocurrencies like Bitcoin has fluctuated wildly, creating millionaires but also leading to financial ruin for others. In 2022, crypto values fell sharply as several exchanges collapsed, highlighting the risky nature of these assets. The lack of regulation and decentralisation in crypto also means that it is susceptible to criminal activity and fraud, with hackers frequently targeting crypto exchanges and investors.

Speculative Nature

Crypto investing is highly speculative, with no guarantees of success. The success of any cryptocurrency project is uncertain, and only a small percentage are expected to flourish. The value of crypto is based purely on what the market is willing to pay, and there is no underlying intrinsic value. This uncertainty and the potential for quick gains or losses is akin to gambling, where the outcome is largely unknown until the game is played.

Short-Term Gains vs Long-Term Investing

The nature of crypto investing also tends to be short-term focused, with people looking to buy and sell quickly to take advantage of price fluctuations. Traditional investing, on the other hand, typically takes a long-term strategic approach, with investors holding assets for years or decades. This short-termism in crypto further contributes to the perception of it as a form of gambling, where quick wins or losses are sought rather than a steady, long-term growth strategy.

Lack of Understanding

Crypto is a complex and evolving space, and even experienced investors may struggle to fully understand the intricacies of blockchain technology and the various crypto projects. This lack of understanding can lead to poor decision-making and increased risk. In contrast, traditional investments like stocks or commodities have a myriad of tangible factors that influence their value, such as company performance, management quality, and strategic aims.

Regulatory Concerns

The lack of regulatory framework around crypto is also a concern for potential investors. While some countries are treating crypto as a financial service, others are calling for it to be regulated as a form of gambling due to its high-risk nature. Regulatory crackdowns could significantly impact the crypto industry, and the lack of clear, long-term rules adds to the uncertainty and risk for investors.

In conclusion, crypto investing shares many similarities with gambling due to its high risk, volatility, speculative nature, and focus on short-term gains. While some people have found success, it is important to understand the risks and treat crypto investing as a form of gambling rather than a traditional investment strategy.

Risk of high losses from security breaches

Investing in cryptocurrencies is risky due to the potential for high losses from security breaches. Cryptocurrency exchanges are vulnerable to being hacked and have become targets of other criminal activity. In the past few years, several large, high-transaction-volume cryptocurrency exchange providers have been hit by data breaches, resulting in losses of hundreds of millions of dollars in cryptocurrency practically overnight.

One of the most prominent examples of a security breach in the cryptocurrency space is the MtGox hack, where more than $700 million in cryptocurrency was stolen. The hack was made possible due to a lack of oversight and follow-through from MtGox's CEO, Mark Karpelès, who became aware of a security breach in 2011 but failed to take appropriate action. Another notable example is the Coincheck breach in 2018, where $534.8 million worth of cryptocurrency was stolen due to the lack of proper security measures, such as multi-signature security processes.

These security breaches highlight the risks associated with investing in cryptocurrencies and the potential for high financial losses. As such, it is crucial for investors to carefully consider the security measures of cryptocurrency exchange providers and take steps to protect their investments.

To better protect their cryptocurrency accounts from hackers, individuals should prioritize security by using hardware wallets, such as a Ledger or a Trezor, to store their private keys. These devices keep the private key encoded, reducing the risk of it being accessed or stolen from a computer. Additionally, creating duplicates of the wallet and storing them in safe places, such as a safe deposit box, can provide an extra layer of security.

Furthermore, individuals should arm themselves with knowledge by learning as much as possible about cryptocurrencies and the underlying blockchain technology. This includes understanding the technical aspects of private keys and how the cryptocurrency system works. By increasing their knowledge, individuals can make more informed decisions and take proactive steps to secure their investments.

In summary, while the potential for high losses from security breaches is a significant concern in the cryptocurrency space, individuals can mitigate these risks by implementing robust security measures and gaining a deeper understanding of the technology. By staying vigilant and proactive, investors can better protect their digital assets and reduce the likelihood of financial losses due to security breaches.

Regulatory changes and crackdowns

In the United States, the Securities and Exchange Commission (SEC) has been at the forefront of regulatory efforts. The SEC has taken a tough stance on crypto exchanges, with its chairman, Gary Gensler, arguing that investor protection rules covering equities and derivatives should also apply to crypto exchanges. The SEC has brought enforcement actions against major crypto exchanges such as Kraken, Coinbase, and FTX, as well as crypto lenders and other service providers. These actions have resulted in fines, the discontinuation of certain services, and increased compliance requirements. The Commodity Futures Trading Commission (CFTC) has also taken action, suing Binance and its CEO, Changpeng Zhao, for allegedly allowing U.S. customers to trade on its platform despite not being registered under U.S. law.

The regulatory landscape for cryptocurrencies is also evolving globally. The European Union introduced the world's first comprehensive cryptocurrency regulations in May 2023, known as the Markets in Crypto-Assets Regulation (MiCA). This regulation requires any company issuing or trading cryptocurrency to obtain a license, and mandates the collection of sender and beneficiary information for all transactions. Asia, a leader in crypto use, has a varied regulatory environment, with countries like Japan and South Korea adopting a more open approach, while China has imposed strict bans on crypto-related activities. In Brazil, the central bank was made the supervisor for crypto assets in 2023, and the country has since seen a shift towards the use of stablecoins.

The International Organization of Securities Commissions has emphasized the need for global principles for crypto regulation, highlighting the cross-border nature of the markets and the significant risk of harm to investors. Their recommendations include greater consistency in regulation and oversight, addressing concerns around money laundering and terrorism financing, and promoting innovation and competition in the sector.

These regulatory changes and crackdowns have had a significant impact on the crypto industry, leading to increased compliance costs, discontinuation of certain services, and, in some cases, the shutdown of crypto firms. While some critics argue that these actions are overreach, supporters contend that they are necessary to protect investors, prevent fraud, and promote transparency and stability in the crypto market.

Environmental impact

Cryptocurrency has a large environmental impact. Some cryptocurrency networks use as much energy as small countries to maintain a blockchain. The energy consumed by crypto mining is often generated by burning fossil fuels, which releases greenhouse gases into the atmosphere and contributes to climate change.

Energy Consumption

The energy consumption of crypto mining is difficult to calculate directly, but it can be estimated based on the network's hashrate and the consumption of commercially-available mining rigs. The Cambridge Bitcoin Electricity Consumption (CBEC) Index estimates that the Bitcoin network uses 151 terawatt-hours (TWh) of electricity annually, which is about 0.59% of global electricity use. This is more than the country of Ukraine and exceeds the total annual electricity usage of many individual countries, such as Argentina or Australia. Ethereum, the second-largest cryptocurrency network, was estimated by CBEC to use about 5.52 gigawatt-hours.

The environmental impacts of crypto mining are significant. Firstly, it produces thousands of tons of electronic waste (e-waste) per year as mining hardware quickly becomes obsolete. Secondly, crypto mining operations can generate air, water, and noise pollution in the communities where they are located, exacerbating environmental justice issues for neighbouring communities already burdened by other pollutants, heat, traffic, or noise.

Additionally, the competitive nature of blockchain mining leads to a waste of resources. As speed is critical to winning the blockchain race, crypto miners utilise the most readily available energy sources, which are often fossil fuels. Crypto mining has been estimated to account for 140 million metric tons of CO2 per year, or about 0.3% of global annual greenhouse gas emissions. This amount is greater than the emissions produced by many individual countries.

Alternatives and Solutions

It is important to note that not all cryptocurrencies use a system that depends on large amounts of energy. Cryptocurrencies like Ethereum, Solana, and many others use a system that requires very little energy, adding little to the environmental impact of the global networking infrastructure.

To reduce the environmental impacts of crypto mining, large-scale cryptocurrency miners could be located where energy is abundant, reliable, and cheap. Additionally, alternative validation methods such as proof of stake, proof of history, proof of elapsed time, proof of burn, and proof of capacity are being developed to reduce energy consumption.

The environmental impact of cryptocurrency is a significant concern, particularly regarding energy consumption, greenhouse gas emissions, and electronic waste. While some cryptocurrencies have intense energy requirements, it is important to remember that the environmental costs of maintaining traditional fiat currency and banking systems are also energy-intensive. However, with the world's urgent need to reduce carbon emissions, the environmental impacts of cryptocurrency cannot be ignored.

Lack of understanding

One of the most common reasons people give for not investing in crypto is a lack of understanding of how it works. This is particularly important when it comes to cryptocurrencies, as they are often linked to specific technological products that are being developed or rolled out. The complexity of blockchain technology and the constant evolution of the crypto space can make it challenging for investors to fully grasp the risks and potential of their investments.

For instance, the process of mining cryptocurrency, which involves solving complex puzzles to verify transactions on a blockchain network, requires a significant amount of energy and computing power. This technical aspect of cryptocurrency has environmental implications and can impact the viability of certain crypto projects.

Additionally, the rapidly changing nature of the crypto industry can make it difficult for investors to keep up. New crypto projects and technologies are constantly emerging, and staying informed about the latest developments can be time-consuming and challenging. This dynamic nature of the industry increases the risk of investing in crypto, as it can be difficult to predict which projects will succeed in the long term.

To make informed investment decisions, it is crucial to conduct thorough research and due diligence. Investors should carefully examine the white papers and websites of crypto projects, follow industry experts, and stay updated on the latest news and developments. Seeking input from a financial advisor familiar with cryptocurrency can also help individuals make more informed decisions.

However, despite the potential benefits of investing in crypto, the risk of losing money due to a lack of understanding remains a significant concern for many individuals. The highly technical nature of blockchain technology and the constant evolution of the crypto space create a steep learning curve for those considering investing in this asset class.

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