Since their inception in 2008, cryptocurrencies have established themselves as a new, highly volatile and non-transparent asset class. As advertisements for Crypto have gone mainstream, what risks do ordinary investors face?
If you were moving in some specific online circles in 2008, you may have had early access to a thing called Bitcoin – a then maverick invention as a peer-to-peer, decentralised, ‘electronic cash system’, whereby transactions were recorded in perpetuity on a distributed (and unchangeable) online ledger, known as the blockchain.
The idea may have been fanciful, but it was also highly attractive. Early adopters included experts in cryptography, hacktivists, and perhaps anyone with a smidge of interest in venturing beyond established financial institutions for idealistic fortunes. PC hardware enthusiasts were also attracted in the early days, as you could mine your own without requiring huge amounts of electricity and processing power; something which is now an issue for the likes of Bitcoin and Ethereum. I was one such PC enthusiast, but I didn’t have the inclination.
For me, as for many, the Bitcoin chance has gone. The ‘best’ time to invest in that coin (or rather collect, as it was a fringe hobby) would have been in 2009. Hindsight is always best avoided with investing, and with good reason. In 2009 one Bitcoin was worth around $0.003, according to coinmarketcap.com – that’s less than a third of a US cent. The 2010 peak was $0.50, while the next year it was $10. It was then $1,000 in 2016 and then in 2021 one Bitcoin was worth up to $35,000.
The incredible value of a single coin in 2021 meant a smashing into the mainstream of cryptocurrencies, and so huge media coverage. Celebrities including Elon Musk made headlines by investing, and Tesla acquired around $1.5bn worth of Bitcoin. With such backing and widespread coverage, it’s little surprise that 2021 was such a big year for Crypto. It’s also unsurprising that the recent ‘crypto crash’ is being talked about as showing the sector’s volatility, even if there are whispers of it as an opportunity.
In the years since 2008 there have been many, many, cryptocurrencies ‘minted’. Some are utility tokens with specific benefits, while some are security tokens offering shares or equity in companies through IPOs. Others have been created for fun. Such ‘meme-coins’ are cryptocurrencies created only because they can be, although they can also teach people about crypto and theoretically acquire value.
One such meme-coin, Dogecoin, devised in 2013 for the very purpose of making fun of cryptocurrency speculation, has acquired notable value. Backed by a community which helped fund a well in Kenya and sponsored a NASCAR driver, the actual investment potential of Dogecoin always appeared a half-joke. Something so infinitesimally unlikely to happen, that the common refrain from core Dogecoin holders of “to the moon” seemed apt. Few could have accurately predicted its value reaching the cents mark, let alone tens of cents. Yet in 2021, with public backing from a varied line-up, including Elon Musk, Gene Simmonds of rock-band KISS, and Snoop Dogg, the coin peaked at an almost unbelievable $0.68 valuation – a 3,400 per cent increase in eight years from £0.0002 – one fiftieth of a cent. It has since plummeted again, a sign of crypto volatility, and a reminder that one of the space’s key issues is unpredictability.
Another inherent issue is that for all the holders of coins who seek such astronomical returns, the likelihood of that is so very small. Not to mention that ‘whales’ (those holding large amounts of coin) can send prices plummeting for everyone else just by cashing in on the peaks. Such destabilisation in other financial markets would likely cause panic.
Further, while the function and spread of the ‘power’ in crypto is the reverse of fiat currencies, the attribution of value now largely seems the same. Beyond those coins which carry a value because they offer additional utility or security, the financial value appears related to belief and trust: the very same issue cryptocurrencies are supposed to work against.
In a 2009 Bitcoin whitepaper, Satoshi Nakamoto, the mysterious creator (or creators) of the coin, wrote:
“The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
Financial markets are based on trust, and yet breaches occur. Yet cryptocurrency now generally fits the same mould. The architecture and records are decentralised, but collectively assigned value again seemingly holds sway. The difference is that those with a knowledge of bearish or bullish market signs and an understanding of Fibonacci Retractment will always have an advantage in skewing the value. Blockchains can be anonymous too, so there’s sometimes no telling who’s doing what or why with their coins. Average investors may have a trust or a belief, but the playing field for investment is clearly not very stable or level.
Crypto also, until recently, has had relatively little regulatory oversight attached to it. The result though is that the world’s nation states have discordant approaches about how to best handle something which sits outside of familiar financial structures. In June last year, China told banks and payment companies they should end facilitation for cryptocurrency transactions, while banning mining of any coins. Then in September, Beijing went a step further by declaring all cryptocurrency transactions illegal. Russia confirmed cryptocurrency legality in 2020, but banned use as a means of payment. However, in January this year the Russian central bank has proposed banning their use entirely, as well as banning the mining of cryptocurrencies, while Thailand has debated introducing a so-called withholding tax targeting owners of cryptocurrency.
It isn’t just a question of legality or illegality though. How to manage such digital currencies and payment systems are also unclear. In the US there is an ongoing legal dispute between global payment solution company Ripple – creator of the well-known cryptocurrency XRP – and the United States SEC (Securities and Exchange Commission). The US SEC has claimed that XRP, available on exchanges like Binance, Crypto and Coindesk, was not a commodity but a security; a security which Ripple allegedly used to increase its own value. The outcome of the dispute will very obviously impact the value of XRP and those invested in it in as-yet unknown ways. Meanwhile the UK’s Financial Conduct Authority only gained regulatory powers for cryptocurrencies in 2020, and elsewhere cryptocurrencies are variously legally restricted or even banned in some countries.
If global trust of crypto is a complex issue, potential investors should also be wary of criminal intent. As with any short or long-term trend where there is money to be made, scams arise. Sometimes these take the shape of social media advertised “investment opportunities”, and other times the shape of criminals tricking unsuspecting people into handing over the secret keys to their crypto wallets. Some companies offer sham IPOs, taking investors cash and closing shop. With the increase in crypto interest in 2021, there was also an 81 per cent increase in cryptos scams.
This year could be another big one for cryptocurrency. Not in Bitcoin reaching a new record high, or Dogecoin or another meme-coin making waves, but in the greater regulation and making safer of cryptocurrency investing, pulling it in line with other markets, and ensuring the space is responsibly promoted. Last year an advert for crypto app Luno, appearing on London’s underground network, claimed: “When you see Crypto on the Underground it’s time to buy”. It was ultimately banned, with the Advertising Standards Agency promising to crackdown on misleading adverts. That specific advert “failed to illustrate the risk of the investment” – “taking advantage of consumers’ inexperience or credulity”, said the ASA. As The Guardian has reported, crypto-advertisements on London transport have reached ‘record levels.’ Famously, Joseph Kennedy, the father of the later President, allegedly got out of the frenzied stock market just in time before the Great Crash of 1929 when a shoe-shine boy started giving him share tips. A tale that so-called ‘Hodlers’ of cryptocurrencies might be wise to remember. Alongside advertising standards, financial regulation and law enforcement practices may require further development in the era of crypto investment. Still, it doesn’t appear that the personal risk element of investment is that big an issue for those looking to get things in line. That makes sense, after all risk is endemic to long-established areas of investment too. Yet given the still unestablished states of crypto markets, and the risks of investing in them, anyone looking towards the markets has reason enough to want to tread lightly. It isn’t 2009 anymore.
Kevin is a freelance writer and poet. Formerly a journalist and ecommerce editor, he is the author of Three Sheets to the Wind: A Collection of Modern Poetry.