Crypto Investing Can be Like Being in the Wild West

For Those Who Shoot First and Ask Questions Later

North American markets today, Friday, viewed several hours before opening at 9:30 a.m. EST, appear headed for a positive start, with all major indicators strongly in the green at time of writing. This follows yesterday’s upbeat trading triggered in no small part by reassurances from the Federal Reserve Bank. “The Fed delivered two messages in a speech by Governor (Christopher) Waller yesterday; firstly, that the U.S. was continuing to make a strong recovery despite the weak jobs report and secondly that the high inflation report yesterday was due to only temporary factors and the accommodative monetary policy will be maintained for some time,” says Jeremy Thomson-Cook, Chief Economist at London-based payments specialist Equals Money.

European markets are open at time of writing and major indicators there are strongly in the green.

The safe havens of gold and silver are up and major currencies such as the Euro, Canadian dollar and British pound sterling are up. That relationship could change today depending on retail sales figures. “Today we will await U.S. retail sales, which are expected to be very positive and could reignite a rush towards the U.S. dollar,” Thomson-Cook says.

There may or may not be a rush towards the greenback today. However, on almost every trading day —and sometimes in the case of crypto currencies – even on a non-trading day -- as happened last Saturday – something happens that highlights one or more serious investment concepts that merit consideration. Even though the market was less volatile yesterday than earlier in the week we still got several ‘messages’ about the current investment environment.

Two recent plunges prove that investing in crypto currencies is not for the weak of heart (or stomach) and that these currencies probably qualify as one of the most volatile of investments.

For some investors, part of the glamor and quick buck ethos of crypto trading may have worn off this week.

Bitcoin – which should perhaps be re-titled ‘investment roller coaster’ gained back approximately half its price yesterday after a plunge triggered by a decision by TESLA Inc. chieftain Elon Musk that the company would stop accepting it as payment for its cars.

On Wednesday it had dropped from just under $55,000 to around to $45,700, its lowest since March 1, in just under two hours following Musk's tweet.

That announcement followed the news on February 08 that TESLA had acquired $1.5 billion of Bitcoin and that it would accept it as payment for its electric vehicles. That had been a large factor behind its rapid appreciation. The decision by the U.S. Internal Revenue Service and Department of Justice to launch an inquiry into Binance Holdings Ltd.– a crypto currency exchange headquartered in the Cayman Islands -- added to the crypto pressure.

The volatility didn’t stop there and affected other companies in the crypto sector. Technology company Marathon Digital Holdings Inc. closed at $19.66, down $3.19 on the day. Riot Blockchain Inc. dropped $4.29 to close at $22.23 while MicroStrategy Inc. dropped a whopping $53.80 to close at $488.08.

Coinbase Global Inc., the operator of the largest U.S. crypto currency exchange, closed yesterday at $265.10, down $18.51 on the day.

And for more volatility, TESLA Inc. dropped $18.20 to close at $571.69.

All of that that followed Musk’s appearance on Saturday Night Live last Saturday when he staked his claim to a place in entertainment history and simultaneously in investment history. Dogecoin – which he had promoted -- tumbled, rose and tumbled again after he called it a ‘hustle’   

These episodes suggest four concepts:

  • With these currencies there are no underlying earnings to support the price levels; that being the case investors do not have the traditional tools necessary for judging an investment such as balance sheets, sales projections or market share. They have the hope that the currency will evolve and that its value will be embraced globally.
  • The remarks of one individual – in this case Musk – can move markets and holders of these currencies likely hope that the currency continues evolving and that Musk doesn’t make any further negative statements.
  • Patience and value investing seem to run counter to the crypto currency ethos but some who bought Bitcoin or Dogecoin at its highs may need both. Bitcoin rose to nearly $19,000 in 2017 then dropped back to below $3,300 in 2018. Those who bought at that peak had to wait for three years to be rewarded.
  • It may be that FOMO – fear of missing out – drives some decisions here. Unfortunately, crypto purchasers often do not have the buffer of a professional investment advisor since most investors dealing in it appear to go through online brokerages or Coinbase. Some advisors see this as a kind of Wild West -- shoot first and ask questions later. In fact, the advisor’s role is limited. To borrow an analogy from a casino scenario: if an investor believes that betting on No.27 on the roulette wheel will produce a big payout, an advisor cannot really prevent the move but can only ensure that the investor carefully considers the possible consequences.

Related: Bitcoin: Spend or Invest? Just Ask Tinkerbell

Al Emid is a financial journalist broadcaster and author who has never invested in crypto currencies.