Know how to invest in cryptocurrencies

According to CoinMarketCap.com, there are nearly 20,000 different cryptocurrencies.1 That’s a lot of options for investors! Before putting any of your life savings into it, Fisher Investments Europe believes it is important to consider some of the unique risks associated with cryptocurrencies.

Volatility

Volatility is inherent in investing, but cryptocurrencies are known to be much more volatile than stocks. For example, since 2017, Bitcoin (the largest and most popular cryptocurrency) has had more than 150 days where its value fell by at least 5% in a single session. During the same period, global stocks experienced such a drop in only four sessions.2

Volatility can seriously hinder an investor’s ability to purchase goods and services using cryptocurrencies. However, in order for a currency to be widely used as a medium of exchange, its value must in principle be stable. Thus, holding cryptocurrency will certainly cause pronounced fluctuations in your daily purchasing power. Can you imagine if you only had cryptocurrencies for everyday shopping at the grocery store or to fill up your car?

Even “stablecoins,” those cryptocurrencies designed to limit extreme volatility on a daily basis, are ultimately fragile. The recent collapse of TerraUSD, a popular stablecoin whose price exceeded its theoretical peg to the US dollar, caused a wave of panic in the cryptocurrency market. To be accepted as a common currency, they must be a more stable medium of exchange.

The possibility of state intervention

Governments have always played a regulatory role in financial markets. Traditionally, central banks are the only institutions that control money in circulation. Intervening in interest rates, printing money, and setting bank reserve requirements are all tools used by central banks to control the money supply. For cryptocurrency investors, government intervention will undoubtedly have dire consequences in terms of implementation and leave new investors on the sidelines. Since cryptocurrencies are supposed to exist outside of government control, it’s no surprise that governments around the world are trying to crack down.

For example, in 2017, China banned initial coin offerings (i.e. raising capital by selling cryptocurrencies) and suspended cryptocurrency trading activities. In 2021, the country did it again, making all cryptocurrency transactions illegal.3 Federal securities laws.4 Historically, the right to mint money has always belonged to governments, suggesting that cryptocurrency regulation will continue to evolve.

Involvement of black markets

Most cryptocurrencies are based on anonymous distributed ledger technology. Transactions are not associated with people, but with the address of the electronic wallet, and are registered in a publicly accessible registry. Proponents of this system claim that it increases the efficiency of transactions. Because they are often anonymous, illegal activity is one source of demand for cryptocurrencies.

Some sites offering to buy drugs, weapons and many other illegal items and services in cryptocurrency have been shut down by federal authorities. The FBI recently estimated that the cost of ransomware attacks between 2013 and 2019 was at least $144 million.5 These illegal activities have the potential to undermine the legitimacy of cryptocurrency adoption, as well as undermine public confidence and encourage stricter regulations.

Fraud

Investing in cryptocurrencies comes with a particular risk of fraud. Hackers have many ways to steal billions of dollars worth of cryptocurrencies. Cryptocurrencies often consist of digital keys (one public and one private) that prove ownership. If a hacker manages to gain access to the owner’s private key, or if the key is lost, it is impossible to recover the assets.

In addition, many exchanges have become targets of cyber attacks. In 2014, MtGox (the largest bitcoin exchange at the time) lost about US$480 million worth of bitcoins belonging to its customers after a cyber attack.6 In 2016, hackers stole US$65 million from a Hong Kong bitcoin exchange called Bitfinix.7 The culprits were recently discovered when the value of the bitcoins in question reached US$4.5 billion. 8 Between October 2020 and March 2021, the Federal Trade Commission (FTC) received nearly 6,800 complaints of cryptocurrency investment scams, compared to 570 complaints during the same period a year earlier. At the same time, registered losses increased more than tenfold to more than 80 million US dollars.9

Are cryptocurrencies for you?

Fisher Investments Europe never excludes investment opportunities, whether in cryptocurrencies, gold, currencies or commodities, but alternative assets such as cryptocurrencies can be less liquid, more volatile and harder to predict with accuracy. Cryptocurrencies in particular are still a much smaller and less liquid market than global stocks and bonds. In our opinion, Bitcoin and other cryptocurrencies are more of a speculative commodity than an investment. Because cryptocurrencies can be very volatile in the short term, betting on them can be extremely risky.

While it is true that any investment involves a trade-off between risk and return, we do not have enough data to understand how cryptocurrencies may react to different market conditions. Finally, Fisher Investments Europe believes that stocks and bonds are more conservative instruments that help clients achieve their long-term goals.

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Fisher Investments Europe is the trade name used by Fisher Investments Luxembourg, Sàrl in France (“Fisher Investments Europe”). Fisher Investments Luxembourg, Sàrl is a limited liability company registered in Luxembourg under number B228486 and regulated by the Commission for the Supervision of the Financial Sector (“CSSF”). Its registered office is at the following address: building K2, Forte 1, 2a rue Albert Borschette, third floor L-1246 Luxembourg.

This material reflects the general views of Fisher Investments Europe and should not be construed as personal investment or tax advice or as a reflection of client performance. There can be no assurance that Fisher Investments Europe will adhere to these opinions, which may change at any time if new information or analysis results are provided to it or if they are re-evaluated. The information contained in this document does not in any way constitute a recommendation or forecast regarding the development of market conditions. They are provided for reference only. Current or future market conditions may differ materially from those presented here. Furthermore, no guarantees are made as to the accuracy of any assumptions made for illustration purposes. Investing in the financial markets involves the risk of losing all or part of the invested capital, and there is no guarantee that this amount can be recovered. Past results are neither a guarantee nor a reliable indicator of future results. The value of your investments and the income from them may fluctuate depending on changes in financial markets and global exchange rates.