Cryptocurrency, today’s digital gold rush to some, can entice investors with hopes of rapid appreciation, but is the potential appeal deserving of investors’ trust? The cryptocurrency hype has many investors asking if they should convert at least a portion of their investments to the digital platform. But, like the California Gold Rush of 1848 that ensued violence and crime in the land, cryptocurrency may be the wild west of investing strategies.1
Cryptocurrency – a decentralized digital currency – is nothing new. The idea of cryptocurrency was first established more than 30 years ago, in 1989, and software to support this idea of a digital currency began development in the early 1990s.2 But it wasn’t until 2008, when Satoshi Nakomoto (a pseudonym) published a paper essentially launching the cryptocurrency revolution that most investors are privy to today.2 A year later, in 2009, Bitcoin, the world’s first decentralized cryptocurrency, was launched.2
Fast forward to current times and cryptocurrency – at least from a societal standpoint – is buzzing with hype promoted by celebrities, professional athletes, and influencers alike. Even the volatility of the cryptocurrency market – which lost nearly $800 billion in market value over the span of one month in May 2022 – has left some crypto enthusiasts unphased.3
According to global data intelligence company Morning Consult, 13% of Gen Zers and 11% of millennials are willing to take substantial financial risks in hopes of earning substantial rewards compared to just 3% of boomers.4
In May 2022, Seven-time Super Bowl champion, Tom Brady, changed his Twitter profile photo to include “laser eyes,” a popular trend among Bitcoin enthusiasts to show their “laser focus” intended to increase prices. However, Bitcoin’s price fell nearly 40%, from $56,245 to $34,665 on the day Brady changed his profile picture, according to Coin Metrics.5
A month later, Brady tweeted, “Alright the laser eyes didn’t work. Anyone have any ideas?”5 While it is unclear how much Brady has invested in cryptocurrency, the volatility of the crypto market may not have substantially impact his financial outlook but it can cause real people to lose real money with potentially disastrous consequences to their financial well-being.
Gary Gensler, Securities and Exchange Commission Chair, warned investors in a tweet, “When celebrities / influencers endorse investment opps (sic), including crypto asset securities, it doesn’t mean those investment products are right for all investors.”6
He went on to say in a video shared on Twitter alongside his tweet, “A celebrity or influencers’ incentives aren’t necessarily aligned with yours. We might enjoy watching a celebrity playing on a basketball court, starring in a reality tv show or movie, or performing to a large crowd at a stadium show, we shouldn’t confuse those skills though with the very different skills needed to offer appropriate investment advice.”6
“When it comes to crypto, remember, many of these are highly speculative assets,” he warned.6
At its core, cryptocurrency is a digital currency where transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.7
Its name itself may be a warning sign to some investors considering their financial future and the morality of their investing strategy. The word crypto comes from the Greek word Kryptos which means hidden or secret.8 Simply put, cryptocurrency translates hidden or secret money.
In 2021, Cryptocurrency-based crime reached an all-time high with illicit addresses receiving $14 billion over the course of the year, up from 7.8 billion in 2020.9 Illicit addresses can range anywhere from malware to ransomware, to terrorism financing to darknet markets to even child abuse material. Scamming revenue also rose 82% in 2021 to $7.8 billion in cryptocurrency stolen from victims.9 Of that total, $2.8 billion came from rug pulls, a newer scam where developers build what appears to be a legitimate cryptocurrency project then take investors’ money and disappear.9 Ninety percent of the total value lost in 2021 for rug pulls was attributed to a single fraudulent exchange – Thodex – where the CEO disappeared after the exchange halted user’s ability to withdraw funds.9
The SEC has made efforts to regulate the cryptocurrency market – such as enforcing a $1.26 million fine on a reality-tv star for not disclosing she was being paid to advertise cryptocurrency on social media – but their reach is limited in a decentralized market.10
While celebrities may profit – legally and illegally – from advertising cryptocurrency, far more serious criminals are turning to cryptocurrency transactions to maintain their anonymity.11 Although transactions on the blockchain are recorded, the identity of the transaction maker remains anonymous – making it more difficult for law enforcement to track down criminals attempting to keep their identity hidden.11 There is also no mediator in a cryptocurrency transaction required, allowing illegal transactions to easily fall under the radar. 11
“Cryptocurrencies are not backed by anything other than the faith of the people who own them,” said Eswar Prasad, a professor at Cornell University. “The dollar, by contrast, is backed by the U.S. government. Investors still trust the dollar, even in hard times.”12 Investors who lose money through fraud or scam in the cryptocurrency market, by contrast, have little recourse.
“Cryptocurrencies, although a seemingly interesting idea, are simply not fit for purpose,” said Nicholas Weaver of UC Berkley. 13 “They do not work as currencies, they are grossly inefficient, and they are not meaningfully distributed in terms of trust. Risks involving cryptocurrencies occur in four major areas: technical risks to participants, economic risks to participants, systemic risks to the cryptocurrency ecosystem, and societal risks.
“This is a virus. Its harms are substantial. It has enabled billion-dollar criminal enterprises. It has enabled venture capitalists to do securities fraud as their business. It has sucked people in. So, either avoid it or help me make it die in a fire,”13 Weaver continues.
Matson Money is a stand that cryptocurrencies and all its digital derivatives live firmly in the world of speculating and gambling. As advocates of prudent and disciplined investing strategies, Matson Money encourages investors to consider your financial future and steer clear of potentially risky investment vehicles such as cryptocurrency. Here are 6 questions every investor should ask a potential advisor before trusting them with their financial future.
To learn more about how we have reimagined investing with an investing methodology rooted in empirically tested academic investing science, read more here.
1. The Gold Rush. Khan Academy. Retrieved 11 October 2022 from https://www.khanacademy.org/humanities/us-history/the-gilded-age/american-west/a/the-gold-rush.
2. History of Cryptocurrency (How Everything Started). Analytics Insight. July 29, 2022. Retrieved 11 October 2022 from https://www.analyticsinsight.net/history-of-cryptocurrencies-how-everything-started/#:~:text=The%20idea%20behind%20Cryptocurrencies,a%20truly%20decentralized%20digital%20currency.
3. Yue, Frances. Crypto crash will have limited impact on U.S. household wealth and labor supply: Goldman Sachs. Market Watch. May 19, 2022. Retrieved 9 June 2022 from https://www.marketwatch.com/story/crypto-crash-will-have-limited-impact-on-u-s-household-wealth-and-labor-supply-goldman-sachs-11652996573?link=MW_latest_news
4. McCluskey, Megan. Millennials and Gen Z Invested When It Was Fun. Now They’re Riding Out a Crash. TIME May 19, 2022. Retrieved 11 October 2022 from https://time.com/6152208/crypto-investing-millennials-gen-z/.
5. Li, Yun. Rom Brady Admits His “laser eyes” Didn’t Work On The Bitcoin Trade. CNBC. June 28, 2021. Retrieved 11 October 2022 from https://www.cnbc.com/2021/06/28/tom-brady-admits-his-laser-eyes-didnt-work-on-the-bitcoin-trade.html.
6. Gensler, G [@GaryGensler]. (October 3, 2022). Today @SECGov, we charged Kim Kardashian for unlawfully touting a crypto security. This case is a reminder that, when celebrities / influencers endorse investment opps, including crypto asset securities, it doesn’t mean those investment products are right for all investors. [Twitter]. https://twitter.com/GaryGensler/status/1576897535427448832 )
7. Cryptocurrency. Dictionary.com. Retrieved 11 October 2022 from https://www.dictionary.com/browse/cryptocurrency.
8. Crypto. Dictionary.com. Retrieved 11 October 2022 from https://www.dictionary.com/browse/crypto.
9 The 2022 Crypto Crime Report. Chainalysis. February 2022. https://theblockchaintest.com/uploads/resources/Chainalysys%20-%20Crypto%20Crime%20Report%20-%202022%20Feb.pdf
10. Calia, Mike and Jacqueline Corba. Kim Kardashian pays over $1 million to settle SEC charges linked to crypto promo on her Instagram. CNBC. October 3, 2022. Retrieved 13 October 2022 from https://www.cnbc.com/2022/10/03/kim-kardashian-settles-sec-charges-instagram-crypto-promotion.html.
11. Sadon, Tom. 5 Reasons Why Criminals & Terrorists Turn to Cryptocurrencies. Cognyte. November 2, 2021. Retrieved 13 October 2022 from https://www.cognyte.com/blog/5-reasons-why-criminals-are-turning-to-cryptocurrencies/
12. Prasad, Eswar. Five Myths About Cryptocurrency. The Washington Post. May 20, 2021. Retrieved 13 October 2022 from https://www.washingtonpost.com/outlook/five-myths/cryptocurrency-yths-bitcoin-dogecoin-musk/2021/05/20/1f3f6c28-b8ad-11eb-96b9-e949d5397de9_story.html.
13. Weaver, Nicholas. Why This Computer Scientist Says All Cryptocurrency Should “Die in a Fire.” Current Affairs. May 12, 2022. Retrieved 13 October 2022 from https://www.currentaffairs.org/2022/05/why-this-computer-scientist-says-all-cryptocurrency-should-die-in-a-fire.
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