Thoughts: Risks In Investing In Cryptos
Nothing gets my blood flowing more than the prospect of investing in a fast moving environment filled with overnight wins and losses. Today, one needs to look no further than the cryptocurrencies to find such market. The action in the crypto market has all the symptoms of the dot-com days, and more, but there is one particular risk that has bothered me – a risk not inherent in buying and selling any other liquid financial asset.
The boom in cryptocurrencies has been unique in the sense that only a small portion of the overall market has participated this time round. Those being the younger, tech savvy, so-called geeky profile, who were quick to jump on the Bitcoin train when it first started. Many of the more traditional financiers and brilliant stock pickers I know have no interest in this sector and have watched the market cap of cryptos balloon from 0 to $600 billion+ without taking part in any of the action.
That said, it is not as easy to get involved with cryptos as is it with stocks. One must set up crypto ‘wallets’ and accounts with cryptocurrency exchanges- many of which have questionable elements that undoubtedly make people skeptical about investing. These operate in environments disconnected from banks and regulation and if one of the largest exchanges suddenly disappeared one day, it wouldn’t come across as completely surprising.
The thing that bothers me the most, however, is not risk related to regulation, nor an issue with credibility. What bothers me the most is the access to immediate liquidity. With any financial asset, like the stocks that I own, at any point in time I can sell out and return to cash where it is safe. With cryptos, not so easy.
Why compare cryptos to stocks when in fact cryptocurrencies are currencies, one may ask? Well fiat currencies are stable, and don’t swing 100%+ in weeks, let alone in decades. cryptocurrencies trade like penny stocks, and consequently should be treated with the same risk profile.
First off, to invest in smaller crypto currencies, one must open an account with exchanges that allow you to buy them. That means to invest, you transfer funds from your bank to your wallet, and from your wallet to an exchange where you will buy the currencies you want using either ETH or BTC. That’s fine, but that makes it extremely difficult to move to cash as the process involves moving funds around through multiple stops, and dealing with multiple spreads.
In other words, once your funds are at a crypto exchange, you can freely buy other crypto currencies, but you can’t freely move back to cash. That’s equivalent to not being able to sell your stock, but rather only having the option to switch to other stocks instead. A scary thought, if you think about it.
The other problem I see with liquidity is when the volume gets high, these damn exchanges overload and shut down without warning. If you can’t access your account, that means you can watch your holdings go to 0 without being able to do anything about it . Not a position I fancy seeing myself in, to say the least. This also means that customer service would be slow and unresponsive during these times. Just try opening an account with any exchange right now and get it verified and you will know what I mean – it will take a minimum of a few weeks just to process your documents, due to ‘heavy load’.
On the other hand, why not partake in some blockchain plays via the good old stock market? The returns are similar and the environment a lot more controllable.