Know how to invest in cryptocurrencies

According to CoinMarketCap.com, there are about 20,000 different cryptocurrencies1. This opens up many opportunities for investors! Before investing any part of your savings in it, Fisher Investments Europe considers it important to consider some of the unique risks associated with cryptocurrencies.

Volatility

Volatility is inherent in investing, but it is known that the volatility of cryptocurrencies is much higher than that of stocks. For example, since 2017, bitcoin (the largest and most well-known cryptocurrency) has had over 150 days where its value has fallen by at least 5% in a single session. Over the same period, global equities have only experienced drops of this magnitude in four sessions.

Volatility can seriously limit an investor’s ability to purchase goods and services using cryptocurrencies. However, for a currency to be widely used as a medium of exchange, its value must, in principle, be stable. Thus, holding cryptocurrencies will certainly be associated with pronounced fluctuations in your purchasing power. Can you imagine that you only have cryptocurrencies for your daily grocery shopping or to fill up your car?

Even “stablecoins,” those cryptocurrencies designed to cap extreme volatility on a daily basis, end up being fragile. The recent crash of TerraUSD, a popular stablecoin that has depreciated above its theoretical peg to the US dollar, has set off a wave of panic in the cryptocurrency market. For them to be more accepted as a common currency, they need to be a more stable medium of exchange.

Possibility of government intervention

Governments have always played a regulatory role in financial markets. Traditionally, central banks are the only institutions that control the circulation of money. Interest rate intervention, money printing, and setting bank reserve requirements are all tools used by central banks to control the money supply. For cryptocurrency investors, government intervention will certainly have a deterrent effect in terms of adoption and leave new investors out of the way. Since cryptocurrencies should exist outside the control of government agencies, it is not surprising that governments around the world are eager to take tough measures.

For example, in 2017, China banned initial coin offerings (that is, raising capital through the sale of cryptocurrencies) and stopped crypto trading activities. In 2021, the country did it again by declaring all cryptocurrency transactions illegal3. Federal securities laws4. Historically, the right to mint money has always belonged to governments, which suggests that the rules governing cryptocurrencies will continue to evolve.

Involvement of black markets

Most cryptocurrencies are based on anonymous distributed ledger technology. Transactions are not tied to people, but to an e-wallet address and are recorded in a public ledger. Proponents of this system claim that it improves the efficiency of transactions. Because they are often anonymous, illegal activity is one source of demand for cryptocurrencies.

Some sites that offered the purchase of drugs, weapons, and many other illegal crypto-currency goods and services have been shut down by federal authorities. The FBI recently estimated that ransomware attacks cost at least $144 million between 2013 and 2019. These illegal activities can undermine the legitimacy of cryptocurrency adoption as well as the credibility of public opinion and encourage adherence to strict regulations.

Fraud

Investing in cryptocurrencies comes with particular risks of fraud. There are many ways for hackers 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 the key is lost, it will be impossible to recover the assets.

In addition, many exchanges have been subjected to cyberattacks. In 2014, MtGox (then the largest bitcoin exchange) lost about $480 million in bitcoins held by its customers in a cyberattack.6 In 2016, hackers stole $65 million from the Hong Kong bitcoin exchange Bitfinix.7 The perpetrators 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 about 6,800 cryptocurrency investment fraud complaints, compared to 570 in the same period a year earlier. At the same time, claimed losses increased more than tenfold to over US$80 million9.

Cryptocurrencies for you?

Fisher Investments Europe never rules out investment opportunities, whether they be cryptocurrencies, gold, currencies or commodities, but alternative assets such as cryptocurrencies can be less liquid, more volatile and more difficult to forecast accurately. Cryptocurrencies in particular are still a much smaller and less liquid market than global stocks and bonds. In our view, 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 all investments involve a trade-off between risk and return, we do not have enough data to understand how cryptocurrencies might react to different market conditions. Finally, Fisher Investments Europe believes that stocks and bonds are more conservative vehicles to help its 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 company number B228486 and regulated by the Financial Sector Supervisory Commission (“CSSF”). The registered office of the company 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 a reflection of the client’s performance. There can be no assurance that Fisher Investments Europe will retain this opinion, which is subject to change at any time if new information or analysis is communicated to it or if it is reassessed. The information contained in this document is in no way a recommendation or a forecast of market developments. They are provided for information only. Current or future market conditions may differ materially from those presented here. Furthermore, no warranty is given as to the accuracy of any assumptions made for illustrative purposes. Investing in financial markets carries the risk of losing all or part of the invested capital, and there is no guarantee that this amount can be recovered. Past performance is neither a guarantee nor a reliable indicator of future performance. The value of your investments and the return on them may fluctuate depending on changes in the financial markets and world exchange rates..