Investing in crypto: Chasing the dream or gambling your future?

Buying into cryptocurrencies like Bitcoin can lead to lucrative high-stakes gains but its volatility means that investors risk losing a lot if they don't tread carefully 
Investing in crypto: Chasing the dream or gambling your future?

Bitcoin was invented in 2008 as a digital form of money and remains at the forefront of cryptocurrency.

The allure of the quick financial windfall is in all of us - and in the current breakneck sociological, economic, and technological cycle, the pull of cryptocurrency seems stronger than ever.

Formerly the arena of tech and gamer experts, the likes of Bitcoin has exploded into the mainstream in recent years, arguably against the very anarchic and revolutionary spirit upon which it was founded.

The appeal of unregulated currency, away from the prying eyes of governments, bankers, and regulators proved irresistible to those who championed it, but like most things in life, the ordinary punter eventually wanted in on the act as the value of Bitcoin and others soared like the fabled Icarus towards the sun.

However, the fable tells us how Icarus flew too close and fell back to Earth almost as promptly as he rose.

You could apply the same principles to the average investor today.

Cryptocurrency can be, and indeed is, a very lucrative high-stakes game of financial prosperity to those who know what they are doing, who have walked the walk since the beginning, and know the slings and arrows of outrageous fortune.

Even they know navigating the tumultuous world of cryptocurrency is high-risk, with the price of Bitcoin resembling the Himalayan mountain range on a graph tracking its fluctuating price in the past year alone. Up one day, down the next, soaring for a while, plummeting like a stone - the grandfather of cryptocurrency is not immune from eye-popping value changes daily.

Dreaming of an early retirement

For the average punter looking to make their fortune, dreaming of early retirement and the finer things in life, it's easy to want a piece of the action.

Why wouldn't they? The likes of football and other sports are now being used as an avenue to promote cryptocurrency and other blockchain-related financial operations. Teams are sponsored by crypto firms.

It was inevitable that cryptocurrency would get in on the sports act, seeing the ubiquitous presence of gambling firms hawking their wares for years.

The likes of the Central Bank and the Financial Services and Pensions Ombudsman have warned of the pitfalls - while not bashing cryptocurrencies in and of themselves, they have warned about unscrupulous actors wishing to take advantage of those who dream big.

Speaking at the Oireachtas Committee on Finance, Central Bank governor Gabriel Makhlouf repeated his warning about investing in cryptocurrencies.

"I think it can sometimes mislead people that a cryptocurrency is just like the euro and it isn't. There are different types of crypto. Some crypto frankly is just like a gamble. It's like walking into a pub and putting money into a fruit machine and you could be lucky and you could get a return on that so-called investment. But actually, quite often, you don't win.

The most important thing of all for that type of crypto is to make sure that the public is aware of it. That the public understands the risks inherent within it.

Mr Makhlouf and others in the financial mainstream are deliberate in their public warnings because there's barely a work office or site, or WhatsApp group, or golf outing, or five-a-side, left in Ireland that hasn't had the "should I invest in crypto" conversation at this stage.

Everyone can't be a winner. There will be casualties along the way, and Mr Makhlouf and others are trying to get out ahead of the potential heartache down the road.

Managing director of Cork-headquartered independent financial advice firm Alpha Wealth, Nick Charalambous, told the Irish Examiner that barely a day goes by without someone wondering about taking the crypto plunge.

"The Central Bank recently issued a warning on the risks of investing in crypto assets, as part of a European-wide awareness campaign. Potential investors are being warned that crypto assets are highly risky and speculative and may not be suitable for retail customers. Despite this, I am getting enquiries daily from people looking to invest.

"Even the large falls in the value of the majority of coins - roughly 35%-40% since the highs of November last year - hasn’t dampened interest, and if anything caused people to want to invest more in them. "

Mr Charalambous has a theory - people don't want to think they are being left behind, wondering if only.

"I think the main reason for this is due to so-called FOMO (Fear Of Missing Out). Reports in social media channels of people gaining great riches from cryptocurrency naturally pull other investors in. Also, sites such as Reddit and Revolut have made these more accessible to the masses."

He said that the Central Bank is "right" to be concerned.

Not just because of the volatility – big rises and falls. To give you an example, depending on how long it takes you to read this article, the value of cryptocurrencies could be up or down by anything up to 10%.

Another reason that the Central Bank is worried, Mr Charalambous said, is that cryptocurrencies are in an unregulated market.

"There are no safeguards. 90% of the schemes are scams and the figures are frightening. Cryptocurrency crime had a record-breaking year in 2021, finding scammers took $14bn worth of crypto last year, double that of the previous year. Opportunists are out there, ready to steal your crypto by pulling a classic Ponzi scam.

"A Ponzi scam is where, instead of being invested in assets to generate returns, the money from new investors is used to pay earlier investors what they assume to be big returns — so enticing more backers. In the process, the fraudsters siphon off some of the cash for themselves and the fund inevitably runs out," he said, Mr Charalambous said that in any high-risk investment, the value of it can fall as well as rise.

"To put this in perspective, on a scale of one to seven, one being your cash deposits in the bank, and seven being high risk, I would put cryptocurrencies into the risk level category eight if the category existed.

"A lot of people, outside of the human concerns of the current conflict, are concerned about their pension and investment values. Most pension funds for example are invested in the stock market. The traditional view was that these markets were not that closely corrected to cryptocurrencies.

What has become more apparent is that cryptocurrencies and stock markets have both become more correlated to each other.

Part of the reasoning for this is logical, Mr Charalambous said.

"They are both classified as “risk assets”. As risk has increased, due to inflation pressures and the conflict in Ukraine, it has caused both these asset classes to fall.

"However cryptocurrencies are stock markets on speed. Whether you are invested in or considering investing in cryptocurrencies, there is one fundamental rule you need to stick to.

"This is the five-year rule. Don’t invest in any investment - cryptocurrencies being one of these - if you have less than a five-year investment horizon. I am asked daily whether now is a good time to invest due to the recent falls.

"Incidentally I have had calls from those who heard recent radio ads to invest or save in gold and asking if now is a good time. Gold is an interesting commodity in that it is risky. A lot of people don’t think it is but its price has moved over 10% a year for several years and also it is behaved quite irrationally, for instance falling during periods of Covid-19, when its price should by rights have risen.

"Why did this happen? It is because we live in a very complex world and the rules of economics don’t always apply. So my takeaway for today is to tread carefully."

While some cryptocurrencies are down about 50%-80% on highs of four months ago, it doesn’t necessarily mean it is a good time to invest in them, he said.

Basic rules of investing

"Whether you understand the Metaverse, NFTs or Smart Contracts or not, the same basic rules of investing apply to this asset class as any other. My advice is to first consider your current financial position. Whilst a lot of financial advisors steer well clear of this murky area of investing, I feel it is important to be educated on how you can get exposure, whether it be personally, through a company investment or a pension fund.

"The main consideration is to ensure saving sufficiently in areas such as retirement plans or children’s education, and are investing in the right vehicles. There is no point in putting monies for a newborn child for their third level education into the bank, post office or credit union. Don’t forget that the five-year rule applies. These institutions are only for monies you need access to within five years.

"Once your time horizon goes beyond that, you are then able to look at risk assets. Risk warnings should apply to anyone investing in this market for anything other than speculation. Please don’t buy into these because you think the market is “cheap” - what goes down can go down can always go down further."

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