*Editor’s Note: CC Biz Buzz is a monthly column series that features insightful commentary from a member of the Columbia College Robert W. Plaster School of Business faculty.
I bet many of you can remember your parents or grandparents at one time or another saying, “if it sounds too good to be true, it probably is.” Cryptocurrency has a relatively short history in relation to traditional investments. Bitcoin is generally thought of as the first cryptocurrency introduced in 2009. Bitcoin was revolutionary because it is considered the first cryptocurrency to combine blockchain record-keeping technology, user privacy, and decentralized control, all with built-in security. The value of a single Bitcoin surpassed $1000 for the first time in 2014 and hit an all-time high of just over $68,000 in November 2021. Wow, that his one heck of a return for your dollar! As popular culture began to write more about digital currency, more investors and tokens or coins came into the market. Ethereum, Tether, Dogecoin, and USD Coin, to name a few.
As with many things that show extraordinary profits, everyone wants to get in on the action. This often happens when the lottery reaches possibilities of over $400 million or so, and we all rush out to buy a ticket. The difference is that most of us understand the odds of actually buying that winning ticket. Investing in Cryptocurrencies seems to be a little different. Many individuals involved think that cryptocurrency is just an alternative to traditional stocks and bonds. And why not put some money into cryptocurrency with the potential of a huge payout?
Let’s look at some real numbers. For someone who invested money into Bitcoin in 2014 at $1000 per coin, that coin is currently valued at $16,836, an average return of 16.97%. Compared to the inflation-adjusted stock market return for the past decade of 14.15%, the crypto investor is ahead by about 3%. But merely looking at the numbers does not tell the entire story.
In 2014, the year Bitcoin first topped $1000 per coin, a Bitcoin exchange, Mt. Gox, when down, with investors losing 850,000 coins that were never recovered. These coins would have a value of approximately $14.3 billion today. Squid Game coin, named after the hit series on Netflix, hit the crypto market around October 2021, selling for pennies on the dollar. The price raised to a peak of over $2800 per coin, but there was a problem: investors could not sell their Squid Game tokens, and on November 1, 2021, $3.36 million was removed from the Squid Game Coin by its creators and the coin because worthless. The latest scandal of FTX resembles the Enron scandal of 2001 and is costing investors millions.
So here are a few things about cryptocurrencies that we all need to remind ourselves of. First, unlike traditional stocks and bonds, there is very little, if any, regulation associated with cryptocurrency. The Securities Exchange Commission (SEC), while likely to become cryptocurrency’s regulator, is currently not in such a position. The IRS continues to consider the trading of cryptocurrency a taxable event and will, in my opinion, increase scrutiny of these trades. Secondly, there is substantial risk associated with cryptocurrency. This would be true of any new asset on the market. The number of Initial Public Offerings (IPO) that fail is a staggering 80%, but we generally only hear about the winners. Third, cryptocurrencies are currently being advertised on social media and through various other unconventional sources targeting youth in many cases. The idea in many of these ads is that it is the next big thing; you can be cool if you own crypto, you would be unconventional, and you can make money to boot. This is not your same boring financial services ad that has the fine legal print at the bottom.
As we begin a new year, it is a great time to reflect on the lessons learned from the past year. The lessons from 2022 are that what goes up must eventually come down, Ponzi schemes and fraud still exist, and when investing for your future, boring is good. Like our grandparents said, “if it sounds too good to be true, it probably is.”
Dr. Mary Dorn is an assistant professor of finance in the Columbia College Robert W Plaster School of Business.