Assessing the risks of cryptocurrency investing
The growing frenzy around bitcoin and other cryptocurrency offerings has prompted warnings from a range of financial heavyweights on the risks that current and potential investors should keep in mind.
Bank of Canada governor Stephen Poloz sounded the alarm last week, saying that buying into the trend is “closer to gambling than investing”, while Canada’s securities regulators association issued a special warning on Monday about the high level of risk associated with digital currency-linked products.
Top of mind for many is the question of just how big a bubble bitcoin is in. Virtually worthless in early 2009, the cryptocurrency hit US$1,000 by early 2017 and then soared to its current price of just under US$17,000, a 12-month gain of more than 1,900 per cent.
The disruptive potential of bitcoin and its underlying blockchain technology is only helping fuel the speculation and could lead it to go higher still, said BMO Financial Group chief economist Doug Porter.
“Bubbles start off with a very compelling story, a fundamental change that triggers a lot of enthusiasm and attracts a lot of investment, and often what we see happen is a good thing goes crazy.”
“These sorts of things, whenever you get into the speculative mania, they can go a lot further and higher than many people believe is possible,” he said.
Even those who fully believe bitcoin will keep growing and help to disrupt financial systems expect the price volatility to continue.
“Even if there are corrections along the way, it will come back even stronger than before, so I’m not too worried about corrections. But for sure there is going to be volatility,” said William Mougayar, a cryptocurrency investor and author of The Business Blockchain.
But with such an astounding run-up already this year, investors are turning to the debut of other coin launches in the hopes of repeating the astounding profits that have come to early bitcoin speculators.