USA TODAY International Edition
Musk loves cryptos, but should you join?
Digital currency craze not for the faint of heart
Billionaires, celebrities and athletes can’t get enough of the crypto craze.
Tesla CEO Elon Musk thinks digital currencies are here to stay. So does investor and Dallas Mavericks owner Mark Cuban.
They’re not alone. Rapper Snoop Dogg jumped on the dogecoin bandwagon and so has Kiss singer Gene Simmons and restaurateur Guy Fieri after the meme- inspired cryptocurrency surged a whopping 14,000% this year alone through Friday.
Athletes also are flocking to bigger cryptos such as bitcoin and ether as well following a record- breaking rally. Trevor Lawrence, the No. 1 NFL draft pick in 2021, partnered with a global cryptocurrency investment app called Blockfolio and plans to place his signing bonus into an account with the company.
Yet it’s no longer just enthusiasts and public figures who are dabbling with digital coins.
Amateurs including Earl S. Bell of Brooklyn, New York, are jumping in. He says he’s been an investor for a decade and started to put his money in different cryptocurrencies about a year ago.
“I saw crypto as freedom. In the COVID era, I wasn’t able to get enough work,” says Bell, an architect by trade. “My future plans are to come out with my own coin.”
Bell says his plan would include creating bank- like safes for cryptocurrency investors to store their crypto wallets.
What are cryptos?
Cryptocurrencies are digital currency created and exchanged over a decentralized computer network where transactions are secured and verified through coding.
Bitcoin, which launched in 2009, is the original and the world’s most popular crypto. It was designed as a alternative to government money and is based on blockchain technology, which acts as a public ledger of transactions.
Since there is no central authority governing supply, bitcoin’s value depends on investors’ confidence in it. It has mainly been used for speculation by traders rather than for payments.
Prices for cryptocurrencies are based on supply and demand. That means the rate at which a cryptocurrency can be exchanged for another currency can fluctuate vastly since the design of many cryptocurrencies ensures a high degree of scarcity.
Bitcoin bulls have called it a “store
of value” – which has historically been reserved for safe- haven investments such as gold – and argue that it’s a good investment to hedge against inflation.
That’s because there’s not an unlimited supply of bitcoin. In fact, there are only 21 million bitcoins that can be mined, and about 18 million have been mined so far. Bitcoin mining is the process that creates cryptocurrency. It is resource- intensive in an effort to control the number of bitcoins in circulation.
Enthusiasm around Bitcoin spurred other digital tokens.
Ethereum, which launched in 2015, is a blockchain- based software platform that is primarily used to support ether, the world’s second- largest cryptocurrency by market value at more than $ 400 billion. It eclipsed $ 3,600 recently.
Ether supply, however, isn’t capped and new tokens are created through a similar mining process as bitcoin.
The “memecoin” Dogecoin was created in 2013 as a joke poking fun at the surge in other digital coins. Dogecoin was inspired by the popular Doge meme, which offers the image of a Shiba Inu dog staring sideways at the camera with raised eyebrows.
The latest surge has pushed Dogecoin’s market capitalization to $ 87 billion as of Friday, which means its value is higher than biotech company Moderna, U. S. multinational automaker Ford and social media giant Twitter.
It also is worth more than SpaceX, Musk’s privately held rocket company, which is valued at $ 74 billion, according to SEC filings.
What cryptos aren’t
Cryptocurrencies aren’t a currency supported by governments, and they aren’t a piece of a company, such as a stock. And the factors that determine their underlying worth are unclear, experts say.
For those who invest in a stock, the price of a share should be the present value or future profit that a company is going to generate, according to Itay Goldstein, a professor of finance and economics at the University of Pennsylvania’s Wharton School of Business.
When it comes to cryptocurrencies, it’s really up in the air, he says.
“No one can tell you whether bitcoin priced at $ 50,000, $ 60,000, or $ 70,000 is too much or too little,” says Goldstein. “So as a result, it takes on a life of its own. ... People start to believe that’s what it should be and then it crashes with no clear guidance on where it should stop.”
Why Mark Cuban loves them
Cuban is one of the core investors on NBC’s reality show “Shark Tank.” He told USA TODAY he’s a big believer and investor in cryptocurrency.
Cuban says he first started investing in cryptocurrencies in 2017 and added to his investments last year and this year. He declined to say how much he has invested, except that it’s “not enough.”
He likes Dogecoin because there’s a limit to it with annual inflation of 5 billion coins.
“So, if more places take Doge and more people spend it, then those 5 billion coins annually will be consumed and that may increase the value of Doge,” Cuban said.
As for cryptocurrency becoming mainstream, Cuban says that can mean a lot of different things.
“I think the first impact of crypto, particularly Ethereum, will be for business applications,” Cuban says.
Are cryptos right for you?
With all the recent hype around Dogecoin, bitcoin and ether, should you jump in on the crypto mania, too? It depends on how much you can tolerate extreme volatility in your portfolio.
First- time investors, however, should proceed with caution. Piling all of your nest egg into something as volatile as cryptocurrencies poses big risks to your retirement, experts say. Wealth managers and finance experts have long been skeptical of these speculative investments for amateur investors due to their extreme swings.
“The risks are huge. Crypto prices are a roller coaster,” says Goldstein. “Certainly, people who put money in bitcoin a few years ago could make a huge return. But there were points in between where it saw big drops.”
In 2013, bitcoin began trading around $ 13 and spiked to more than $ 1,000 by December. In late 2017, the digital token surged to nearly $ 20,000, before crashing to almost $ 3,000 the following year before its dizzying rise to above $ 64,000 last month.
“If you have a small amount of money that you’re trying to save and have plans for what to use it for, this isn’t something you should invest in,” Goldstein added. “This is for people who want to take on risk and speculate.”
Dogecoin has seen similar booms before where it reached all- time highs in 2017, but it was short- lived.
“I don’t think this time is any different,” says Leeor Shimron, vice president of digital- asset strategy at Fundstrat Global Advisors.
“These types of meme coins have more power in the pandemic because more people are plugged into social media on Twitter or TikTok,” Shimron added, who is bullish instead on larger coins such as bitcoin and ether. “But it’s not healthy or sustainable for smaller coins like dogecoin that don’t necessarily have fundamental value.”
But that hasn’t stopped non- professional investors from throwing themselves in the mix.
Like other investments, such as SPACs or special purpose acquisition companies, cryptocurrency has a mass following on social media sites.
Facebook, for example, is where Abdullah Taimur of Pakistan trades information with other cryptocurrency investors in the United States and elsewhere.
He says he began investing in at least six cryptocurrencies, including Dogecoin, SafeMoon and WINk, the past few months. Taimur adds he doesn’t mind the volatility in the crypto markets and gave advice for others looking to jump in.
“You have to know about the future of the coins you have invested in, and you need to do some research about the projects of your coins. Most importantly, never sell at a loss or jump on a flying rocket,” he says, adding. “If you’re a beginner, just don’t invest right away. Join these ( online) crypto groups. You really get to know about the market, and you also learn from other people’s experience.”
Why are cryptos surging?
A number of factors are driving the crypto craze in prices.
For a long time, institutional investors were skeptical of cryptocurrencies. But with the stock market at record highs, interest rates at historic lows and real estate prices strengthening, investors are looking for more ways to generate returns and diversify their portfolios, according to Goldstein.
Investment banks like Morgan Stanley and rival Goldman Sachs have offered some of their wealthiest clients access to Bitcoin funds.
The debut of Coinbase as a publicly traded company last month attracted both day traders and new amateur investors and helped spur the latest rally in crytocurrencies, pushing virtual tokens like dogecoin, bitcoin and ether to record highs. The cryptocurrency exchange was founded as a simpler way to trade digital coins. The rally in Dogecoin came even though Coinbase isn’t offering to trade it.
The surge in popularity for “memecoins” such as Dogecoin follows a recent boom in retail trading during the coronavirus pandemic as more people worked online, spurring interest in “meme stocks” including GameStop.
The rise in participation among retail investors was helped in part by the injection of stimulus checks into the economy, analysts say. For instance, 10% of stimulus payments in the third round, or nearly $ 40 billion of the $ 380 billion in direct checks, were expected to be used to buy bitcoins and stocks, according to Mizuho Securities.
In fact, bitcoin was the preferred investment choice among 200 of the respondents who expect to receive a third round of direct payments.
Dogecoin has ridden a similar Reddit- driven wave as stocks like GameStop and AMC in recent months, accelerated by a series of tweets by tech billionaire Musk, who was pumping the cryptocurrency. This year, Dogecoin soared following enthusiasm from a Reddit group called r/ Satoshi Street Bets, which aims to pump up the prices of cryptocurrencies.
Musk, who has more than 51 million followers on Twitter, has driven traders into frenzies by mentioning Dogecoin at times, although on Friday, he tweeted a note of caution: “Cryptocurrency is promising, but please invest with caution!” he wrote on Twitter.
What are the risks?
Jeff Eriks of Scottsdale, Arizona, also is part of an investment Facebook group, but he said he avoids cryptocurrencies.
“There’s a lot of risk and reward as long as you have the cash backup to deal with it,” Eriks says.
Eriks says he’s a small- business owner who likes to throw some cash into the market to see what it will do, but he likely would never use cryptocurrencies to pay his 22 employees.
That’s because he says it’s difficult for him to see cryptocurrencies becoming a common form of payment even though some businesses are accepting it.
There have also been growing concerns about a regulatory crackdown on bitcoin. Turkey’s central bank banned the use of cryptocurrencies from the end of April, saying crypto payments came with “significant risks.”
India also is reportedly set to propose a law banning cryptocurrencies, fining anyone trading in the country, or holding such digital assets.
Taimur and Bell add that new investors in cryptocurrencies need to be careful of scammers.
The Securities and Exchange Commission agrees.
The SEC the past few years has issued several warnings for investors to “watch out” for fraudulent digital asset and crypto trading websites, and there have been dozens of criminal charges brought against alleged fraudsters.
The SEC charged or settled at least 23 cases last year and five this year involving alleged cryptocurrency fraud.
In one case in March, the SEC said it filed an emergency action and obtained a temporary restraining order against an Idaho man. He had allegedly raised millions of dollars from hundreds of investors by falsely claiming to be a financial adviser with securities licenses, overstating investment returns and misappropriating money received from investors.
An SEC spokesman referred questions to the agency’s website on cryptocurrency enforcement actions.
How can you protect yourself?
The sharp rise in the value of bitcoins has some analysts worried about a potential bubble in the cryptocurrency market, with bitcoin’s price – at one point – more than doubling since the start of 2021.
More wealth advisors, however, are starting to take these alternative investments seriously. Their clients as asking how they can incorporate cryptocurrencies into their portfolios to generate more money for their nest eggs.
“Interest in cryptos is the highest it’s ever been. Now the investment community is trying to wrap its head around this asset class,” says Shimron of Fundstrat Global Advisors.
Just more than 60% of financial advisers say they have been approached by clients for information about cryptocurrencies, according to a recent study from Grayscale, the world’s largest digital currency asset manager.
But just 10% of advisers surveyed recommend or use cryptocurrencies in client portfolios. Why? Lack of familiarity is often the main reason advisers steer clear of recommending particular investments, the survey showed.
In the highly regulated world of broker- dealers and registered investment advisory firms, the evolving state of cryptocurrency regulation has prompted many firms to stand on the sidelines. As a result, 48% of advisers surveyed said that firm policy or compliance issues currently keep them from recommending or using cryptocurrencies in client portfolios.
Of the roughly half of advisers surveyed who said they don’t recommend cryptocurrency because of a formal prohibition, nearly a quarter of them said they would expect to begin using them as soon as they’re able.
Cryptocurrencies stand to benefit from a massive generational wealth transfer over the next decade, experts say. By 2030, millennials will hold five times as much wealth as they have today and are expected to inherit over $ 68 trillion from their predecessors, according to a study by Coldwell Banker Global Luxury.
Shimron has advised clients who are more conservative with their investments to allocate between 2% to 5% of their portfolio in crypto, with 80% of that toward bitcoin and 20% toward Ethereum.
For those who want to be more aggressive, he recommends that they use up to 10% of their total portfolio allocation toward crypto, though some younger investors could go a little higher than that if they’re willing to accept the risk, he adds.
Shimron says that investors should buy and hold because investing in cryptos a “multi- decadelong play” as investors wait for the societal and technological shift to take place.
When it comes to cryptos, investors should stick to a rigid investing plan by using a dollar- cost average approach, Shimron added. From there, investors can determine how much they want to invest, their allocation and a time frame they’re comfortable with to help them ride out bumps along the way.
“Volatility will always be there,” says Shimron. “Never put in more money than you’re willing to lose.”