Massachusetts Daily Collegian

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A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

Don’t put your life savings in cryptocurrencies

The risks of cryptocurrencies are aplenty
Flickr/Zach Copley
Flickr/Zach Copley

I first heard about Bitcoin in 2011 when news stories appeared about the new online currency’s surge in popularity. Headlines were seemingly incredible with stories of prescient investors who bought the coins for pennies, only to find them worth nearly $30 each as of June 2011. This surge was short-lived; the currency’s inherent instability seemed to prove itself. Within five months, Bitcoin’s value had plummeted down to around $2. Every so often, the currency will make a new name for itself, as it did in December 2013 when its value peaked again at over $1,100. A man who bought $27 of Bitcoin found himself an accidental millionaire. The bubble slowly popped again with Bitcoin prices falling to a steady $200 range by 2015.

Once again, it seems that Bitcoin has found a new, bigger bubble, and, along with other cryptocurrencies, it made quite a pop. On December 16, 2017, the coin’s value hit its all-time peak of $19,343.04. For reference, that means that if someone bought $10 worth of Bitcoin in July 2010 at five cents each and then forgot about it, they would now find it worth nearly $4 million. Of course, this bubble popped too. In the past week, the price has been hovering between $8,000 and $10,000. This still represents a pretty decent profit for early investors, but for someone joining late in the game, this is simply an example of the volatility of cryptocurrencies.

For all the success stories you hear about people making millions in crypto, there are also some with less-than-happy endings. In the most recent crypto bubble, there have been accounts of people losing their life savings. Cryptocurrency has the potential for massive rapid gains, but also catastrophic losses. It is inherently volatile, deriving much of its value solely from speculation rather than from the fiat system of any government.

Make no mistake: Bitcoin and other cryptocurrencies are high-risk investments, and it’s a bad idea to expect any sort of profit from them. Rather than trying to “beat the market,” it’s probably better for the average investor to put their money in an index fund and leave it alone until retirement.

Cryptocurrencies have become the hot new thing on Wall Street, with hedge fund managers investing heavily in the online currency. In January, the popular stock trading app Robinhood added cryptocurrency trading capabilities. This is all fine for people who know they are making high-risk bets, but for the average person—myself included—who lacks experience with market dynamics, cryptocurrency is a terrible investment.

The casual day trader who wants to make a fortune off crypto often misses the point. Bitcoins weren’t developed as a store of value, but as a decentralized online currency deriving its power from its untraceable nature and lack of central planning. It seeks to be an alternative to government-created money in states where hyperinflation or oppressive regimes make the use of regular money difficult. And yet, there is also a good amount of shady dealing involved. Because its decentralized nature makes transactions less traceable, online black markets on the dark web, such as the Silk Road, used Bitcoin and other cryptocurrencies to finance drug deals, sex trafficking and even murder-for-hire.

The casual crypto investor doesn’t care so much about these aspects of the currency. To someone simply looking to speculate on the market, it doesn’t matter whether the currency derives its price from the decentralized, non-fiat value of peer networks or that transactions are stored in a cryptographic public ledger known as a blockchain. To investors, the only thing that matters is the value of the coin, and during these bubbles of instability, the only thing fueling the value of the coin is speculation from other investors.

Proponents of cryptocurrency might argue that even the U.S. government dollar only derives its value from the worth that people give it. After all, bank notes themselves have no inherent utility aside from what society agreed upon as a value. So then why not accept a similar argument for the value of cryptocurrencies?

While this is true, government-backed currencies have something that cryptocurrencies don’t: stability. As Nobel economist Paul Krugman wrote in his New York Times column titled “Bitcoin is Evil,” “To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.” The value of the U.S. dollar might be based on some socially constructed trust of the U.S. government’s stability, but that doesn’t change the fact that it has a real utility precisely because of its stability. People invest in the dollar because it simply works; given the high volatility of cryptocurrencies, it’s fair to say that they don’t.

Is this to say that cryptocurrencies are entirely useless? Not at all. As mentioned above, the advantages of privacy and decentralization make it an appealing option for some people. But casual investors, particularly young college business students with access to Robinhood and a bank account, should stay far away from banking on crypto as their main investment.

Edridge D’Souza is a Collegian columnist and can be reached at [email protected].

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  • P

    Paige GiannettiFeb 22, 2018 at 12:24 am

    Risky for those of us who are no longer students!

  • J

    John aimoFeb 21, 2018 at 1:22 am

    Cryptocurrency is digital alchemy, the fact that people don’t recognize this is amazing.