The rise of bitcoin and other cryptocurrencies during the last year has been driven by widening interest and a flood of money from ordinary investors.
That might not turn out so well. “If you don’t have a basic understanding of what you’re getting involved with, then it’s probably not the best time for you to engage,” Perianne Boring, president of the Chamber of Digital Commerce, said at the recent Yahoo Finance All-Markets Summit. “Today, it’s really more appropriate for a more sophisticated investor.”
The Chamber of Digital Commerce is a trade group representing the blockchain industry in Washington, D.C. Blockchain technology undergirds bitcoin and many other cryptocurrencies. Some people, especially computer programmers and other technologists, understand it. But many investors don’t, and they’ve been investing in cryptocurrencies simply hoping for a quick profit. (Here’s a primer on what the blockchain is.)
[Watch: What is bitcoin?]
Boring and other industry officials worry that unexpected investor losses or some other type of setback could create a backlash leading to stifling regulation that strangles innovation and sends new startups to other countries. “We are in a very nascent time in this ecosystem,” Boring said at the Yahoo Finance summit. “We currently have a very fragmented regulatory regime. The rules to the road are pretty complicated from a consumer perspective.”
There are different ways to invest in the blockchain, with different levels of risk. Investors can purchase cryptocurrencies such as bitcoin, ethereum and litecoin on exchanges such as Coinbase and Kraken, which operate similar to the way Fidelity or Vanguard do. Except they’re less proven and less integrated with the mainstream financial system, and cryptocurrencies themselves carry no investor protection.
[Watch: Is bitcoin a scam?]
Then there are initial coin offerings, which are basically startups funded by investors that issue tokens people can buy—which may or may not end up having value in the future. Amid this gold rush, scams and failures seem certain, with some analysts likening the crypto world today to the Internet right before the dot-com crash that erupted in 2000.
“I think [the] analogy to the Internet is right on, in the sense that there will be an economic shakeout,” attorney Grant Fondo of the law firm Goodwin said at the Yahoo Finance All Markets Summit. “You hear these stories about people putting all their money behind one person or one project. That’s just a bad idea.”
[Watch: What backs bitcoin?]
Perhaps the worst fiasco in bitcoin’s short history was the collapse of the Mt. Gox exchange in Japan in 2013, which vaporized $460 million worth of bitcoin and other consumer assets. Could that happen here? Possibly. But there were warning signs that Mt. Gox was in trouble before it failed—exactly the reason Boring says anybody investing in cryptocurrencies needs to do their homework and know what they’re dealing with. “That increased level of opportunity,” she says, “also brings about an increased amount of responsibility on the individual consumer.”
Industry insiders remain confident enough to put their own money in cryptocurrencies. “I have more money in cryptocurrencies than in any formal retirement savings account out there,” Boring said. “I’m all in.” Do as she says, in other words, not as she does.
Confidential tip line: email@example.com. Encrypted communication available.
- 74 bitcoin questions, answered
- A bitcoin crash? Not even close
- Trump is changing your paycheck. Here’s how
- Government debt is exploding. Here’s the danger
- Trump’s stock-market mistake
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman