Why you can still lose it all in cryptocurrencies

·Anchor, Editor-at-Large
·5 min read

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Monday, November 22, 2021

Putting money to work in cryptocurrencies remains far from a normal investing exercise, which is something people with grand visions (note this number of people is growing as cryptos reach the mainstream) of getting rich off of dogecoin (DOGE-USD) or Shibu Inu (SHIB-USD) in under 12 hours need to be reminded of consistently. 

So allow me to offer that reminder today as bitcoin (BTC-USD) — the benchmark crypto — has been coming under its latest selling spell.

Buying a crypto — despite all the hype of them being an amazing asset class and must-own "things" for the next decade — is not like buying a share of stock in Starbucks or JPMorgan Chase. Am I simplifying things here? Perhaps, but again it's warranted as more individuals with no investing experience flock to crypto trading. 

With Starbucks or JPMorgan, you get quarterly earnings releases, earnings calls, investment bank presentations and media appearances by execs. You generally know how these large, well-known companies are doing financially and likely to do in the years ahead. Even with micro-cap companies (aka penny stocks) that are publicly traded, you get a peek at some form of financial statements. In many cases, management will even pick up the phone when you call them. 

But crypto is an entirely different ballgame with extreme periods of volatility (see bitcoin prices below, via a nifty chart compiled by my colleague Julie Hyman), no financial statements and no execs. It simply just exists, and thrives on hype and speculation and crumbles on any number of fears that could appear out of thin air. In other words, you could lose your shirt while investing in cryptocurrencies if you truly do not understand what you are signing up for. 

The losing your shirt aspect is only rising in probability as more sophisticated investors get involved in the crypto space and employ an array of trading tactics. Check out what CoinShares Meltem Demirors told us on Yahoo Finance Live about why cryptos still battle through pockets of extreme swings:

"One of the things we can't forget is crypto markets function differently than traditional markets. It's still challenging to access leverage. Traders particularly have to pay a funding raise to keep their options open, to keep their positions open. That can be really expensive. So you have to remember unlike traditional markets where there is a tremendous amount of leverage and borrowing you can get at very low costs, crypto leveraged cash is very expensive. The other thing is that sentiment tends to be rather volatile."

Who am I to argue with a pro like Meltem who has been in the crypto game for a while. You shouldn't argue either (especially if you have no idea what she was talking about above), just learn as much as you can on crypto before dabbling. That knowledge could make the difference between losing all of your capital or earning a nice return to go spend on something real like a watch, car, home or JPMorgan shares.

Odds and ends

The market: One of the downsides to earnings season is that you tend to get so myopically focused on individual companies you lose sight of what's happening in the broader market. To that end, here are a few things to track this week now that earnings madness is dying down. First, the small-cap Russell 2000 Index has underperformed the S&P 500 and Dow Jones Industrial Average these past two weeks. If retailers like Walmart and Target hadn't offered such bullish commentary on the holidays last week, I would have said the Russell is lagging out of fear of inflationary gas prices (among other things rising in price) crimping consumer demand very soon. The Russell has shed 4% in two weeks. 

Second, airline stocks such as Delta Air Lines, Southwest Airlines and JetBlue Airways continue to be smacked around (each stock lost about 6% on average last week) as oil prices stay elevated and COVID-19 concerns ratchet back up in Europe. It's hard to see these stocks working unless those worries subside, even if the holiday season is poised to be strong for domestic travel. 

And lastly, the Philadelphia Semiconductor Index (aka SOX) will open the holiday-shortened trading week at a record high. Hat tip to Nvidia and Qualcomm for helping to send the SOX to new heights. (Here's what the CEOs of Nvidia and Qualcomm recently told Yahoo Finance Live about their growth plans.)

Black Friday: I've been reminiscing about the good ol' days when I spent my Thanksgiving at a Subway inside a busy Walmart covering Black Friday (circa 2016). I only have fond memories of the holiday reporting hustle, which is going to look different this year (or similar to 2020) as retailers Best Buy, Costco, Walmart, Target and others will stay closed to give workers a much deserved break. What may also look different this week is how much people spend online and in stores when they do reopen for holiday gift seekers in relation to 2020. All indications point to a potential holiday spending blowout, fueled in large part by higher hourly wages and increased savings for households. 

Fix your eyes on a new consumer survey released by Goldman Sachs: "By income bracket, consumers with household incomes of $100k or greater have the biggest propensity to increase holiday spend, with 37% intending to spend more, meanwhile 47% of people with a household income of less than $50k plan to spend less. However, within this, the majority of respondents across all income brackets indicated the same or more spending plans. We also observed that consumers with children in their household bifurcate to indicating “more” or “less” spending, with 41% planning to spend more this year and 39% planning to spend less than 2020." 

That said, I will still be able to satisfy my appetite for adrenaline this Black Friday week. I will be reporting live from New York City's Herald Square Wednesday afternoon and Friday, a few special guests will also join me on Yahoo Finance Live. Come say hi, and bring me a Subway sandwich on whole wheat with turkey (no cheese or mayo). Old habits die hard.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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