I bet many of you can remember your parents or grandparents at one point or another saying, "if it sounds too good to be true, it probably is." Cryptocurrency has a relatively short history relative to traditional investments. Bitcoin is generally considered to have been the first cryptocurrency introduced in 2009. Bitcoin was revolutionary because it is considered the first cryptocurrency to combine blockchain record-keeping technology, user privacy, and decentralized control, all with built-in security. .
The value of a single Bitcoin topped $1000 for the first time in 2014 and hit an all-time high of just over $68,000 in November 2021. Wow, that's quite a return for your dollar! As popular culture began to write more about the digital currency, more investors and tokens or coins entered the market. Ethereum, Tether, Dogecoin, and USD Coin to name a few.
As with many things that show extraordinary benefits, everyone wants to get in on the action. This often happens when the lottery hits odds of over $400 million and we all run out to buy a ticket. The difference is that most of us understand the odds of buying that winning ticket. Investing in Cryptocurrencies seems to be a bit different. Many people involved seem to think that cryptocurrency is just an alternative to traditional stocks and bonds. And why not put some money into crypto with the potential for a big payout?
Let's look at some real numbers. For someone who invested money in Bitcoin in 2014 at $1,000 per coin, that coin is currently worth $16,836, an average return of 16.97%. Compared to the inflation-adjusted stock market return over the past decade of 14.15%, the crypto investor is ahead by about 3%. But just looking at the numbers doesn't tell the whole story.
In 2014, the year Bitcoin first topped $1,000 per coin, one Bitcoin exchange, Mt. Gox, crashed and investors lost 850,000 coins that never recovered. These coins would be worth approximately $14.3 billion today. The Squid Game coin, named after the hit Netflix series, hit the cryptocurrency market around October 2021 and sold for pennies on the dollar. The price rose to a peak of over $2,800 per coin, but there was a problem: investors couldn't sell their Squid Game tokens, and on November 1, 2021, $3.36 million worth of Squid Game Coin was withdrawn by its creators. and the coin because without value. The latest FTX scandal resembles the Enron scandal of 2001 and is costing investors millions.
So here are some things about cryptocurrencies that we all need to remember. First, unlike traditional stocks and bonds, there is little to no regulation associated with cryptocurrencies. The Securities and Exchange Commission (SEC), while likely to become the regulator for cryptocurrencies, is currently not in that position. The IRS continues to consider cryptocurrency trading a taxable event, and scrutiny of these exchanges will increase in my opinion. Second, there is substantial risk associated with cryptocurrency. This would be true for any new asset on the market. The number of Initial Public Offerings (IPOs) that fail is a staggering 80%, but we usually only hear about the winners. Third, cryptocurrencies are currently being advertised on social media and through other unconventional sources targeting young people in many cases. The idea in many of these ads is that it's the next big thing; It can be great if you own crypto, it would be unconventional and you can make money to boot. This is not the same boring financial services ad that has the legal fine print at the bottom.
As a new year begins, it is a good time to reflect on the lessons learned from the past year. The lessons of 2022 are that what goes up must eventually come down, Ponzi schemes and fraud still exist, and when you invest for your future, boredom is good. As our grandparents used to say, โif it sounds too good to be true, it probably isโ.
