Bitcoin and other cryptocurrencies are growing up and facing new scrutiny. Will they earn your trust?
They may lose their renegade image, but the Wild West is no place for average investors
- Cryptocurrencies are surging in popularity
- But they remain largely unregulated
- The government may take a more active role
Like a teenager forced into adulthood, cryptocurrencies are finally growing up – with plenty of drama along the way.
With investors having sunk an estimated $1.7 trillion into crypto, the Biden administration is reportedly taking a look at whether to further regulate digital currencies, a move that could rein in their renegade image.
In another sign that crypto is going mainstream, investors have taken note that crypto’s price gyrations appear to correlate with the milder ups and downs of tech stocks. The observation defies the image of crypto as cutting its own path, devoid of attachments to either stock markets or governments.
It may be no coincidence that the closer alignment between crypto and stock prices come as digital assets are being promoted more by the traditional financial establishment, no longer defying it.
Supporters say give crypto time to come into its own.
“For now, people don’t know what to make of blockchain assets and crypto” so coins trade in rough tandem to markets, said Ted Jenkin, a certified financial planner and CEO of oXYGen Financial. “Over time, it will be an uncorrelated asset,” parting ways with the markets.
As such, he said crypto is worth adding to portfolios as a hedge against more traditional investments. But he urges investors to be level-headed in choosing their coins and make them no more than 5% of their portfolios, similar to how they treat precious metals.
It’s easy to see why limiting exposure to crypto can be prudent move. The price of Bitcoin alone has fallen dramatically from its November high. A coin has ranged in value from $28,893 to $68,789 over the past year. It was trading Sunday at $38,144, reports Yahoo Finance..
Bitcoin’s troubles are just the latest in a series of gyrations that has made crypto synonymous with price volatility and a tough asset for many investors to understand.
There remain few places to spend Bitcoin and unlike stocks, its value is not usually tied to underlying assets like product sales or buildings and equipment. Since buyers can be anonymous, crypto has been the preferred medium of exchange in ransomware attacks and other criminal activity. U.S. Sen. Dianne Feinstein, D-Calif., last weekrequested federal agencies to report on how they track whether cryptocurrencies are used in drug or human trafficking.
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Investors lack protection
With little government oversight, some believe cryptocurrencies are susceptible to price manipulation through a process called “spoofing,” involving large trade orders that are placed with no intention of them being fulfilled with the hope of moving the price by drawing out trades from other investors.
Yet the number of cryptocurrencies continues to proliferate. A site that tracks cryptocurrencies and their prices, CoinGecko, reports that as of Sunday, it is tracking the prices of 12,388 cryptocurrencies that collectively have a market cap of $1.82 trillion. Of them, 40% of the market is held by Bitcoin and another 17% by second-place Ethereum.
Given the amount of investment in crypto and the potential impact its swings could have on the economy, the Biden administration is reported to be weighing new regulations that could help bring some order to the chaos.
Bloomberg News recently disclosed the Biden administration is preparing an executive order that could be released as soon as February that require federal agencies to look at their potential risks as well as the opportunities cryptocurrencies present. It also reported in December that U.S Sen. Cynthia Lummis, R-Wyo., is preparing legislation around cryptocurrencies.
Regulation might provide new underpinnings that boost the popularity of crypto.
“Regulation equals validation,” Jenkin said. “If cryptocurrency becomes regulated, it validates it is an asset that should be part of everyone’s portfolio.”
►Why did crypto lose so much? Uncertainty in traditional markets and Fed concerns, experts say
But governments around the world have generally viewed crypto suspiciously. The country first to adopt Bitcoin as its legal tender, El Salvador, drew a warning from the International Monetary Fund that its decision is ill advised and should be reversed.
“There are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities,” the IMF said last week.
Some of crypto’s biggest supporters have been young investors. It’s a generation that has never known a time without smartphones or the Internet, making the digital nature of crypto all the more appealing, notes Nick Casares, head of product at PolyientX, a platform for nonfungible token (NFT) projects. NFTs, aimed at allowing people to buy of digital assets, are often associated with cryptocurrencies.
“When you have young people coming from a perspective of everything is digital and everything is tied to an app….crypto feels like a more comfortable way to manage your personal resources,” Casares said.
Like many of its investors, crypto is still young, but as it matures, Casares predicts it will “fall in line as a subsection of the financial sector” and be less correlated to stocks.
Independent and freedom-seeking – much like adulthood.