Many people are excited about investing in cryptocurrency (also known simply as crypto), which has become a major investment sector over the past decade. However, it has been a wild ride recently, with major cryptocurrencies like Bitcoin and Ethereum losing more than 50 percent of their value this year. A proposed bill in Congress would put crypto trading under the regulations of the Commodity Futures Trading Commission (CFTC), which regulates the trading of commodities like gold, silver, oil, and gasoline. Members of Congress are worried that many investors know little about the risks of crypto investing and that crypto trading platforms are not prepared to handle high volumes of trade, potentially running out of money.
Since cryptocurrencies are not legal tender, crypto platforms – and the estimated 16 percent of Americans who have either invested in or used cryptocurrency – are not protected by the U.S. government the way banks are. If your platform goes bankrupt or your crypto wallet gets hacked, there is no equivalent of the FDIC (Federal Deposit Insurance Corporation) to insure your money. Also, since many investors know little about crypto, they are likelier to fall for schemes and scams involving fake currencies and/or platforms. Many may think that buying units of crypto has the same protections and stability as banking or buying shares of stock, which it does not.
How Does Crypto Work?
Cryptocurrencies, commonly known as crypto, are digital currencies that are not controlled by any government. They are popular with investors because they cannot inflate, or lose value, due to a mathematical limit on how much of a cryptocurrency can exist. They are also decentralized and operate using blockchain, which records all transactions and is open to all users. This prevents hacking and theft, meaning that cryptocurrencies do not inflate and, theoretically, cannot be hacked or stolen remotely (but, because cryptocurrency is often stored in digital wallets like flash drives, these wallets can be stolen and the currency used). Blockchain also allows people to send cryptocurrency to each other directly, without using banks.
Although the first digital currency was created in 1990, the most popular cryptocurrency, Bitcoin, was invented in 2008. Its value went from virtually nothing (less than a penny) to roughly $69,000 by the time it peaked in 2021. Today, many popular cryptocurrencies besides Bitcoin, including Ethereum and stablecoins, are pegged to the value of the U.S. dollar, like Tether and USD Coin. It is important to note that cryptocurrencies are not legal tender currencies, meaning they are not the same as U.S. currency. Although some businesses may accept Bitcoin or other cryptocurrencies as payment, cryptocurrencies are commodities (things) like gold or silver. The value of non-pegged cryptocurrencies can rise and fall based on consumer demand, similar to the price of an ounce of gold or silver.
Why Crypto is in the News So Much
Because cryptocurrency was designed as a replacement for legal tender government-produced currency, it has intrigued people who are worried about government intervention in the economy and inflation (declining purchasing power of money). In addition to being non-inflationary due to their mathematical limit, cryptocurrencies are also popular because they cannot be confiscated by the government for taxation the way money in banks can. For those who do not trust the banking system, Internal Revenue Service (the federal tax-collection agency), or inflation, cryptocurrency promises to be a convenient alternative to U.S. currency.
But, despite crypto’s popularity and pop culture appeal, it crashed in 2021. Many retail investors (individual investors) had put much of their investment money into crypto, meaning they lost lots of money. With Bitcoin at about a third of its peak value, some members of Congress want to ensure that cryptocurrency trading (buying and selling) is regulated like the stock market to ensure stability and fairness. There are fears of individuals putting their life savings into crypto and then losing it all.
Should I Invest in Crypto?
Currently, cryptocurrency is considered a riskier investment than stocks. This high-risk investment could make you rich, but you could also lose your entire investment. One issue with crypto, compared to stocks, is that crypto’s value is entirely based on consumer demand. While demand for a stock is heavily influenced by a corporation’s reported financial data, including revenue and profit, there are no such financial statements for cryptocurrency – it doesn’t sell a product or generate revenue. As a commodity rather than a security (share of stock), crypto is a thing and not a unit of ownership that entitles the bearer to a share of a company’s profits.
Is Crypto Here to Stay?
The popularity of cryptocurrency could make it a good investment in the long term, but for now, it is considered a high-risk investment. Despite its rough 2021, crypto has much support from widely-known investors, including billionaires like Mark Cuban. They argue that we are simply in crypto winter, with winter referring to a period of dormancy before the investment “wakes up” and increases in value again. This crypto winter is like the Dot-Com Bust of 2000, with cryptocurrency emerging stronger than ever after a brief crash drives less competitive options from the market. Thus, the 2022 crypto crash is just a period of temporary growing pain before the investment goes truly mainstream.
Some think crypto will eventually be a good investment, but the crypto winter will be lengthy. Others think crypto will fizzle out in the long run because governments will restrict its use and sellers will not come around to accepting cryptocurrency payments as originally anticipated. Some businesses have indeed stopped accepting crypto as payment during this current crash…will they go back to accepting it when values start to rise again? If you have a little money you’re willing to invest on a gamble, it could pay off big if crypto becomes popular again!