For the past decade, cryptocurrency has been a recurring subject in the world of finance. Even today, it continues to baffle, amaze, and frustrate people. While it has been lauded for its innovation in the financial sector, recent events have brought its hindrances to light. That is not to say that its shortcomings have been thoroughly dismissed or ignored. When going over the pros of crypto, one must always mention the cons as well. However, now more than ever is the public starting to question the validity of crypto’s “ideal alternative” image.
Financial experts are caught in this discourse due to being flooded with questions regarding digital currency. Is it a safe investment in the long run? Is it stable enough? How exactly does it work? It seems that, regardless of the hype, cryptocurrency creates a wide variety of concerns. There are some who worry that cryptocurrencies, such as Bitcoin, are a bubble and are risky investments. Others believe it is easily vulnerable to fraud.
Among those with these concerns are the financial experts themselves.
Mining creating volatility
Some experts have reservations when it comes to mining, particularly bitcoin mining. Technically speaking, this is the only method of introducing new currencies to the marketplace. The process is carried out by “miners” who utilize expensive software to solve various math problems. Once they solve the problems, they will acquire the currency.
Mining is inherently difficult, so there is a sense of assurance to Bitcoin users that the odds of a massive supply shock in the digital market are slim. With that said, the method of bitcoin creation causes a huge problem. In essence, it gives miners the idea to hoard the currency once they acquire it. This incentivization is one of the leading causes of Bitcoin’s infamous price volatility, as is the fact that it is not asset-backed. Without the support of a stable asset, price fluctuations are as erratic as they are troublesome.
A potential solution for this solution comes in the form of asset-backed crypto. Stablecoins and gold-backed crypto are digital currencies that essentially receive support from assets that are comparatively more stable in value and price. Therefore, investors can invest in digital currency without dealing with the frightening ambiguity of market alterations.
FOMO taking control
When cryptocurrency was rising in popularity, there was an influx of novices diving headfirst into it without understanding how it works. This is common for a lot of innovation but doing so with crypto can generate disastrous results. Naturally, financial experts find this recklessness concerning.
The Mental Game of Trading author, Jared Tendler, mentions that it is important to be aware of the Dunning-Kruger Effect. This is essentially the tendency of performers with poor skills to “overestimate their abilities.” In the context of the crypto market, this is when investors and/or traders lacking substantial experiences become overconfident. Tendler elaborates on this by saying that doing so will make them susceptible to critical losses. The results will likely be unsuccessful, not to mention potentially harmful.
Excessive speculation and hype
Financial experts who are strongly against cryptocurrency cite their concerns with the hype and speculations surrounding digital cash. According to Applied Capital financial advisor, Michael Shea, the speculation and hype regarding the currency is quite massive. This garners lots of attention, which in turn significantly increases the prices.
Other experts compare crypto trading to gambling primarily due to the lack of pattern in both the rise and fall of their value. Some continue to recommend traditional investing (ex. stocks, IRAs, 401(k), index funds, and money market funds) because they deem crypto as too risky or unstable.
The general consensus among experts
Generally speaking, experts are split on whether investors should dabble in crypto. However, a common piece of advice is to remain cautious and know both your risk tolerance and your finances’ overall health.