A word to the wise for you young investors looking to profit from ongoing volatility in the cryptocurrency market: That strategy comes with serious financial risk.
Yes, that warning could apply to investors of any age, but it’s worth emphasizing to millennials who are more likely to think a volatile financial market offers a quick path to profits, according to a recently released survey on investing by the American Institute of CPAs (AICPA), the industry trade group for professional accountants.
The survey found nearly half of U.S. adults believe a volatile market is an easy way to make a profit. Millennials are especially enthusiastic about a short-term buying and selling strategy: Sixty-two percent surveyed think it’s profitable versus 55 percent of Gen Xers and 37 percent of baby boomers. It could be a risky approach to take in the digital currencies market, however, which so far this year has seen its market cap fall from $598.5 billion to $234.9 billion, according to the AICPA.
Do Your Homework
“Cryptocurrencies may be new and may be exciting, but every dollar you put to work in an investment, be it in a cryptocurrency or a share of stock, can be impacted by market volatility and can lose value,” Sean Stein Smith, CPA member of the AICPA’s National CPA Financial Literacy Commission, tells ThirtyK.
The survey also found nearly half of Americans aren’t familiar with cryptocurrency, and three out of 10 involved in household investment decisions say they never research investment strategies and potential investment opportunities, even as one-third say they typically make high-risk investments. Many millennials have yet to experience a bear market as adults, lacking firsthand experience of steep downturns.
Stein Smith says the approach toward investing in the digital currencies market should mirror the approach taken with any other investment. He advises careful research, understanding one’s risk tolerance, and not panicking during market selloffs. Those are “three core principles that should always be applied to any investment strategy,” he says.
In a press release, Greg Anton, CPA, chairman of the AICPA’s National CPA Financial Literacy Commission, touted the benefits of a well-researched and properly diversified portfolio.
“Crypto is the same as other new asset classes,” says Gina Heng of the Marvelstone Group. “The opportunity for an upside is there. But don’t put all your eggs in.”
Investing for the Long Term
Jimmy Song, a bitcoin developer, educator and entrepreneur based in Austin, Texas, agrees there’s a cautionary tale in survey results.
When trading on volatility, he tells ThirtyK, individuals incorrectly assume they’re better than average, just as they overrate their senses of humor or poker skills. “But that’s simply not possible mathematically,” he says. “For every winner, there is a loser.”
Song says that looking past current volatility, over the long term cryptocurrencies perform well. With digital currencies, he isn’t convinced diversification is necessary. “If bitcoin (BTC) is hard money, which is the investment thesis that I have and many in the community have, you don’t need portfolio diversification,” he says. That said, there is some truth to time determining an investment’s relative risk, he adds.
Gina Heng, co-founder and CEO of the Marvelstone Group, a private investment group based in Singapore, and founder of Miss Kaya, a money management tool for women, tells ThirtyK that “Crypto is the same as other new asset classes. The opportunity for an upside is there. But don’t put all your eggs in.”
Heng advises making investing in digital currencies a regular part of one’s investment strategy if the belief is the market will see long-term growth. One option for the long haul would be to put 5 percent to 10 percent of one’s monthly income in a crypto portfolio for five to 10 years, she says. Another investment approach would be to use “small money,” expendable money that’s not borrowed or needed in the short term, to speculate, she says. “If it works, it is good,” she says. “If not, you won’t lose your mind.”
Speculating in ‘Cryptoland’
Alex Mashinsky, a blockchain entrepreneur and founder of Celsius Network, tells ThirtyK that “because crypto can be more volatile than most asset classes, it’s very hard to time. Plenty of speculators who came to find riches in ‘cryptoland’ are now fleeing back home to ‘fiatland’ empty-handed.”
He suggests millennials buy at several intervals, trying to create a base price, rather than guessing when to put all their money to work. One must have conviction, technical and business reasons to support one of the more than 140 current blockchains or more than 3,000 cryptocurrencies vying for mass adoption, he adds.
Stein Smith urges investors to do their due diligence. “Any potential crypto investor should realize that not every cryptocurrency is the same,” he says. For example, Twitter and Microsoft are both technology companies, but few investors would say they have a similar investment profile.
“Cryptocurrencies are no different,” he says, “and every addition to your investment portfolio should be weighed, both individually and alongside broader market conditions.”