Investment or speculation? – Sterling Journal-Advocate

With cryptocurrencies so much in the news, you might be wondering if you should invest in them. But invest may not be the right word because, in many ways, cryptocurrencies, or crypto for short, are more speculation than investment.

But whats really the difference between a speculator and an investor? Probably the main factor is the differing views of time. A true investor is in it for the long term, building a portfolio that, over many years, can eventually provide the financial resources to achieve important goals, such as a comfortable retirement. But speculators want to see results, in the form of big gains, right now and theyre often willing to take big risks to achieve these outcomes.

Theres also the difference in knowledge. Investors know that theyre buying shares of stock in a company that manufactures products or provides services. But many speculators in cryptocurrency dont fully comprehend what theyre buying because crypto just isnt that easy to understand. Cryptocurrency is a digital asset, and cryptocurrency transactions only exist as digital entries on a blockchain, with the block essentially being just a collection of information, or digital ledgers. But even knowing this doesnt necessarily provide a clear picture to many of those entering the crypto world.

In addition to time and understanding, two other elements help define cryptocurrencys speculative nature:

Volatility Cryptocurrencies are subject to truly astonishing price swings, with big gains followed by enormous losses sometimes within a matter of hours. Whats behind this type of volatility? Actually, several factors are involved. For one thing, the price of Bitcoin and other cryptocurrencies depends heavily on supply and demand and the demand can skyrocket when media outlets and crypto celebrities tout a particular offering. Furthermore, speculators will bet on crypto prices moving up or down, and these bets can trigger a rush on buying and selling, again leading to the rapid price movements. And many purchasers of crypto, especially young people, want to see big profits quickly, so when they lose large amounts, which is common, they often simply quit the market, contributing to the volatility.

Lack of regulation When you invest in the traditional financial markets, your transactions are regulated by the Securities and Exchange Commission (SEC), and the firms with which you invest are typically overseen by the Financial Industry Regulatory Authority (FINRA). Other agencies are also involved in regulating various investments. These regulating bodies work to ensure the basic fairness of the financial markets and to prevent and investigate fraud. But cryptocurrency exchanges are essentially unregulated, and this lack of oversight has contributed to the growth of scam exchanges, crypto market manipulation, excessive trading fees and other predatory practices. This Wild West scenario should be of concern to anyone putting money in crypto.

The cryptocurrency market is still relatively new, and its certainly possible that, in the future, crypto can become more of an investment and less of a speculation. In fact, Congress is actively considering ways to regulate the cryptocurrency market. But for now, caveat emptor let the buyer beware.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, Member SIPC. Ann Bowey is an Edward Jones financial advisor in Sterling.