Celebrities push cryptocurrencies, but fans carry all the risk — Quartz

Matt Damon walking down a white lane talking about what makes someone brave. Climbers of Mount Everest are brave. The Wright brothers were brave. Astronauts, too. These adventurers and entrepreneurs are brave because they “embrace the moment and commit”.

“Wealth favors the brave,” said the actor with a nod.

Damon sells services to Crypto.com, a Singapore-based cryptocurrency exchange that recently spent $700 million dollar To put her name on the Los Angeles Lakers circuit. He’s not the only celebrity hanging around Bitcoin. Tom Brady is a spokesperson for cryptocurrency exchange FTX, TikTok star Charli D’Amelio advertises for Gemini, and Kim Kardashian pushed lesser-known cryptocurrency EthereumMax to 276 million followers on Instagram in May.

These encrypted ads are everywhere. Facebook recently reversed its longstanding ban on crypto ads. Crypto.com and FTX are running during this year’s Super Bowl broadcast (30-second ads cost $6.5 million this year, the Wall Street Journal reports). , gets something right: You must be brave to invest in cryptocurrency because it is one of the most volatile and unregulated assets available to regular investors.

Is crypto a smart investment?

Crypto.com ad tells viewers to be brave. And if courage entails investing in assets with little or no transparency, cryptocurrency investments really are a profile in courage. In general, US securities laws require companies to disclose important information about stocks and other financial products including official, financial results and forecasts of what lies ahead. Investors have legal recourse if they have been lied to or otherwise defrauded. None of these apply to cryptocurrencies.

At most, many crypto projects have “white papers” outlining their purpose: Bitcoin is meant to be used for peer-to-peer financial transactions, and Ethereum was created to host decentralized software. But the coins linked to this blockchain cannot transfer fragmented ownership in a company or else they become securities. (In 2018, the US Securities and Exchange Commission cracked down on initial coin offerings, or ICOs, after deciding that they represented unregistered securities.)

However, cryptocurrencies have become a very popular investment for speculators – not just retail investors. The crypto market has been flooded with institutional investors in recent years including hedge funds, pension funds, and endowments. Banks and venture capitalists are also digging in.

Since the beginning of March 2020, the price of Bitcoin has almost quadrupled to $43,118, while the price of Ether has increased by 10 times. And this is the returns: $1,000 invested in bitcoin in March 2020, it would be worth $5,000 today. A low-risk investment like the Fidelity 500 Index Fund, which tracks the S&P 500 index, only gained $1,577 at the time.

Cryptocurrency risks

“[Crypto] “Its orders of magnitude are more risky than anything else in the stock market,” said Ishwar Venugopal, a professor of finance at the University of Central Florida, mainly because of the lack of financial transparency and legal accountability that comes with regulated securities. He likened investing in cryptocurrency to being an angel investor in an early stage startup knowing that your investment could go to zero. As for cryptocurrency investors, he said, “The risk stems from a lack of information, misinformation, and speculation.”

Venugopal said the most dangerous crypto products have no white paper or any real commercial purpose. Meme coins like Dogecoin and Shiba Inu have become the 12th and 13th most valuable digital currency by market capitalization (in no small part due to a tweet by another celebrity, Tesla CEO Elon Musk).

Musk’s tweet is significant because the price of crypto assets often has no correlation with financial performance. A recent study from Yale University and the University of Rochester found that cryptocurrency prices are primarily driven by two factors: trading momentum and investor interest. Noise, in other words. The price of the cryptocurrencies in the study – Bitcoin, Ether and Ripple – was not correlated with movements in traditional asset classes such as stocks, currencies and commodities.

How to add crypto to your wallet

Should a Responsible Retail Investor Invest in Cryptocurrencies? While network adoption and institutional investment may reduce investment risk, retail investors must remain extremely cautious. Even financial planners struggle to advise clients on investing in cryptocurrencies and risks, but many advise putting no more than 5% of an individual’s investment portfolio in cryptocurrencies.

Caitlin Cook, community leader for Onramp Invest, a software company that gives financial planners access to the crypto markets, said planners and investors need to understand the volatility of the crypto market and set the right budget if they want to invest.

“If you see a 30% drop in cryptocurrencies in a day, can you handle that?” Cook asks. “Personally, I firmly believe that you shouldn’t put more into this than you can handle no matter how optimistic you are in space.”