(Bloomberg Markets) — Cryptocurrencies are back, at least if you ask crypto believers. The US Securities and Exchange Commission has finally approved bitcoin exchange-traded funds — reluctantly, and with a strong push from the courts. Renewed investor enthusiasm in risky assets such as technology stocks appears to have affected tokens as well. If you bought Bitcoin at the height of the crypto winter at the end of 2022, it would rise by more than 180%. You have the right to brag
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But for the rest of us, who may feel shades of the age-old fear of missing out, discussing survivor bias is in order. The prices of some large currencies like Bitcoin and Ether do not provide a complete picture of what cryptocurrency traders have experienced. Imagine an investor entering the world of cryptocurrencies in 2021: Sam Bankman-Fried's FTX exchange would have seemed like a reasonable place to hold these coins. Alongside Bitcoin, there were 12,000 smaller altcoins that could be used, many of which are now dead or illiquid, the specter of a rampant trading trend that made tokens appear more valuable than they actually were.
A cryptocurrency enthusiast may also have followed famous investors like Mike Novogratz of Galaxy Digital Holdings Ltd. In the Luna token that was popular at the time or bought the stablecoin associated with it, TerraUSD – both of which have since collapsed, with founder Do Kwon facing fraud charges. Meanwhile, many now-bankrupt lending platforms have offered ways to earn significant returns on digital assets. Non-fungible tokens — digital assets largely associated with virtual cartoon images — briefly seemed cool enough to trade for thousands or even millions of dollars. They still trade, but at a relatively cheap price. In short, there were countless ways to evaporate wealth.
Even buying and holding bitcoin — HODLing, the crypto language for holding on to an investment no matter the cost — would have been difficult over the past couple of years. Since February 2022, the price of the coin has risen from around $44,000 to around $48,000 today. But the journey between them was fraught with risks – it fell to $15,500 when FTX collapsed. Cryptocurrency investors have experienced much more volatility than you would see in stocks or bonds, reaffirming the narrative that digital tokens are not for the faint of heart. “If I had to sum it up in one word, it would be stressful,” says Craig Erlam, a senior market analyst at foreign exchange brokerage Oanda Corp. “We're back where we started, but the journey in between has been very eventful.
Nikita Fadeev, head of cryptocurrency hedge fund Fasanara Digital, says almost everyone he knows in the space has been affected by the industry's woes, either by betting on assets that have fallen or by lending money to trading firms like Genesis, which went bankrupt after lending. To another hedge fund with exposure to TerraUSD and Luna. “Diversification is really key, because you never know who might land, no matter how polished or how well-funded they are,” Fadeev says, noting that both Luna and FTX looked “really strong” before their demise.
In hindsight, diversification is unlikely to have saved you if you were willing to overlook red flags about those projects, says Molly White, a cryptocurrency skeptic and author of the newsletter Citation Needed. TerraUSD and Luna promised buyers a 20% return, while FTX relied on a cozy relationship with sister trading platform Alameda Research – issues that should have immediately set off alarm bells for anyone conducting basic due diligence. “People are generally willing to write off a lot of red flags in the industry by saying, ‘Well, this is how cryptocurrencies work,'” White says. “Diversification is harder than people think, because the level of interconnectedness between companies is huge.”
Despite all this drama, the real-world utility of digital assets remains unclear, and blockchain technology is largely absent from most payment systems. Native cryptocurrency traders are typically drawn to the drama of tokens' ups and downs, but the lack of fundamental value to rely on makes selling them more difficult for those in traditional markets. Whether it is a mistake to invest in it may depend on your expectations. “We're still talking about an incredibly speculative instrument, so I wouldn't even call them bugs,” Erlam says. “The only mistake you can make in cryptocurrency is to use money you cannot afford to lose and expect to make big gains.”
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