Even with Bitcoin's Price Jump, Know the Risks
Cryptocurrencies have recently seen a broad resurgence in price, as Bitcoin exchange-traded funds (ETFs) hit the market in mid-January and traders placed bullish bets that demand would outpace supply. Amid a backdrop of investors anticipating multiple interest-rate decreases this year, risky assets in general look relatively more attractive than they have over the past couple years, providing tailwinds to the crypto industry.
Despite the price increases, potential crypto buyers should be aware of the underlying risks posed by this asset class. For starters, the values of cryptocurrencies are generally not supported by discounted expected future cash flows, as in the case of stocks and bonds. They're also not supported by the demand for required tax payments, as is the U.S. dollar, the euro, and the Japanese yen, along with many other sovereign currencies.
Additionally, several instances of blatant fraud have impacted crypto buyers, most notably the collapse of FTX, the bankrupt cryptocurrency exchange formerly run by Sam Bankman-Fried. The nascent and largely untested nature of the industry has proven to be fruitful ground for fraudsters and an immense challenge for regulators and consumer protection advocates.
While seeing a particular asset price spike upward can be tempting, investors should be aware of the acute financial and regulatory risks associated with an asset purchase.
- Tony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management
