If there’s money to be made from a trend, Goldman Sachs usually wants to be involved, and cryptocurrencies are no different. Indeed, a recent report from Goldman analysts Robert Boroujerdi and Jessica Binder Graham declares that “whether or not you believe in the merit of investing in cryptocurrencies (you know who you are), real dollars are at work here and warrant watching.” But what is the crypto currency risk and should one buy after such a huge rally? The answer is unclear, but value investors would likely be cautious.
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Goldman isn’t the only outfit that’s now starting to take Bitcoin and its peers seriously. As tensions between the United States and North Korea rise, some investors are looking to digital currencies as a safe haven, even though they are some of the most volatile currencies around. According to Ron Chernesky, chief executive officer of trading platform InvestFeed Inc., who spoke with Bloomberg earlier this week, investors are “transferring their funds into crypto currencies as they try to diversify their risk in case of a severe downturn in the market.” He goes on to say that the “space has gone from niche to more widely adopted with one of the main draws being that crypto currencies are seen as less correlated with other assets.”
But even though crypto currencies may be less correlated with other assets, it’s difficult to argue that they are a way of reducing risk.
Crypto Currency Risk Is Groes
Risk in the traditional sense is the danger of a permanent capital impairment. The chances of such an impairment from investing in an S&P 500 index fund, for example, is negligible. However, the likelihood of losing everything in Bitcoin are rising.
Last year, Reuters reported that a third of Bitcoin trading platforms had been hacked, and nearly half have closed in the half dozen years since they burst on the scene. Only last month the largest Bitcoin and Ether exchange in South Korea by volume, Bithumb, was hacked reportedly costing investors monetary losses of “billions of won” (1 billion won = $874,000).
As the value of the cryptocurrency market continues to grow, these hack attacks will likely only become more prevalent.
Not only are attacks becoming more common, but law enforcement agencies are the world also seem to be discovering new serious crypto currency frauds almost every month.
At the end of June, the Securities and Exchange Commission accused Renwick Haddow, a British citizen, who had been disqualified from serving as a company director in the United Kingdom, of running a scam seeking investment for the hot new business, Bitcoin Store. Then at the end of July, Alexander Vinnik was charged by a US grand jury for laundering $4 billion using virtual currency Bitcoin. Charges also included receiving funds from the failed Mt Gox exchange. And today in London, police have arrested a man on suspicion of setting up a boiler room to persuade people to invest in a non-existent crypto currency. Losses of £160,000 have so far been reported.
Granted, there have also been hundreds if not thousands of equity market scams over the years, but the lack of compensation victims of crypto currency fraud are receiving, coupled with the opaque nature of the exchanges, volatility of prices, lack of investor protection and outright fraud on an unregulated product means these assets come with significantly more crypto currency risk than equities, not less.