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Jul 18
2024

The Cryptocurrency Illusion: The Unseen Risk of Partaking in Digital Dreams

Cryptocurrency has gained popularity over the past decade, often touted as the future of finance and a revolutionary investment opportunity to some. However, beneath the dazzling allure of the possibility of high returns lies an often volatile and speculative market fraught with potential risks. Prudent investors beware, cryptocurrencies can wage war and cause potential destruction to your financial future.  

The Volatility Trap

Cryptocurrencies are notorious for their extreme price volatility.1 Such dramatic swings can be attributed to speculative trading, regulatory news, and market sentiment, which can create an unpredictable environment that resembles gambling more than investing. Even the so-called crypto “experts” advise only investing about 5% of an overall portfolio in cryptocurrency, citing the high volatility of cryptocurrency markets and the potential to lose it all.1

Unlike more traditional investment vehicles, which derive value from underlying businesses or cash flows, cryptocurrencies lack intrinsic value. Their worth is primarily driven by supply and demand dynamics, often fueled by hype and speculation rather than fundamental financial performance.2 This volatility makes it challenging to rely on cryptocurrencies for consistent returns or long-term success.

Regulatory Uncertainty

The regulatory landscape for cryptocurrencies is uncertain and still evolving. Regulatory actions can have immediate and profound impacts on cryptocurrency prices. For instance, China’s crackdown on cryptocurrency mining and trading in 2021 led to notable market disruptions.3 Inconsistent and unpredictable regulatory environments add another layer of potential risk for investors.

In the United States, while the Securities and Exchange Commission (SEC) has not banned the trading of cryptocurrency, they have made significant strides to enforce regulations consistent with other trading platforms.4 In 2024, the SEC brought 46 enforcement actions related to cryptocurrency against 124 defendants, the largest number in a decade.4

Moreover, the lack of regulatory oversight has made the cryptocurrency market a hotbed for fraud and scams. The Federal Trade Commission (FTC) warns investors to be cognizant of such scams and report popular tactics among scammers, according to the Federal Trade Commission, are individuals or businesses only accepting payment in cryptocurrencies, guarantees of profits or big returns, scammers pretending to be celebrities promoting cryptocurrencies, and online “love interests” requesting money through cryptocurrency, and more.5 Such incidents highlight the vulnerabilities and potential risks associated with investing in cryptocurrencies.

Environmental Concerns

Cryptocurrency mining, particularly Bitcoin, consumes vast amounts of energy, raising significant environmental concerns. The process of mining involves solving complex mathematical problems, which requires substantial computational power and, consequently, electricity. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin, the world’s largest cryptocurrency, consumes an estimated 150 terawatt-hours of electricity each year – equivalent to the country of Argentina, which has a population of 45 million people.6

This massive energy consumption contributes to carbon emissions and environmental degradation, making cryptocurrencies an unsustainable investment choice.7 Investors with a focus on environmental, social, and governance (ESG) criteria may find cryptocurrencies at odds with their values and investment goals.

Security Risks

The digital nature of cryptocurrencies can make them susceptible to cyberattacks and security breaches. The decentralized and often anonymous nature of these transactions can make it difficult to recover lost or stolen assets.8 Additionally, the irreversible nature of most cryptocurrency transactions means that errors or fraud can result in permanent financial loss.8 The high-profile hacks of exchanges like Coincheck or Bithub, where investors lost significant sums, underscore the security risks inherent in cryptocurrency investments.8

Lack of Consumer Protections

Traditional financial systems offer various consumer protections, including insurance on bank deposits and regulatory oversight of financial institutions. In contrast, the cryptocurrency market operates with minimal consumer protections. If an exchange is hacked or goes bankrupt, investors have little recourse to recover their funds. The decentralized nature of cryptocurrencies, while providing certain potential benefits, also means that there is no central authority to appeal to in cases of fraud or theft.8

Market Manipulation

The relatively low liquidity of many cryptocurrencies compared to traditional assets can make them more susceptible to market manipulation. Large trades or coordinated buying and selling by a small number of individuals can cause price swings.9 The infamous “pump and dump” schemes, where the price of a cryptocurrency is artificially inflated before being sold off by the manipulators, leaving ordinary investors with significant losses, are a testament to the potential risks of market manipulation in the crypto space.9

While the allure of potential high returns from cryptocurrencies can be tempting, cryptocurrencies remain a potentially risky investment option for investors. The speculative nature of cryptocurrencies contrasts sharply with a prudent portfolio. At Matson Money, we are committed that investors operate from academic investing principles that can help save them from speculating and gambling with their financial future.

Instead of getting swept up in the hype, investors can focus on three simple rules: own equities, diversify and rebalance. We are training and developing investors to be vigilant investors, to stay disciplined, and stick with the science of investing. If you want to learn more about academic investing principles to have confidence in your long-term investing strategy, join us for our breakthrough educational event, the American Dream Experience.

DISCLOSURES:

This content is based on the views, opinions, beliefs, or viewpoints of Matson Money, Inc.  This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.  

All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors.  Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.  

Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.    

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS 

Sources:

  1. Tambe, Nikita and Jain, Aashika. Why I s the Crypto Market Down Today? Forbes Advisor. Published June 10, 2024. Retrieved 13 June 2024 from https://www.forbes.com/advisor/in/investing/cryptocurrency/why-crypto-market-is-down/.
  2. Kelleher, John. Why Do Bitcoins Have Value? Investopedia. Published April 10, 2024. Retrieved 14 June 2024 from https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp. 
  3. John, Alun, Samuel Shen and Tom Wilson. China’s top regulators ban crypto trading and mining, sending bitcoin tumbling. Reuters. Published September 24, 2024 from https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrency-trading-2021-09-24/.
  4. SEC Continues to Regulate Cryptocurrency Through Record-High Enforcement Efforts. Published February 26, 2024. Retrieved 14 June 2024 from https://www.troutman.com/insights/sec-continues-to-regulate-cryptocurrency-through-record-high-enforcement-efforts.html#:~:text=SEC’s%20Cryptocurrency%20Enforcement%20Efforts&text=In%202023%2C%20the%20SEC%20brought,individuals%20and%2046%25%20were%20firms.
  5. What To Know About Cryptocurrency and Scams. Federal Trade Commission. Retrieved 14 June 2024 from https://consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams#scams.
  6. Bitcoin Network Power Demand. Cambridge Bitcoin Electricity Consumption Index, University of Cambridge. Retrieved 14 June 2024 from https://ccaf.io/cbnsi/cbeci
  7. Hinsdale, Jeremy. Cryptocurrency’s Dirty Secret: Energy Consumption. Published May 4, 2022. Retrieved 14 June 2024 from https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:~:text=Bitcoin%2C%20the%20world’s%20largest%20cryptocurrency,of%20Argentina%2C%20population%2045%20million.
  8. What to know about cryptocurrency and cybersecurity risks.  City National Bank. Retrieved 14 June 2024 from https://www.cnb.com/personal-banking/insights/cryptocurrency-cybersecurity-risks.html.
  9. Das, Lipsa. What is a Pump and Dump. Ledger Academy. Published November 22, 2023. Retrieved 14 June 2024 from https://www.ledger.com/academy/what-is-a-pump-and-dump-in-crypto.

Interested in learning more?

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    www.nobelprize.org 

    The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics, and generally regarded as the most prestigious award for that field.

    Markowitz, Harry.  “Portfolio Selection.”  Journal of Finance.  1952.

    Harry Max Markowitz is an American economist, and a recipient of the 1989 John von Neumann Theory Prize and the 1990 Nobel Memorial Prize in Economic Sciences. Markowitz is a professor of finance at the Rady School of Management at the University of California, San Diego.

    Efficient Market Hypothesis, first explained by Dr. Eugene Fama in his 1965 doctoral thesis.

    Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.

    Eugene F. Fama, 2013 Nobel laureate in Economic Sciences; is widely recognized as the "father of modern finance." His research is well known in both the academic and investment communities. He is strongly identified with research on markets, particularly the Efficient Market Hypothesis.

    FAMA/FRENCH FIVE FACTOR MODEL 

    Eugene F. Fama, Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, No. 2, (June 1992); Eugene F. Fama, Kenneth R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, No. 1, (February 1993); Eugene F. Fama, Kenneth R. French, “Profitability, Investment and Average Returns,” Journal of Financial Economics 82, No. 3 (December 2006); Eugene F. Fama, Kenneth R. French, “A Five-Factor Asset Pricing Model,” Journal of Financial Economics 116, No. 1 (April 2015);

    Three Factor Model

    Fama, Eugene F. and Kenneth R. French. “The Cross-Section of Expected Stock Returns,” Journal of Finance, 47, June 1992.

    Efficient Market Hypothesis

    Eugene F. Fama, “Random Walks in Stock Market Prices,” Financial Analysts Journal, September/October 1965.

    Modern Portfolio Theory

    Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. New York. Wiley. 1959. Print.

     

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    Equity Market Risk: Even a long-term investment approach cannot guarantee a profit or prevent a loss. Economic, market, political, and issuer-specific conditions and events, known as market risks, will cause the value of equity securities, and the investment strategies that own them, to rise or fall which will cause the value of your equity portfolio to rise or fall. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

    Foreign Securities and Currencies Risk: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the U.S. dollar or that a foreign government will convert, or be forced to convert, its currency to another currency, changing its value against the U.S. dollar).

    Emerging Markets Risk: Numerous emerging market countries have a history of, and continue to experience serious, and potentially continuing, economic and political volatility. Stock markets in many emerging market countries are generally relatively small, expensive to trade in and have higher risks than those in developed markets. Securities in emerging markets also may be less liquid than those in developed markets and foreigners are often limited in their ability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Frontier market countries are those that generally have smaller economies or less developed capital markets and, as a result, the risks of investing in emerging market countries are magnified in frontier market countries.

    Small Company Risk: Securities of small public companies with a total market capitalization (market value) of $300M to $2B are known as small-cap companies. Publicly traded companies with a total market capitalization (market value) of $50M to $300M are known as micro-cap companies.  Both small-cap and micro-cap companies are often less liquid than those of large companies which can make it difficult to sell the securities of small-cap or micro-cap companies at a desired time or price. As a result, small-cap and micro-cap company stocks may fluctuate relatively more in price. In general, these companies are also more vulnerable than larger companies to adverse business or economic developments and they may have more limited resources.

    Because of lower daily trading volumes, trading costs for small stocks are higher. Trading costs result from both direct commissions and the price movements caused by buying or selling shares.

    Value Investment Risk: Value stocks are stocks of publicly traded companies that tend to trade at a “value price” compared to a company’s financials. These stocks may perform differently from the market. Following a value-oriented investment strategy may cause client portfolios to underperform equity investment strategies.

    For more information, please see the Matson Money Form ADV Part 2A.

    Risks of Investing in International Equities

    Matson Money utilizes international equities in its investment strategies.  These asset categories are held by clients both directly and indirectly, with various sub-categories (large value, small value international, emerging markets, etc.).  Because the value of client investments with Matson will fluctuate, there is risk that you will lose money.  The following is a description of the principal risks of investing in international equities, including emerging markets:

    Equity Market Risk: Even a long-term investment approach cannot guarantee a profit or prevent a loss. Economic, market, political, and issuer-specific conditions and events, known as market risks, will cause the value of equity securities, and the investment strategies that own them, to rise or fall which will cause the value of your equity portfolio to rise fall. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

    Foreign Securities and Currencies Risk: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the U.S. dollar or that a foreign government will convert, or be forced to convert, its currency to another currency, changing its value against the U.S. dollar).

    Emerging Markets Risk: Numerous emerging market countries have a history of, and continue to experience serious, and potentially continuing, economic and political volatility. Stock markets in many emerging market countries are generally relatively small, expensive to trade in and have higher risks than those in developed markets. Securities in emerging markets also may be less liquid than those in developed markets and foreigners are often limited in their ability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Frontier market countries generally have smaller economies or less developed capital markets and, as a result, the risks of investing in emerging market countries are magnified in frontier market countries.

    International Small Company Risk: Securities of small public companies with a total market capitalization (market value) of $300M to $2B are known as small-cap companies. Small-cap companies are often less liquid than those of large companies which can make it difficult to sell the securities of small-cap companies at a desired time or price. As a result, small-cap company stocks may fluctuate relatively more in price. In general, these companies are also more vulnerable than larger companies to adverse business or economic developments and they may have more limited resources. Because of lower daily trading volumes, trading costs for small stocks are higher. Trading costs result from both direct commissions and the price movements caused by buying or selling shares.

    International Value Investment Risk: Value stocks are stocks of publicly traded companies that tend to trade at a “value price” compared to a company’s financials. These stocks may perform differently from the market. Following a value-oriented investment strategy may cause client portfolios to underperform equity investment strategies.

    For more information, please see the Matson Money Form ADV Part 2A.

    Risks of Investing in Small/Micro-Cap Stocks

    Matson Money utilizes both Small and Micro-cap asset categories in its investment strategies.  These asset categories are held by clients indirectly through mutual funds, with various sub-categories (large value, small value international, emerging markets, etc.).  Because the value of client investments with Matson will fluctuate, there is risk that you will lose money.  The following is a description of the principal risks of investing in small and microcap securities:

    Equity Market Risk: Even a long-term investment approach cannot guarantee a profit or prevent a loss. Economic, market, political, and issuer-specific conditions and events, known as market risks, will cause the value of equity securities, and the investment strategies that own them, to rise or fall which will cause the value of your equity portfolio to rise or fall. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
    Small Company Risk: Securities of small public companies with a total market capitalization (market value) of $300M to $2B are known as small-cap companies. Publicly traded companies with a total market capitalization (market value) of $50M to $300M are known as micro-cap companies.  Both small-cap and micro-cap companies are often less liquid than those of large companies which can make it difficult to sell the securities of small-cap or micro-cap companies at a desired time or price.  As a result, small-cap and micro-cap company stocks may fluctuate relatively more in price. In general, these companies are also more vulnerable than larger companies to adverse business or economic developments and they may have more limited resources.

    Because of lower daily trading volumes, trading costs for small stocks are higher. Trading costs result from both direct commissions and the price movements caused by buying or selling shares.

    Value Investment Risk: Value stocks are stocks of publicly traded companies that tend to trade at a “value price” compared to a company’s financials. These stocks may perform differently from the market.  Following a value-oriented investment strategy may cause client portfolios to underperform equity investment strategies.

    Liquidity Risk: Generally speaking, small and micro-cap stocks are subject to greater liquidity risk. When liquidity risk is elevated, the security being purchased or sold becomes more expensive than a security that is readily available in the marketplace.

    Volatility Risk: Generally speaking, small and micro-cap stocks are subject to greater volatility risk.  When volatility risk is elevated, the price of a security may fluctuate rapidly in a short period of time.

    Market Uncertainty: Small and micro-cap stocks are subject to market uncertainty. Factors such as geopolitical disturbances, economic fluctuations, politics, international relations, and various business cycles all produce market uncertainty.  Market uncertainly does inform the stock price.

    Risks of Investing in Fixed Income 

    Matson Money utilizes fixed income asset categories in its investment strategies. These asset categories are held by clients indirectly through mutual funds, with various sub-categories (large value, small value international, emerging markets, etc.).  Because the value of client investments with Matson will fluctuate, there is risk that you will lose money.  The following is a description of the principal risks of investing in fixed income cap securities:

    Market Risk: Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of fixed income securities owned by Matson portfolios to rise or fall. As a result, the value of your portfolio may rise or fall if it includes fixed income securities.

    Credit Risk: Credit risk is the risk that the issuer of a security may be unable to make interest payments and/or repay principal when due. A downgrade to an issuer’s credit rating or a perceived change in an issuer’s financial strength may affect a security’s value, and thus, impact the investment portfolio’s performance. Government agency obligations have different levels of credit support and, therefore, different degrees of credit risk. Securities issued by agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the United States, such as the Federal Housing Administration and Ginnie Mae, present credit risk that is generally lower than other securities issued by other state or local agencies, or other public or private entities.  Other securities issued by agencies and instrumentalities sponsored by the U.S. Government, that are supported only by the issuer’s right to borrow from the U.S. Treasury, subject to certain limitations, and securities issued by agencies and instrumentalities sponsored by the U.S. Government that are sponsored by the credit of the issuing agencies, such as Freddie Mac and Fannie Mae, are subject to a greater degree of credit risk. U.S. government agency securities issued or guaranteed by the credit of the agency still involve a risk of non-payment of principal and/or interest.

    Interest Rate Risk: Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. When interest rates rise, fixed income security prices fall. When interest rates fall, fixed income security prices rise. In general, fixed income securities with longer maturities are more sensitive to changes in interest rates.

    Foreign Securities and Currencies: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the U.S. dollar or that a foreign government will convert, or be forced to convert, its currency to another currency, changing its value against the U.S. dollar).

    Foreign Government Debt Risk:  The risk that: (a) the governmental entity that controls the repayment of government debt may not be willing or able to repay the principal and/or to pay the interest when it becomes due, due to factors such as political considerations, the relative size of the governmental entity’s debt position in relation to the economy, cash flow problems, insufficient foreign currency reserves, the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies, and/or other national economic factors; (b) governments may default on their debt securities, which may require holders of such securities to participate in debt rescheduling; and (c) there is no legal or bankruptcy process by which defaulted government debt may be collected in whole or in part.

    For more information, please see the Matson Money Form ADV Part 2A.

     

  • Index Disclosures

    References to Indices within text

    Investors cannot invest in a market index directly, and the performance of an index does not represent any actual transactions.  The performance of an index does not include the deduction of various fees and expenses which would lower returns. Advisory fees charged to Matson Money clients, whether directly or indirectly through a mutual fund, are described in Matson Money’s Form ADV Part 2A and Form CRS, available at www.matsonmoney.com.

    Data prior to the launch date of the index is hypothetical back-tested data (i.e. calculations of how the index might have performed over that time period had the index existed). There are frequently material differences between hypothetical back-tested performance and actual results. Past performance -- whether actual or back-tested -- is no indication or guarantee of future performance. Hypothetical back-tested performance is used by Matson for educational purposes only and is intended only to demonstrate how the market has historically behaved. Matson does not configure, alter, or otherwise use hypothetical back-tested information in an attempt to artificially enhance or impair performance. Matson only uses hypothetical performance information that is relevant to the financial situation and investment objectives of the recipient as communicated to Matson.

    • S&P 500 Index.

    The S&P 500® Index is widely recognized as representative of the equity market in general.   The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.

     

  • Awards

    Receipt of an award does not acknowledge any particular skill or expertise on behalf of recipient and should not be used in determining whether to enter into any agreement with Matson Money, Inc. Please consider the disclosure of criteria for each award shown.

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