Matt Damon’s advertisement for Crypto.com, a Singapore-based cryptocurrency exchange, encourages viewers to be “courageous”. Investing in cryptocurrency requires courage and risky investor profile, since it is one of the most unpredictable and unregulated investments available to normal investors.
Matt Damon talks about what makes someone brave as he walks along a white corridor. Climbers of Mt. Everest are courageous. The Wright Brothers exhibited courage. Astronauts are as well. These entrepreneurs and explorers are courageous because they “enjoy the present and commit.”
“Fortune favors the courageous,” the actor replies with a nod.
Damon is promoting Crypto.com, a Singapore-based cryptocurrency exchange that just paid $700 million to brand the Los Angeles Lakers arena with its name. He is far from the only celebrity to promote Bitcoin. Tom Brady is a spokesman for the cryptocurrency exchange FTX, Charli D’Amelio of TikTok promotes the exchange Gemini, and Kim Kardashian promoted the lesser-known cryptocurrency EthereumMax in May to her 276 million Instagram followers.
These crypto advertisements are ubiquitous. Facebook just lifted its long-standing prohibition on crypto advertisements. Both Crypto.com and FTX are airing advertisements during this year’s Super Bowl broadcast (30-second advertisements cost $6.5 million this year, according to the Wall Street Journal.) Damon’s television commercial, which ran for months and cost around $38 million dollars, gets one thing right: investing in cryptocurrency requires courage, since it is one of the most unpredictable and unregulated investments available to normal investors.
Is cryptocurrency a wise investment?
The Crypto.com advertisement encourages viewers to be courageous. And if boldness involves investing in assets with little to no transparency, then cryptocurrency investments fit the bill. In general, US securities regulations compel corporations to disclose material information about their stocks and other financial instruments, such as who is in control, financial results, and future projections. Investors have legal remedies if they have been scammed or lied to. None of these are applicable to cryptography.
Numerous cryptocurrency businesses have “white papers” describing their mission: Bitcoin was designed for peer-to-peer financial transactions, whereas Ethereum was created to host decentralized software. However, the currencies linked with these blockchains cannot be used to transfer fractional ownership in a business; otherwise, they would become securities. (In 2018, the US Securities and Exchange Commission imposed stricter regulations on initial coin offerings, or ICOs, after determining that they were unregistered securities.)
Nonetheless, cryptocurrencies have grown in popularity among speculators — and not only ordinary investors. In recent years, the crypto market has seen an influx of institutional investors, including hedge funds, pension funds, and endowments. Banks and venture investors are joining the fray as well.
Since the beginning of March 2020, bitcoin’s price has nearly quadrupled to $43,118, while ether’s price has increased by a factor of ten. That has resulted in returns: a $1,000 investment in bitcoin in March 2020 is now worth $5,000. A low-risk investment such as the Fidelity 500 Index Fund, which tracks the S&P 500, has increased by just $1,577 during that time period.
The dangers of cryptocurrency
“[Crypto] is orders of magnitude riskier than anything in the stock market,” Eshwar Venugopal, a finance professor at the University of Central Florida, explained, citing the absence of financial transparency and legal responsibility inherent in regulated securities. He compared investing in cryptocurrency to being an angel investor in an early-stage firm with the knowledge that your money may evaporate. “The risk for cryptocurrency investors comes from a lack of information, disinformation, and speculation,” he explained.
The most dangerous crypto goods lack a white paper and have no discernible commercial goal, Venugopal explained. Dogecoin and Shiba Inu currency have surpassed Bitcoin to become the 12th and 13th most valuable cryptocurrencies, respectively, in terms of market value (in no small part due to tweeting by another celebrity, Tesla CEO Elon Musk).
Musk’s post is significant since the price of crypto assets is frequently unrelated to financial success. According to a recent study conducted by Yale and the University of Rochester, the primary drivers of cryptocurrency prices are two factors: trading momentum and investor interest. In other words, hype. The analysis found that the prices of three cryptocurrencies—Bitcoin, Ether, and Ripple—were uncorrelated with traditional asset classes such as equities, currencies, and commodities.
How to incorporate cryptocurrency into your portfolio
Should a prudent retail investor invest in cryptocurrency? While network adoption and institutional investment have the potential to mitigate investment risk, retail investors should exercise extreme caution. Even financial planners have difficulty advising clients on cryptocurrency investing and risk, however many advocate investing no more than 5% of one’s investment portfolio in cryptocurrency.
Caitlin Cook, community manager at Onramp Invest, a software startup that connects financial planners to the cryptocurrency markets, said planners and investors must grasp how unpredictable the crypto market is and budget correctly if they choose to invest.
“Can you manage it if crypto drops 30% in a single day?” Cook inquires. “I’m a big believer that you should not invest more than you can afford to lose, regardless of how bullish you are on the area.”