Crypto: Trick? Or Treat?
Posted in Category: Investing
Tagged with : Investing
Gather ‘round my spooktacular thrill-seekers! It’s time for a ghastly adventure into the mysterious world of cryptocurrencies! Should you pry open the creaky door to the crypt of crypto? Or steer clear entirely and stay on the more well-lit and familiar investing streets? The choice is yours, brave soul.
Ok, full disclosure: a certain Natural Language Processing AI chatbot contributed heavily to that opening paragraph. I’m nowhere near that cheesy. I am, however, someone who deeply comprehends the potential tricks and treats that the world of crypto has to offer.
Given that – and the raging popularity of this relatively new class of investing – let’s dive in and try to separate the licorice from the lollipops (see, that one was mine). How about we start with the sweet stuff?
The Most Alluring Crypto Treat (Potentially!)
Arguably, the biggest “treat” crypto offers is the potential to make money, and it has indeed delivered some astounding short-term returns. Just take a look at this annual return comparison between Bitcoin (the largest cryptocurrency by market share*) and the S&P 500 Index® from 2018-2022.
|Year||Bitcoin||S&P 500 Index®|
Look at the returns: 93%…followed by 304%…and then 60%. When I first laid eyes on these numbers, I had to double-check if my internet connection was possessed by the Lost Spirit of Heavy Exaggeration. To set the record straight, it wasn’t. Those numbers are real. Crypto has undeniably rewarded some investors with some delectable treats.
That said, crypto isn’t all lollipops and peanut butter cups.
The Most Devious Crypto Tricks
In fact, investing in crypto can be a tricky endeavor (see what I did there?) that can lead to substantial losses and sleepless nights, and even tricking you into thinking it will outperform any other investments.
Let’s revisit the numbers from the previous chart, but this time, pay attention to the years when Bitcoin generated negative returns: -73% in 2018 and -64% in 2022. Ouch! Those look more like tricks than treats, don’t they?
What’s even trickier is that Bitcoin probably didn’t perform as spectacularly as you might think over the entire period in question.
To illustrate this further, let’s expand on the previous chart to compare the results of $1,000 invested in Bitcoin at the beginning of 2018 to $1,000 invested in the S&P 500 Index®.
|Bitcoin||S&P 500 Index®|
|Annual Return||Year-end Value of $1,000 Invested at Start of 2018||Annual Return||Year-end Value of $1,000 Invested at Start of 2018|
|Average Annual Return: 3.40%||Average Annual Return: 7.51%|
As you can see, while Bitcoin had some astonishingly high-returning years that produced some real gains, it also suffered some severe downturns that resulted in significant losses. The result? Bitcoin was significantly outperformed by the S&P 500 Index®, and it brought a lot more drama on the journey.
Summing It Up
So, am I saying you should avoid crypto as if it were an adult trick-or-treater wielding a running chainsaw? Not at all. But I’m also not claiming that crypto is the investing equivalent of stumbling upon a house giving away full-sized candy bars and the owner saying, “Take ‘em all!”
In other words, you probably don’t need to completely steer clear of crypto, but you shouldn’t assume it’s your ticket to easy riches either. If you do decide to invest in cryptocurrencies, make sure you do your research, so you fully understand what you’re purchasing. And always remember that in the world of investing, there’s no such thing as a free lunch (or free candy bar).
*Note: Bitcoin is used simply for illustrative purposes only due to its popularity and market share. As of the time of this writing, there were approximately 23,000 cryptocurrencies in existence, each with their own performance history that likely does not match what is shown for Bitcoin. Different cryptocurrencies have, and will no doubt continue to, perform differently than Bitcoin.