Cryptocurrencies like Bitcoin are a hot topic these days, there’s no doubt about it. The currency once (and sometimes still) pooh-poohed as a harebrained scheme has now gained some respect after its price, which started 2017 at $900, shot up to more than $19,000 in December.
What is cryptocurrency, exactly? It’s a digital currency built on blockchain, a data structure used to create a digital transaction ledger that’s shared among a distributed network of computers. Among the types of cryptocurrency are Bitcoin, Ethereum and Litecoin, but many others have been created. There are no hard assets, central banks or governments behind the currency, which its proponents argue makes it more secure, creating the Bitcoin Revolution. But the currency is highly volatile and has also been linked to back alley deals and hacker ransoms because of its anonymous nature.
Thinking about jumping on the bandwagon? Not so fast.
A number of industry experts have cautioned investors to be careful about such a speculative investment. Several wealth management professionals contacted by BizTimes Milwaukee did not feel comfortable commenting on cryptocurrency because of its complexity and risky nature.
“No one is an expert at this,” said Michael Antonelli managing director and equity sales trader at Milwaukee-based Robert W. Baird & Co. Inc. “There literally isn’t anyone. It’s such a new thing to the world. Me, like every other person in the world, is kind of looking at Bitcoin and saying, ‘What is going on over here?’”
Antonelli described cryptocurrencies not as an investment, but as something like baseball cards or wine.
“People collected baseball cards because people thought they would be worth more someday,” he said. “An investment is something, to me, that you’re going to put your money in and hope it grows.
“It’s just a speculative instrument. Its value could be zero, its value could be $1 million. Almost nobody knows.”
The two people involved in a cryptocurrency transaction decide its worth and the currency is impossible to value. For that reason, it may be something people put a small amount of money toward as a hobby, but shouldn’t be part of their investment portfolio, he said.
“They’re looking for something exciting because stocks have become really boring and volatility’s been zapped out of the world,” Antonelli said. “I don’t see crypto as being part of someone’s financial plan, ever. I know smart people that have taken…a small chunk of money and said, ‘I’m playing around in them because I’m bored or I want to try something different.’”
In early January, the Wisconsin Department of Financial Institutions issued a warning to state residents about investing in cryptocurrencies. Among the concerns it laid out were the minimal regulatory oversight and lack of recourse if cryptocurrency is hacked; the fact that cryptocurrency is not insured by the FDIC; the highly volatile investments; the frequently unregulated companies involved in cryptocurrency, which may be more susceptible to fraud; and the fact that investors have to rely upon the strength of their own computer security systems and those of third parties to protect against theft.
“We’re recommending (investors) use the same due diligence and judgment that they use (in typical investments), doing that in evaluating cryptocurrencies,” said Jim Podewils, deputy secretary at the DFI. “The volatility risk in the pricing is certainly one that comes to mind real quickly. We’ve seen wide swings in this vehicle…and that’s one risk.”
An additional layer of risk, he said, is storing the currency once it’s been purchased.
“There’s usually little or no recourse when a cryptocurrency is gone because one of the features is the anonymity that somebody has owning it,” Podewils said.
Podewils said there are as many as 1,500 different cryptocurrencies, with more being created every day. Evaluating what each represents and the investment potential is important, he said.
“Something that has high risk, a lot of volatility, probably you don’t want to put in any money that you can’t afford to lose,” he said.
While the DFI does not track cryptocurrency usage in Wisconsin, it decided to warn investors because of the media attention and popularity the investments have gained.
While a currency traded outside of the banking system could be seen as disruptive to the banking industry, which the DFI regulates, Podewils said it’s not a concern for the state’s financial institutions.
“We have not seen any threat or impact on banking or credit unions in the state,” he said.
“I just think it’s fun to watch because as a student of market history, we may look back on this and laugh or say, ‘Wow, that changed the world,’” Antonelli said.
