What Just Happened to Crypto?
The Rise of Crypto
Cryptocurrency definitely seemed to be moving into the mainstream this year when the mayors of Miami and New York City received their paychecks in Bitcoin and PayPal started accepting it for payment across all accounts.
What started as a way to transact and invest seamlessly outside of the regulated international banking market had grown to over 300 million users worldwide at the end of 2021. Most of the cryptocurrency exchanges operate without a central authority and avoiding regulation was one of the founding tenets of crypto.
Lack of regulation also means a lack of transparency, which can make it very difficult to understand what you are investing in and who is behind various exchanges and products. Without transparency, an FTX token or a TerraUSA stablecoin is worth what the company says it’s worth. Until it isn’t. There have been several spectacular crypto company implosions this year including FTX, which owes its creditors around $8 billion (yes, with a “b”).
The complete lack of accounting and outright stealing at FTX is not likely to be happening at other cryptocurrency companies, but without standards, it is difficult to know who is following the rules. Without independent oversight, you as an investor are trusting that basic controls are happening such as keeping your deposits safe, separated and available when you want to withdraw them. The insular nature of the crypto community also means that many companies invest in or lend to others in their space and the level of exposure (another piece of data that would need to be reported if crypto was regulated) is unknown until bankruptcy filings, such as BlockFi’s filing this week.
Limit Your Investing Risk
Smart Sister Finance works with many personal finance clients who have cryptocurrency investments. Being curious about high risk-high reward investments like crypto or options is a natural part of expanding your financial knowledge. If you are interested in crypto or other complicated investments like options or futures, understand your risk of loss (which could be a 100% loss) and limit your dollar exposure. The Smart Sister Finance rule of thumb is not to invest more than 5% of your portfolio in high risk investments.
As someone who was a Certified Public Accountant for many years, I know that many people find audits and standardized reporting dull and unnecessary. Why do we have to jump through all these hoops when we should just be out there making money? Having standards and rules that are independently reviewed protect investors from fraud and companies from being derailed by individuals who think the rules don’t apply to them.
You work hard for your money. Diversified investing can help your money grow but it requires understanding what you are investing in and whether it matches your risk tolerance. Here’s a risk quiz to help you gauge your risk tolerance. Call a Smart Sister if you want to review your investment strategy and reduce risk while building your wealth.
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