Technology

Know the Risks of Investing in Cryptocurrencies

Some investors have made a lot of money, but losses can be painfully real.

Christian Catalini is a professor at MIT’s Sloan School of Management and a partner in MIT’s Digital Currency Initiative.

KIPLINGER: What are cryptocurrencies, and why should investors care about them?

CATALINI: Cryptocurrencies are virtual coins that behave very much like a digital form of gold. Both are scarce and can be transferred between people without going through traditional financial intermediaries. Transactions are verified not by banks but by computers that have access to a universal ledger. But unlike gold, which is used for jewelry and has industrial uses, cryptocurrencies have no intrinsic value. They derive and retain their worth from investor demand alone. That demand has grown steadily in the past couple of years, and early investors in some of the most popular cryptocurrencies, such as Bitcoin and Ethereum, have made a lot of money.

What risks come with investing in cryptocurrencies? Cryptocurrencies are highly volatile and speculative assets. As with gambling, investors wanting to buy them should invest only what they can afford to lose. There are currently hundreds of different cryptocurrencies. In 10 years, many of them probably won’t be around anymore. It’s hard to predict which have long-term, mainstream potential.

What can investors do to minimize the risk? I think many people are rushing to invest in cryptocurrencies without appreciating their complexity. It’s important to research the technical abilities of any currency’s founders, much as venture capitalists do before investing in start-ups. Investors should also realize that if they don’t use robust passwords and other security measures to protect the online accounts they use to buy cryptocurrencies, those accounts may get hacked and their funds may be stolen.

Do you think cryptocurrencies that stand the test of time will become more widely embraced? I think we’ll see more of a coexistence between regular currencies and cryptocurrencies, which I do think come with some ad­vantages. For example, with digital money, if you want to wire money abroad, you’d likely be able to do so at a lower cost. I think countries or financial institutions will eventually adopt the underlying digital-ledger technology that powers cryptocurrencies, called blockchain, to speed up or lower the cost of transactions.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021
Stock Market Holidays in 2021
Markets

Stock Market Holidays in 2021

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2021.
September 2, 2021

Recommended

These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021
10 New Products Apple Could Release This Fall
Technology

10 New Products Apple Could Release This Fall

Here’s what we think Apple is going to announce at its Sept. 14 event, from sure bets like the iPhone 13 to longshots like an all-new MacBook Air.
September 7, 2021