One of the most challenging aspects of investing in cryptocurrencies is dealing with their high levels of volatility, unpredictability and risk. Unlike traditional assets, such as stocks, bonds or commodities, cryptocurrencies do not have any intrinsic value, meaning that their prices are determined solely by supply and demand in the market. This makes them extremely susceptible to speculation, manipulation and hype, which can lead to huge price swings in a matter of hours or even minutes.
Cryptocurrencies are also influenced by a variety of factors that are often difficult to quantify or anticipate, such as regulatory developments, technological innovations, security breaches, network effects, social media trends and more. These factors can create positive or negative feedback loops that amplify the volatility of the market.
For example, a positive news event, such as a major adoption or endorsement of a cryptocurrency, can trigger a surge in demand and price, which in turn attracts more investors and media attention, creating a self-reinforcing cycle. Conversely, a negative news event, such as a hack, a ban or a scam, can trigger a panic sell-off and a crash in price, which in turn discourages further investment and erodes confidence, creating a downward spiral.
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However, cryptocurrencies also come with many drawbacks and risks. One of the main challenges is their high volatility, which means that their prices can fluctuate dramatically in a short period of time. For example, in 2017, the price of Bitcoin, the most popular cryptocurrency, rose from about $1,000 to almost $20,000, and then fell to below $4,000 in 2018. Such swings can be influenced by various factors, such as supply and demand, technical issues, regulatory changes, hacking attacks, media coverage, public sentiment and speculation.
Another challenge is their security and reliability. Cryptocurrencies rely on cryptography and blockchain technology to ensure the validity and integrity of transactions. However, these technologies are not foolproof and can be vulnerable to errors, bugs, hacks or malicious attacks. For instance, in 2014, Mt. Gox, the largest Bitcoin exchange at the time, lost about 850,000 Bitcoins (worth about $450 million) due to a hacking attack.
In 2016, a hacker exploited a flaw in the code of a smart contract platform called Ethereum and stole about $50 million worth of Ether, another cryptocurrency. Therefore, investing in cryptocurrencies requires a high level of research, analysis and risk management. It is not advisable to invest more than you can afford to lose or to rely on emotions or gut feelings.
It is also important to diversify your portfolio across different cryptocurrencies and other asset classes, to use reputable platforms and wallets to store your funds securely, and to keep yourself updated on the latest developments and trends in the industry.
Cryptocurrencies are not for the faint-hearted or the uninformed. They are an exciting but risky frontier of innovation and experimentation that can offer great rewards but also great losses. They require a lot of research, education and caution to understand and use them properly.
They also require a high tolerance for risk and uncertainty, as well as a long-term perspective and patience. Cryptocurrencies are not a get-rich-quick scheme or a magic bullet for financial problems. They are an innovative and experimental phenomenon that may have a significant impact on the future of money and society.
SEC delays decision for Fidelity’s spot Ethereum ETF
Meanwhile, the Securities and Exchange Commission (SEC) has postponed its decision on whether to approve Fidelity’s spot Ethereum exchange-traded fund (ETF) until March 28, 2024. The regulator said it needed more time to evaluate the proposal, which was filed by Fidelity in October 2023.
Fidelity’s ETF, called Wise Origin Ethereum Trust, would track the price of Ethereum based on the spot market prices from major cryptocurrency exchanges. Unlike futures-based ETFs, which trade contracts that expire at a certain date, spot ETFs would hold the underlying asset directly. This would allow investors to gain exposure to Ethereum without having to deal with the technical challenges of buying and storing it themselves.
Fidelity is one of the largest and most reputable asset managers in the world, with over $10 trillion in assets under management. It has been a pioneer in the cryptocurrency space, launching its own digital asset platform, Fidelity Digital Assets, in 2018. Fidelity also owns a 7.4% stake in Coinbase, the largest US-based cryptocurrency exchange.
Fidelity’s spot Ethereum ETF would be the first of its kind in the US, if approved by the SEC. So far, the regulator has only approved Bitcoin futures-based ETFs, which launched in October 2021 and have attracted billions of dollars in inflows. However, many investors and experts prefer spot ETFs, as they are more aligned with the actual price and supply of the underlying cryptocurrency.
The SEC has been cautious about approving spot cryptocurrency ETFs, citing concerns about market manipulation, fraud, custody, liquidity and investor protection. The regulator has rejected or delayed several proposals for spot Bitcoin ETFs over the years and has not yet approved any for Ethereum or other cryptocurrencies.
Fidelity is not the only firm seeking to launch a spot Ethereum ETF in the US. In November 2023, VanEck and Valkyrie also filed their own proposals for similar products. The SEC has not yet announced its decision on these applications, but it is expected to do so by April and May 2024, respectively.
The approval of a spot Ethereum ETF in the US would be a major milestone for the cryptocurrency industry, as it would signal the regulator’s recognition and acceptance of the second-largest cryptocurrency by market capitalization. It would also likely boost the demand and price of Ethereum, which has been on a strong uptrend since the launch of its network upgrade, Ethereum 2.0, in December 2020.
Ethereum is currently trading at around $6,000, up more than 600% from a year ago. It has a market capitalization of over $700 billion, making it the fourth-largest asset in the world after Bitcoin, gold and Apple.