Crypto investing has become more popular in recent years. How does investing into a cryptocurrency like Bitcoin differ from traditional instruments?

It should be viewed as speculative. It’s crypto speculation rather than investing, in my opinion. The difference from a traditional investment, let’s say stocks, is that when we invest in stocks, the value of the company is what determines what the value of the share price should be. Whereas in the crypto market, the valuation is purely based on the supply and demand in the market and those market forces. So, because there is really no underlying fundamental value, it makes it very different from the traditional investment vehicles.

Is that similar to how investors view meme stocks?

It’s very similar to meme stock investing, where the value of the company is completely divorced from the fundamentals of the firm. Really, you do it in hopes that someone is willing to pay a higher price for that speculative asset.

How are cryptocurrency values derived?

Sometimes investors talk about values being tied to how much it costs to, let’s say, mine an additional coin. Really? How much it costs to produce something doesn’t determine the value of it. If I go and build myself a really cool house, and I spend $2,000,000 on the materials to build that house, the house is not worth $2,000,000 until the market determines the value of it.

It’s purely supply and demand, and that’s what makes it so dangerous. When that demand gets spooked by various events, the market value of that coin can drop dramatically from 100 to zero in a day.

What are some of the cryptocurrency risks investors should consider before purchasing?

Any person who enters that market and starts trading crypto should have an understanding that it is a Wild West. It’s unregulated. Scammers will be out there. Big pools of money might be manipulating the trades. You can lose everything.

When you start hearing about people who never dabbled in investing putting their life savings into cryptocurrency, it’s heartbreaking and scary. They may not understand the risks.

Does that lack of regulation make cryptocurrencies susceptible to bad actors?

There always has been market manipulation, and there always will be. It is illegal, but there is much more transparency in stock trading. Because of the anonymity of the crypto market, it is very difficult to find that market manipulation and know who might be doing it. It’s just the nature of that market. It makes it easy for sophisticated bad actors to take advantage of less experienced traders, sometimes even first-time investors, who may not know that any of this is happening.