Opinion
Don’t be fooled by record prices, crypto is still as unsafe as ever
Victoria Devine
Money columnistOf all the finance-related questions I’m asked, one has popped up more than any other in recent times. It’s not one of the usual suspects, either, such as the cost-of-living crisis, housing or superannuation. No, it’s about crypto ETFs, or cryptocurrency exchange-traded funds.
Usually, the conversation begins when my interlocutor says they’ve finally taken the plunge and invested in crypto for the first time. The once-volatile market used to make them wary, they say, but now they feel safe because it’s being offered in ETFs.
The introduction of crypto ETFs has sent investors into a frenzy. But it’s important to remember the market is still unregulated and volatile.Credit: Dionne Gain
Since the ETFs are offered by globally recognised investment firms, the crypto market must have become more regulated and safe, right?
Wrong.
Cryptocurrency has always been volatile. Since its inception 15 years ago, the unregulated digital market has charted record highs and crushing lows, with some investors walking into the sunset with hundreds of millions in their digital wallets and others losing everything, and then some. But over the past 18 months, the crypto roller-coaster has been dizzying, even by its own standards.
The market hit a low in November 2022 when FTX, an exchange platform and hedge fund operated by Sam Bankman-Fried, collapsed. FTX customers lost $US8 billion ($12.1 billion), and Bankman-Fried was jailed for financial fraud and conspiracy.
At the time, many thought crypto’s halcyon days were over, and the writing was on the wall for the industry. But by March this year the price of Bitcoin – the original and most powerful cryptocurrency on the market – was surging at an all-time high of $US69,000 ($106,000).
While cryptocurrency is going mainstream, this change in circumstances hasn’t been accompanied by any additional regulations or guardrails.
So what’s behind such a remarkable turnaround? Well, namely, the introduction of crypto ETFs and a US court ruling that’s made crypto more mainstream than ever.
For the unfamiliar, an ETF is a managed investment product that is essentially a big bucket that people put money into and hand over to a fund investor to be managed. The pros of ETFs are that they outsource the confusing and fiddly trading work to an expert, give you exposure to international markets with less risk, and most relevantly in this instance, are a recognised pillar of the financial system. The cons are that you don’t get to choose what your fund buys or sells.
In January, a US court ruled that, despite crypto’s known volatility and pushback from the US government, investment firms could now offer clients crypto ETFs; that they were safe for wide-scale public investment.
Within days of the court ruling, the price of major cryptocurrencies surged. That $106,000 bitcoin price hit, for example, just five months after it had traded at $US25,000 ($30,000). While there’s absolutely no denying a price increase of 253 per cent is a major boon for investors, it speaks to the volatility of the market.
Volatility aside, the other major issue here is that while cryptocurrency is going mainstream, this change in circumstances hasn’t been accompanied by additional regulations or guardrails. And that should be a red flag to any investor.
Unsurprisingly, many within the crypto industry strongly oppose putting in place additional regulations because one of the main tenets of cryptocurrency is that it is the antithesis of the existing, highly regulated financial market. Risk, for many, is an integral part of its appeal.
However, as the US Securities and Exchange Commission now argues, crypto is walking, talking and quacking like a sharemarket duck yet it’s not being held to the same rules. So, if the ultra-volatile market plunges by 253 per cent instead of rises, there’s nothing to protect investors – or the market more broadly – from losing all of that money.
The good news for Australian investors is that the ETF market is a substantially smaller piece of the investment market pie here than it is in the United States – about 5 per cent, by some estimations. While that might sound tiny, the figures are anything but.
According to data from Global X, as of March 31, 2024, the Australian ETF market was worth $197 billion. It had risen by 38 per cent in 12 months and almost doubled in value over three years. Which, I guess, is why I now get asked about crypto ETFs just about every time I leave the house.
While I’m not going to tell you not to invest in them, what I would say is: if the reason you suddenly find yourself wanting to invest in crypto ETFs is because there’s a lot of hype around the market right now, your friends are saying how great it is, and you’re worried about missing out on a potential windfall, take a beat. Consider what your values are, what your financial ambitions are, and ask yourself if the people telling you to jump are investment experts.
Personally, I wouldn’t ask a bricklayer for advice on buying diamonds. Instead, I’d ask a diamond expert. And if I were driving along a single-lane, windy road on the side of a cliff and there were no guard rails to protect me in the event that something went wrong, well, I’d drive with extreme caution and remember that, more often than not, slow and steady wins the race.
Victoria Devine is an award-winning retired financial adviser, best-selling author and host of Australia’s No.1 finance podcast, She’s on the Money. Victoria is also the founder and director of Zella Money.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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