Why is there all of this talk about cryptocurrencies, and should we be listening? Bitcoin began 2017 worth $1,000 per coin, but closed the year at more than $19,000. Other so-called cryptocurrencies—digital currency that is sent and received electronically—are also soaring in value. There are over 1,000 cryptocurrencies in existence.
The perceived value of one cryptocurrency over another is based on the notion that the holder of the digital currency gains exclusive access to a given type of blockchain technology,” says Mark Williams (Questrom’93), a Questrom School of Business master lecturer in finance and executive-in-residence. Blockchain uses a volunteer computer network, controlled by no one, to record cyber-currency transactions that while public, link to just an electronic address. Enthusiasts foresee blockchain technology being applied to stocks, bonds, contracts, and other assets.
Some speculators view this as a lottery ticket, and if the market adopts your blockchain type, the payday will be astronomical. But this has also created an extreme asset bubble. Betting on a particular cryptocurrency is fraught with uncertainty and high risk.
My advice to those contemplating buying cryptocurrencies: do your homework first, understand your personal risk tolerance, and if interested, commit only an amount of money that you are willing to lose and that won’t impact you financially if it is a total bust. For risk-adverse investors, stick with traditional stock and bond investing, companies that have real assets, real boards, real management, real cash flow, and real regulation.
A mandatory condition for safe investments in the crypto-economy is a basic computer literacy. If you don’t know how computers work, then think twice before putting your wealth into cryptocurrencies.
Instead of actually buying cryptocurrencies, or coins, you can invest in the building blocks of the currencies, blockchain technology. Blockchain technology powers Bitcoin and other cryptocurrencies, but there are many ways to invest in blockchain tech without pouring your money into these digital currencies. The first place to look into blockchain startups. The second option is crowdfunding platforms, as blockchain startups in their infancy will often look into crowdfunding to get off the ground.
So, what does the Oracle of Omaha (Warren Buffet) have to say about cryptocurrencies? “In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending,” Buffett recently said on CNBC, noting that he didn’t understand Bitcoin and other blockchain-based digital assets. It’s not the first time Buffett has dismissed cryptocurrencies. In 2014, the octogenarian investor dubbed Bitcoin a “mirage,” warning investors to “stay away from it.”
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