CHICAGO, Ill. — After soaring by 86,000% in just a matter of days, the explosive new cryptocurrency known as "SQUID" crashed to zero this week. It turned out to be a swindle with scammers making off with more than $3.3 million in investor money. Crypto can be risky. Still, it’s a gamble that’s attracting traders of all ages.
If you’ve never heard of cryptocurrency, you’re now in a small minority. New research suggests that only about 4% of American adults surveyed are in the dark about the digital or virtual currency that uses cryptography for security.
“The way you make money on cryptocurrency is by selling it to somebody who thinks it's going to be worth even more in the future than you think it's going to be. It's what's called ‘the greater fool theory’ of investing,” said James Royal, an analyst with Bankrate.com and author of the book "The Zen of Thrift Conversions." “I think hot potato is a good metaphor for thinking about what's going on in cryptocurrency markets right now.”
It’s been more than 10 years since decentralized digital currency Bitcoin was introduced and since then, countless competitors have launched their platforms in the race to create more digital currency.
“Fundamentally, what you're investing in with crypto is not an asset that's backed by something. It's not backed by cash flow. It's not backed by an underlying asset,” said Royal.
Investor confidence varies by generation with millennials leading the way.
According to a recent survey by Bankrate, 49% of millennials are at least somewhat comfortable with investing in crypto assets such as Bitcoin, compared to 37% of Gen X’ers and only 22% of baby boomers.
“We're looking at a period of time where real wages have not grown in decades for a lot of people. And so, I think a lot of people think cryptocurrency is a kind of lottery ticket,” he said.
But Royal says while that lottery ticket could yield substantial returns, it also comes with substantial risk. An estimated one-third of people have been scammed by some type of fake email and imposter website.
“In a fast-growing area like this, where it's not clear exactly who's real and who's fake, it's important to understand that you can get scammed,” he said.
Shady cryptocurrency projects can quickly turn into scams, something proven by the Squid Game-inspired cryptocurrency in the last few weeks.
“It lost it all, literally lost 100% of its value within minutes,” said Royal.
Royal says if you’re getting into digital currencies, be sure to use a reputable exchange or broker like Robinhood or Interactive Brokers. Try to avoid the get-rich-quick mentality of investing and be cautious of allocating too large of a portion of your portfolio to cryptocurrency.
“You're not analyzing assets or cash flow, you're analyzing the psychology of the rest of the market to figure out how you should act," said Royal.
Because in the end, he says virtual currency is driven by optimism and market perception.
