It’s hard to escape the hype surrounding cryptocurrency, from Elon Musk saying that “there’s a good chance that crypto is the future currency of Earth” to headlines like this one, predicting that Bitcoin could hit $100,000 by 2023. Whether either of those things happens, or crypto takes a turn for the worse, remains to be seen, but one thing is clear: There’s a lot of action happening around cryptocurrency: Cryptocurrency payment gateway Triple A estimates that as of this year, there are more than 300 million crypto users worldwide and over 18,000 businesses that accept crypto payments. For their part, many colleges and universities — like Stanford, MIT, Duke, and UPenn — have been working to get their student up to speed on this quick-moving world by steadily adding cryptocurrency courses to their curriculum.
So we asked Professor Christine A. Parlour, the Sylvan C. Coleman Chair at UC Berkeley’s Haas School of Business — who has taught courses on investing for years and more recently has begun introducing crypto into her curriculum — what new crypto investors should know. “Over time, as cryptocurrencies have increased in importance, the content of the FinTech MBA course has switched increasingly to crypto,” she says. Here are her thoughts:
Don’t assume you’re investing in a safe space …
“We are very used to investing in a safe environment,” says Parlour. “Various regulatory agencies ensure that traditional equity markets are transparent, and there are specific rules governing the trading process. This regulatory system is not fully in place for crypto, either on the corporate side or on the trading side. Everyone who participates should be aware of this,” says Parlour. Indeed, as MarketWatch recently reported, though “in 2021, U.S. regulators made several pushes for new rules in crypto …. uncertainties still remain, as the market ponders whether crypto lending products are securities, how stablecoins and decentralized finance should be regulated, and whether the SEC will approve a spot bitcoin ETF soon.”
- … And because of that, be careful. “Investors should be very cautious and make sure that they carefully do their homework,” says Parlour. As MarketWatch Picks recently reported experts differ on recommendations for how much of your nest egg, if any should be in crypto. Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management told us that: “We recommend people allocate 1% to 5% [of a portfolio to crypto]. It’s very high risk, so it must be a long-term investment and people need to look at it like a small cap tech stock.” And certified financial planner Brad Ledwith said you should look at it like you’re a gambler walking into a casino. “A lot of people walk into a casino and they budget how much they are willing to lose. Are you willing to lose 1-2% of your entire portfolio? If so, that may be a good allocation, but it is all up to your gambling risk tolerance.
Don’t buy the hype on every crypto innovation that comes out
Parlour says it’s important to understand how particular innovations add value. “By that, I mean that innovation for the sake of innovation is not productive.” Many of the business models are new and untested and “because of this, some crypto-backed ventures will fail,” says Parlour. That doesn’t mean there aren’t great innovations, you just have to know where to look. “There are huge benefits to everyone if we can identify inefficiency and build a better system,” says Parlour.