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Three Common Crypto Investing Myths

FTSE Russell

Contributor:
FTSE Russell
Visit: FTSE Russell

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Head of Americas ETP Strategy and Business Development

As cryptocurrencies such as Bitcoin continue to grab headlines, the digital asset market has seen rapid growth, with an increasing interest, and product offering from the mainstream investment community. However, like many nascent and fast-growing industries, misinformation or lack of understanding has given rise to widespread misconceptions.

Below, we identify three common digital asset investing myths—and explore how these perceived barriers to crypto investing can be overcome with proper digital asset exchange vetting.

Myth 1: Digital assets are nefarious

Privacy and anonymity are key features of the blockchain technology that underpins digital assets. As such, news stories often cast cryptocurrency as an ideal mechanism for criminal activity. But the reality is, the vast majority1 of cryptocurrency transactions aren’t as nefarious as news headlines would have investors believe—and with proper digital asset exchange vetting, it’s possible to keep the bad actors out.  

With over 450 exchanges to choose from, investors won’t encounter a shortage of venues when looking to trade digital assets—but it’s important to recognize that not all digital asset exchanges are created equal. When vetting an exchange, investors should ensure the exchanges conduct due diligence on their participants and have adequate “Know Your Customer” (KYC) and Anti-Money Laundering (AML) policies in place. These can protect exchanges from illegal transactions and help them flag any suspicious activity.

Myth 2: Digital assets aren’t a trustworthy investment

Many investors view the digital asset market as relatively opaque, where crypto prices are subject to manipulation and it’s difficult to identify which assets are investable—and which aren’t. And with digital asset performance highs and lows frequently making headlines, digital assets have come to be known for their volatility. All of these factors have helped shape the perception that digital assets aren’t a legitimate asset and can’t be trusted.

Indeed, untrustworthy data has been a key challenge in the growing digital asset market. Many free price aggregators are focused on quantity over quality, and their pricing data can at times include manipulated data. And some digital asset exchanges report large trading volumes to attract customers that upon closer inspection are unsupported by actual order book data. But while unreliable data has been a growing pain for the digital asset market, investors can avoid it by thoroughly vetting exchanges’ data quality and practices.   

Price volatility has also been behind the misconception that digital assets aren’t trustworthy. However, while many investors wouldn’t hesitate to allocate to small cap stocks, in reality small cap volatility has been comparable to the largest cryptocurrencies, such as Bitcoin and Ethereum. In the example below, some constituents of both the Russell 1000 and Russell 2000 exhibited substantially higher volatility for the time period than Bitcoin. 

some constituents of both the Russell 1000 and Russell 2000 exhibited substantially higher volatility for the time period than Bitcoin.

While their volatility can be comparable to some small cap stocks, digital assets’ reputation for high volatility isn’t entirely unearned. However, they can still be a powerful diversification tool in the context of a broader portfolio—and it’s possible to mitigate risk for a digital asset such as Bitcoin with relatively straightforward portfolio construction techniques.

Myth 3: Digital assets aren’t secure

The digital asset market has been dogged by news of hacks and scams, primarily a result of security breaches where exchanges lack sufficient operational security. This challenge isn’t specific to cryptocurrencies—hacks can be a widespread problem across many digital industries.

However, security breaches can be particularly problematic in the digital asset space if an exchange doesn’t offer insurance to protect users from losses. As such, it’s essential to thoroughly assess digital asset exchange security systems and practices to ensure all platform users’ assets are safeguarded and insured.

A robust digital exchange vetting process

Many of the perceived challenges associated with crypto investing don’t have to be challenges at all if exchanges are properly vetted. However, few investors have the access or bandwidth to conduct thorough due diligence on the industry’s over 450 digital exchanges. At FTSE Russell, we’ve partnered with Digital Asset Research (DAR) to develop a vetting methodology for digital asset exchanges to be eligible pricing sources for our indexes. Through a transparent and rigorous process, we vet exchanges for reliable pricing data and adequate KYC/AML polices. We also ensure their assets are legitimate, readily tradeable, meet regulatory requirements, and are supported by robust technology. 

Please see our exchange vetting guide for more information. For more information visit the Digital Asset spotlightSubscribe to our blog.

[1] “99% of transactions on the bitcoin blockchain are for legitimate purposes”, Jeff Billingham Chainanalysis, Digital Asset Summit in New York in September 2021.

Originally Posted on November 2, 2021 – Three Common Crypto Investing Myths

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