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.
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.
 “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
Disclosure: FTSE Russell
This material is not intended as investment advice. Interactive Advisors or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.
© 2021 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®“ and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell products, including but not limited to indexes, data and analytics or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained herein or accessible through FTSE Russell products, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, BR and/or their respective licensors.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from FTSE Russell and is being posted with permission from FTSE Russell. The views expressed in this material are solely those of the author and/or FTSE Russell and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Digital Assets
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.