4 Myths About Investing in Cryptocurrency

The truth about crypto's diversification value, fraud, the role blockchain technology is playing in performance, and how much it costs to trade.

4 Myths About Investing in Cryptocurrency

Madeline Hume, CFA, Susan Dziubinski

Jun 23, 2022

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Although cryptocurrencies have been making headlines as a growing asset class, the crypto landscape is complicated and can be difficult to understand. As a result, there are still many myths surrounding cryptocurrencies, both negative and positive. Here today to debunk some crypto myths is Madeline Hume. Madeline is a senior research analyst for Morningstar, who recently published Morningstar's first Cryptocurrency Landscape report.

Nice to see you, Madeline. Thanks for being here.

Madeline Hume: Thanks for having me, Susan.

Dziubinski: All right. Let's walk through some of these myths. One of them is that cryptocurrency can help diversify an equity portfolio and may even be an inflation hedge. Now, we've had a volatile stock market this year, and we've certainly seen some inflation. Has crypto really been a diversifier?

Hume: People like to say that when they see something new, they like to compare it to things that they've seen before, right? So, if something walks like a duck and quacks like a duck, well, maybe it is a duck. But cryptocurrencies at this point are still a platypus. There's a couple of different things going on under there, and there's really nothing that we can compare it to that's a perfect comparison.

So, with correlations to equity markets, there are some times when they trade really closely together. Oftentimes, it's when markets are under stress and liquidity is compressed and people are selling across the board. So, that would be the current market that we're in. There are other times when the seas are a little bit smoother that those correlations tend to break apart. But in short, this asset class is still very new, and there is a lot that we're uncovering about how it behaves. But there is really no neat box that we can fit it into just yet.

Dziubinski: Now, another myth is that fraud is just rampant in cryptocurrency. How significant really is fraud in this particular asset class when you compare it to other, more established, perhaps, asset classes?

Hume: It's true that fraud in cryptocurrency, in absolute terms, has increased year-over-year. This has been accelerated by really notable, kind of, notorious hacks that have happened in the past year, which include the Wormhole hack in February 2022 and the Poly Network hack in August of 2021. But the interesting thing is that's been influenced by the sheer growth of the asset class over the past year. And so, the proportion of fraudulent transactions has actually decreased. Overall, it represents about 0.15% of all cryptocurrency transactions, which relatively speaking, is fairly straightforward for an asset class, so not all that different from other securities that people invest in.

Dziubinski: Some will argue that it's really the adoption of blockchain technology—that's what's driving interest in crypto and in its performance. Is that really the case, and if not, what does that mean for investors in cryptocurrency?

Hume: Actually, Susan, you know, it's funny. We actually kind of see the opposite where the rabid investor interest in cryptocurrencies has led companies to ask themselves how they can incorporate blockchain technology into their operations. Great example of this is Square changing its name to Block to kind of honor or announce this new era of more crypto-friendly business lines. And then, you touch base with it a year later and there really are no products to speak of just yet that deliver on that promise.

So, there is still a lot to uncover about how blockchains will be used in our everyday life, and the conversation is far from settled. But what is important for investors to keep in mind is that performance for this asset class is much more in line with what is the flavor of the month and not so much the steady adoption of blockchain technologies. There may be a day in the future where that happens, but we're just not there yet.

Dziubinski: And then, lastly, there is this myth that cryptocurrency is really easy to buy and sell, just like you'd buy or sell a stock or an ETF. True?

Hume: Well, it's certainly true that it's easy enough to open a Coinbase account and start buying and selling, but the devil is really in the details with this. Companies will charge a really high premium for the privilege of being able to buy and sell so easily. Just to give you an example: Morningstar did a study of some of the biggest exchanges that offer cryptocurrency trades, and the average trade is about 1.5% transaction fee. That's a huge, huge commission cost relative to the frictionless trading that we see in stocks and ETFs. And sometimes transaction fees can run well in excess of that. I mean, I personally have paid more than 8% on some transactions. So, it's really important with crypto and looking through all these really pretty user interfaces to read the fine print.

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Dziubinski: Thank you Madeline for debunking some of these crypto myths today. I'm sure we'll be talking more with you about more of the myths in the future given the increased interest in this asset class. We appreciate your time.

Hume: Thanks for having me, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.