Bitcoin volatility wards off student investors

Bitcoin volatility wards off student investors
Photo courtesy of Wikimedia Commons

The virtual currency boom has students at The University of Alabama discussing and trading within the newly popularized crypto market.

“I know that a lot of kids are trading cryptocurrency, and they actually make fun of me when I walk out of my office.” said John Heins, the UA Fitzpatrick professor of value investing. “I want to hear discussion about common stocks and businesses and quite often I hear them talking about cryptocurrency.”

Cryptocurrencies like bitcoin are virtual currency that implement encryption to regulate the units of currency in circulation and their transfer. While there is no intrinsic value to cryptocurrency, the market value is ascertained solely by the demand of people wanting to buy and sell it, leading to large shifts in cost.

“I do like reading about cryptocurrencies and think the economic implications of them are interesting, but you have to realize it’s a completely unregulated currency market that is subject to major shifts,” said Joe Ballard, a sophomore majoring in finance and economics.

Ballard sold off the bitcoins he had after everything “started going crazy.”

“Crypto markets are something that are so volatile that it doesn’t make sense as a long-term investment,” he said. “I think it all depends on what your financial goals are.”

Ballard, like many students at the University, was intrigued by the idea of a new form of currency unlike any used today. Many of these cryptocurrencies are decentralized, meaning that they are completely independent of any bank and also unrestricted in their use.

“Sophomore year of high school, my buddy’s dad worked for NVIDIA so we got some hardware together and made a mining rig,” Ballard said. “I was interested in mining bitcoin because of the idea of being able to run software on my computer and leave it running to make money.”

Ben Jackson, a senior majoring in finance, is a member of the Culverhouse Investment Management Group. CIMG is a student-lead investment portfolio started in 2009 where students manage over half a million dollars of money to invest in companies that they have researched. Jackson said CIMG isn’t comfortable investing in cryptocurrencies yet due to the uncertainty of the market.

“In the the world of financing, there are two different ways to invest: investing and speculation,” Jackson said. “Investing involves understanding the security, finding a value from security, and then hopefully buying that security at a discount. Anything that is not that is speculation. So it falls out of our circle of competence in what we’re comfortable with doing.”

While CIMG as an organization is not officially active in the crypto market, the idea of a universal virtual currency has piqued the interests of many. Many of CIMG’s members include bitcoin and other cryptocoins as part of their personal portfolio.

“There are about 40-50 people in CIMG, and we’re very interested in the financial markets so on a day-to-day basis we’re always talking about different interesting things in the markets,” Jackson said. “Obviously you can’t open a newspaper right now without seeing something about bitcoin. So it’s something we’ve talked about.”

The ultimate hope for many holders of cryptocurrency is that in the future, the currency would be used not as a commodity to be traded, but rather as an actual medium of exchange that could be used to buy everyday goods, and Heins said there is a slim chance this could happen.

“I actually understand the theoretical reasons why this could make sense,” Heins said. “But it would seem to be that it would be a long, hard road because if you're a government and one of the important tools that you have to control your economy is monetary policy, it’s hard for me to imagine governments to give up that tool. I think it's going to be a hard road for it to get to the point where its really shaking up the balance of power in the monetary world.”

With speculation or the future of bitcoin and the crypto market as a whole, many worry about the value of cryptocurrencies and its role in society. This uncertainty directly impacts the security of the market, and thus the confidence in investment seems to have stalled.

“A conversation that a lot of us have had is the concern that there is no underlying value,” Jackson said. “It’s a very interesting security, and I’m not saying people can’t make money off trading it, but it’s not an investment, it's a speculation.”

Due to the lack of a guaranteed return, Heins said this is not a investment beginners should flock to.

“I would not say that this would not be the first place to go as an investor unless you know that you’re largely just gambling, but I would argue that to form good investing habits, it’s better not to do that,” Heins said. 

He also said he understands despite any investment advice, there’s always going to be the temptation of risk. 

“There is a great allure to getting something for nothing,” Heins said. “The danger is that you can lose a lot of money from that. Go in with your eyes wide open and don't expect it to be easy and for money to just come by.”

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