EXPLAINER: Crypto markets

Harrisonburg, Virginia – The current cryptocurrency market is performing poorly, weathering what market watchers are calling a crypto winter. However, interest in the currency remains hot.

WHAT IS CRYPTO CURRENCY?

It can be helpful to think of crypto in the context of currency that is familiar, says James Madison University business professor John Guo. Fiat money, often thought of as paper money, is a government-backed currency that has evolved with the internet into electronic funds, but the basis remains the same. Then there is virtual currency which has no value in the real world but maintains worth in select virtual arenas — think golden coins in video games. Crypto currency is both a medium of exchange for goods and services and a financial asset. Like fiat money, crypto is used as a reward in exchange for service. And like virtual money, crypto began as an internal value exchange. However, crypto is purely a digital manifestation and, unlike virtual money, has value in the broader world where it is bought and sold, like stocks in the stock market.

HOW TO GET STARTED

Guo has three pieces of advice for those looking to invest in crypto.

1. Become a voracious reader. An understanding of the system is vital and research can build confidence before diving in.
2. Know how much risk is acceptable. Set a quantifiable measure and stick to it. Have an exit strategy and be willing to utilize it.
3. Be progressive with investments. A cautious approach can help manage risk.

WHAT TO KNOW

Crypto has been described as the wild west of financial markets. Yet the market is becoming more regulated. The government is strengthening efforts to curb cybercrimes and tax laws are beginning to catch up to advances in the market. However, investors should still be vigilant for scams. Guo is working on an algorithm to identify scams and evaluate risk levels in crypto opportunities. In the meantime, traditional financial wisdom holds for crypto as well. “If it seems too good to be true, it probably is,” says Guo. He advises investors to always start with a zero-trust mentality, investigating and verifying information independently. Credit scores too can be useful in monitoring investments; dips in scores can sometimes reflect investments with questionable entities. Also, “never bet the entire basket of eggs in crypto,” he says. Portfolio diversification can help insulate investors.

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Contact: Ginny Cramer, cramervm@jmu.edu