Money Rehab with Nicole Lapin - Why Is Crypto So Volatile?

Episode Date: November 16, 2021

Cryptocurrency is an incredibly volatile investment. There was a day this year when Bitcoin’s value dropped 30% in one day. But… why? And does that mean we shouldn’t invest in it? Today Nicole breaks it down. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Cryptocurrency is a rapidly growing industry.

This is not breaking news. I'm sure you've heard both sides of the crypto story. Crypto has made kings and queens and also paupers. But those wins and losses don't necessarily come from the winners picking good coins and the losers picking bad ones. It's possible to talk to two people who have both invested in Dogecoin, but one lost a lot of money and another gained a profit. Whether you win or lose can depend largely on timing. This is because cryptocurrency is an incredibly topsy-turvy investment. All cryptocurrencies experience huge fluctuations in their valuation, a quality known

on Wall Street as volatility. Cryptocurrency is an incredibly volatile investment. In one day, Bitcoin's value dropped 30%. But why? Here's the question from listener Andy. Hey, Nicole. My name is Andy and I live in Montana. I've been thinking about investing in crypto for a while. Some of my friends have made some good returns by investing in Bitcoin, while other people tell me it's too volatile and I should stay away from it. I find it all pretty confusing. My understanding is that crypto mining is designed to protect against inflation of the currency itself. So why is it so volatile? It's a really good question. And it brings up something that we often forget with cryptocurrency. It isn't intrinsically valuable. There isn't gold or

diamonds or even salt or anything backing up crypto's value? At no point did the U.S. Treasury say, yes, anytime someone wants to bring us a Bitcoin, we will give them X number of dollars from our reserves. No, crypto's value comes from how much people are willing to trade for it in goods, other cryptocurrencies, or in their own dollars. But like you, Andy, there are prospective investors that are interested in crypto not to use it as a currency, but to use it as a hedge against inflation. But without anything intrinsically valuable backing up the currency, crypto's market value is based entirely on speculation, which is essentially

educated guesswork. Investing in something that is speculative is a guaranteed way to introduce volatility into your portfolio. It means the investment's value isn't very grounded, which makes the price incredibly sensitive to even slight changes in investors' expectations or perceptions. Think of it like visual art. Say you're at a fancy gallery and there are two statues made by twin artists that everyone is buzzing about. One twin made a shiny, gorgeous statue made of 50 pounds of gold. The other twins' statue also clocks in at 50 pounds, but it's made of sand and cardboard. Gallery goers flock to these two pieces equally because the twins are really big deals in the art world. Let's just say the twins have been pictured lately

laughing over coffee with Anna Wintour, ice skating with Barack Obama, and joyriding with Kylie Jenner. Suffice it to say, the sculptors are big freaking deals and everyone's fanboy or girling over them. At the gallery, both pieces are valued at the same price. Let's say they're both priced at $2 million, just to put a big fun number on it. Then, drama alert, it's discovered that both of these twins are big frauds. All of the photos were photoshopped. Anna Wintour has never heard of them. Barack Obama was out of town during this alleged ice skating adventure. And Kylie Jenner doesn't even follow them back on Instagram. As you can imagine, art collectors stop buzzing about these artists, and the gallerist knows he has to slash the price of the sculptures

down. For the gold statue, popularity is no longer adding value to the price. However, the statue is still made out of gold, so it is worth something. The gallerist obviously wouldn't slash the price of the sculpture for less than the value of the raw materials because at the very least, some jeweler may price drop from the $2 million that the sculptor was once worth, but still a valuable piece. For the twin who made their piece in the sandbox, however, if the gallerist were to price the piece at the cost of raw materials, that price would drop to a big fat zero, a value drop of $2 million to zero, that's a long way to fall. Cryptocurrency is in the same boat as the Sandy statue. It's not intrinsically valuable. Of course, not everyone would agree with this conceptualization, but I would say that crypto's

value really comes from how much money in dollars people are willing to spend to get their hands on it. Because crypto has no intrinsic value like the sand and cardboard in the statue, its value is very sensitive and extremely reactive to news and opinions. It's essentially like a hot air balloon ride. You might enjoy the view from the top, but once you realize you're only suspended by hot air, you wish you could come down off the ride without falling. But unfortunately, what goes up must come down. For example, the Wall Street Journal has a fascinating graphic on the Musk effect, or the phenomenon of how strongly the value of Bitcoin is affected by Elon Musk's tweets.

If it makes you nervous that one person's Twitter account has a huge influence over the value of your investments, good. It should. Having the value of your investments be the whim of one person's fickle opinion that you have no control over sounds like a huge risk to me. That is risky. It kind of reminds me of the time when one person's Twitter account had a huge influence over the state of the union, if you catch my drift. For today's tip, you can dig straight to the bank. Before you decide whether or not you want to invest in crypto, you need to know if you're up for a bumpy ride. Earlier, I referenced a day where Bitcoin's value dropped 30% in just one day. I mean, can you imagine losing 30% of what you

have in your bank account in one day? If that mere thought made you sweat or break out into hives, cryptocurrency may not be a good investment for you. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.