Part 5 – Extrinsic Risks
You know how to defend yourself from you... but what about the risks you do not have direct control over?
Hello and welcome back.
This week we are taking a look at Extrinsic Risks. These are risks you accept when owning assets that are caused by external forces, rather than the internal ones we discussed last week.
There are 6 primary Extrinsic Risks in the crypto space (though most of these apply to stocks as well):
- Institutional Investors
- Regulatory risks
- Limited Acceptance
- Economic Risk
- Rug Pulls and Ponzi Schemes
The first and easiest to understand risk is of course price volatility.
This simply just means that Cryptocurrencies fluctuate in price a lot. Much more than the S&P 500 or NASDAQ on an intraday timeline (though in long run, stocks suffer some pretty nasty volatility. Even high cap index funds like the S&P as I showed you in part 1).
The reason that crypto fluctuates so much in price is because is Market Cap is low compared to other assets. Market cap is a measure of the total valuation of an asset. In this instance it is the value of all Bitcoin times the total number of outstanding shares (or coins, in this case).
As of the time of writing this article, Bitcoin has a rounded market cap of $570,000,000,000, or Five Hundred and Seventy Billion Dollars. Sounds like a lot right?
Well the S&P 500 has a market cap of $34.528 Trillion dollars (with a T). Just Apple alone (the creators of the device this article is being written on) has a market cap 4.5 times the market cap of Bitcoin at $2.61 Trillion.
Volatility happens largely because of supply and demand. When a lot of people buy an asset, its price goes up and when a lot of people sell it, the price goes down. This is a simplistic explanation but for our purposes it works well enough. The higher the Market Cap of an asset, the more money it takes to move the needle, and Crypto assets have a very small market cap compared to the stock market.
This is a benefit and a con!
Bitcoin is more easily manipulated because of its lower market cap, however it is also the reason that you are able to capitalize on meteoric portfolio growth. Bitcoin is an asset comparable to gold many ways, yet gold has a $13.24 Trillion market cap! if Bitcoin triples in price it will still only be just over 10% of golds Market Cap, and that gives a lot of room for growth (potentially).
Volatility is a risk. Bitcoin has made double and triple digit free falls, which is a byproduct of its small Market Cap. But it is also the reason we are all here trying to purchase it.
Regulatory Risks and Limited Acceptance
Crypto was first released to the public in January of 2009, which is 14 years ago. that may seem like a long time but Crypto is still an emerging asset class. There still is not a definitive regulatory body in the United States for crypto, and not much progress has been made to regulate it (aside from mandating you pay taxes when selling like any stock).
There is a non-zero possibility that the government will fully ban cryptocurrency. I do not think this is likely, but again it is a non-zero possibility.
Bitcoin also has yet to see full mainstream adoption, despite its popularity.
I am of the opinion that future regulations will benefit crypto in the long run, and make the space safer for individual investors like ourselves. But exactly what those regulations are to be remains to be seen. Heavily taxing crypto assets is potential but unlikely to be popular with the ultrarich who are holding massive quanities of crypto (and who have strong political lobbying power).
Its youth also makes it hard to determine exactly what the future of crypto holds. the Metaverse took the world by storm and then immediately died right in front of us (which I predicted for the record. follow me for more hot takes like these). I do not believe that Bitcoin is going to fade into obscurity however, it holds actual value unlike parcels of digital land in a roblox knock off video game.
I do not own a crystal ball (and their usefulness is truly questionable). I do believe Bitcoin and other cryptos will find mainstream adoption across the board, and other cryptos are likely to revolutionize payment processing at the very least. Crypto also has a massive foothold yet to be fully exploited in the video game community in the form of NFT’s, which would pump the crypto market cap significantly. And I consider this to be an extremely likely outcome.
All of that being said, it is still worth noting. the future is not written in stone. Anyone claiming otherwise has something to sell you.