Matt Damon walks through a white hallway talking about what makes someone brave. Mt. Everest climbers are brave. The Wright Brothers were brave. Astronauts are too. These adventurers and entrepreneurs are brave because they “embrace the moment and commit.”
“Fortune,” the actor says with a nod, “favors the brave.”
Damon is selling the services of Crypto.com, a Singapore-based cryptocurrency exchange that recently spent $700 million dollars to slap its name on the Los Angeles Lakers arena. He’s not the only celebrity hawking Bitcoin. Tom Brady is a spokesperson for the crypto exchange FTX, the TikTok star Charli D’Amelio advertises for the exchange Gemini, and Kim Kardashian pushed the lesser-known coin EthereumMax to her 276 million Instagram followers in May.
These crypto ads are everywhere. Facebook recently reversed its long-standing ban on crypto ads. Both Crypto.com and FTX are running spots during the Super Bowl broadcast this year (30-second ads cost $6.5 million this year, the Wall Street Journal reports.) Damon’s television ad spot, which has run for months and cost approximately $38 million dollars, gets something right: You need to be brave to invest in crypto because it’s one of the most volatile and unregulated assets available to average investors.
The Crypto.com ad tells viewers to be brave. And if bravery entails investing in assets with little to no transparency, crypto investments are indeed a profile in courage. Generally, US securities laws require companies to disclose critical information about stocks and other financial products including who is in charge, financial results, and forecasts of what’s ahead. Investors have legal recourse if they have been lied to or otherwise defrauded. None of these apply to crypto.
At most, many crypto ventures have “white papers” outlining their purpose: Bitcoin is meant to be used in peer-to-peer financial transactions, and Ethereum was built to host decentralized software. But the coins associated with these blockchains cannot transfer fractionalized ownership in a company or else they become securities. (In 2018, the US Securities and Exchange Commission cracked down on initial coin offerings, or ICOs, after it determined they represented unregistered securities.)
Still, cryptocurrencies have become extremely popular investments for speculators—and not just retail investors. The crypto market has been flooded with institutional investors in recent years including hedge funds, pension funds, and endowments. Banks and venture capitalists are digging in too.
Since the start of March 2020, the price of bitcoin has nearly quadrupled to $43,118, while the price of ether rose by a factor of 10. That’s delivered returns: $1,000 invested in bitcoin in March 2020, would be worth $5,000 today. A low-risk investment like the Fidelity 500 Index Fund, which tracks with the S&P 500, has risen just $1,577 in that time.
“[Crypto] is orders of magnitude riskier than anything in the stock market,” said Eshwar Venugopal, a finance professor at the University of Central Florida, principally because of the lack of financial transparency and legal accountability that come with regulated securities. He likened investing in crypto to being an angel investor in an early-stage startup knowing your investment could go to zero. For crypto investors, “the risk is from lack of information, misinformation, and speculation,” he said.
The riskiest crypto products have no white paper or no real business purpose, Venugopal said. Meme coins like Dogecoin and Shiba Inu coin have become the 12th and 13th most valuable crypto by market capitalization (in no small part due to tweeting by another celebrity, Tesla CEO Elon Musk).
A Musk tweet matters because the price of crypto assets are often not tied to financial performance. One recent study from Yale and the University of Rochester found that crypto prices are primarily driven by two factors: trading momentum and investor attention. Hype, in other words. The price of cryptocurrencies in the study—Bitcoin, Ether, and Ripple—were uncorrelated with movements in traditional asset classes like stocks, currencies, and commodities.
Should a responsible retail investor invest in crypto? While network adoption and institutional investment may lower investment risk, retail investors should still be very cautious. Even financial planners struggle to advise clients on crypto investing and the risk, but many recommend putting no more than 5% of one’s investment portfolio in crypto.
Caitlin Cook, the head of community for Onramp Invest, a software company that gives financial planners access to the crypto markets, said planners and investors need to understand how volatile the crypto market is and budget appropriately if they want to invest.
“If you see crypto down 30% on a day, can you handle that?” asks Cook. “I’m personally a firm believer that you should not be putting more into this than you can afford going to zero no matter how bullish you are on the space.”