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Since 2014, Harvard-educated David Yermack, a professor of finance at New York University, has taught courses on cryptocurrency. And when he’s not busy doing that, he’s publishing in academic journals such as The Handbook of Digital Currency and once served as a visiting scholar at the Federal Reserve Banks of New York and Philadelphia. He says that when it comes to investing in crypto, people need to account for three things. “Crypto investors should be aware of the high volatility of these assets, the unregulated nature of the trading platforms and the numerous frictions and delays involved in executing trades,” says Yermack. Here’s what he means:
Prepare for high volatility
Cryptocurrencies like Bitcoin often change significantly in value in a short amount of time. In May 2021, for example, Bitcoin suffered a drop of 30% in just a single day, and that’s just one example of many. “From day one, this has been a risky investment for people,” due in part to its purely speculative asset class, Yermack told CNBC in February.
- Trading platforms aren’t regulated like stocks Demand has grown for digital assets but some of the financial resources, protections and patterns investors have come to expect when trading traditional assets such as stocks and bonds are different in crypto, as MarketWatch previously reported. Securities and Exchange Commission Chairman Gary Gensler in mid September said he was investigating U.S. cryptocurrency trading platforms in an effort to step up investor protections in the nascent industry.
- Executing trades can take time Cryptocurrency trades may involve third-party exchanges and transfers from U.S. dollars to cryptocurrency, which can take time. Depending on your payment method, selling cryptocurrency can take anywhere from a few seconds to several days. It’s also important for investors to understand the fees that can come with trading crypto. You can read more about what different exchanges charge here.