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Inci on the risks and benefits of investing in cryptocurrencies
A. Can Inci, Ph.D., professor of finance at Bryant, recently published his book Contemporary issues in quantitative financean introduction to financial engineering for graduate-level finance students and a leading reference for financial services practitioners. Bryant News caught up with Inci to talk about his book and the financial innovations it contains. The conversation began with Inci telling the story of President Harry Truman, who asked for a one-armed economist to be sent to provide decisive economic advice without saying, “On the one hand, this… but on the other hand, that…”
Inci brought up Truman’s situation when discussing the pros and cons of buying and trading cryptocurrencies. “Unfortunately, in life there are pros and cons. The decisions are not that simple,” said Inci, a true two-hander, “but I’m happy to provide an objective perspective.”
Can you give us a brief history of cryptocurrency?
Cryptocurrency is a very risky digital asset class that began emerging in the mid-2000s. The company started on the dark web to make purchases that bypassed exchange rate conversions, taxes and fees. government regulations. Over time, there has been a trend away from nefarious goals and toward making cryptocurrencies more legitimate, marketable, and valuable to the global community. By eliminating friction, i.e. exchange rate conversions and transaction costs, users could buy anything, anywhere in the world, using a single currency: crypto. cash. Governments still struggle to regulate cryptocurrencies, but their popularity continues, often for the wrong reasons.
Why are people so attracted to cryptocurrencies?
There are three main reasons why people are interested in cryptocurrencies. First, as a medium of exchange. Instead of the US dollar, for example, you would use a cryptocurrency. Unfortunately, this will not work, at least not in the near future, because the value of cryptocurrency is very volatile. In order to be used to buy goods and services, the medium of exchange must be stable, and cryptocurrencies will not stabilize or mature in the foreseeable future.
The second reason why people are interested in cryptocurrencies is that they are a source of wealth creation and an investment opportunity, which is a double-edged sword. Investing a large percentage of your wealth in such a risky opportunity is not a good idea. You will not get rich quick by investing in cryptocurrencies. In fact, these assets are very risky, and you stand to lose substantial amounts of money.
Augmenting a traditional portfolio of stocks and bonds with a modest ratio of cryptocurrencies is the third and best reason to invest. This type of enhanced portfolio can do a great job creating higher profits and reducing risk. Of course, the cryptocurrency market is risky, but the risk structure differs from traditional securities like stocks and bonds. For example, if the stock market and bond market are down, the crypto market could be going up. So, because investments are more diversified, it simultaneously helps protect your portfolio and provide better returns.
Why are cryptocurrencies so volatile?
There is no backing for the value of cryptocurrencies. Traditional securities, such as stocks, are backed by the assets of the company, and the credit of the borrower, whether a company or a government, supports the value of the bonds. Cryptocurrencies derive their value from their notoriety, popularity, and a relatively limited supply that drives demand.
What advice would you give to someone interested in investing in cryptocurrencies?
Since cryptocurrencies are still very volatile, it is best to invest in well-known brands like Bitcoin. A good financial advisor should suggest diversifying your portfolio with cryptocurrencies, but not too much.
I experimented with investing in cryptocurrencies so that I could advise my students. But, while I saw my small investment quadruple very quickly, it collapsed, proving their risk. So be wary of friends who pressure you to invest, because if you dig a little deeper, you may find that they are trying to drive up the value of their coins by increasing demand.
What other important trends are on the horizon in finance?
The financial profession is moving towards machine learning, artificial intelligence (AI) and the manipulation, understanding and presentation of big data.
The human element will always be part of machine learning and AI, no matter how complex and technical the profession becomes. Humans do not always act rationally. In fact, we often act irrationally. And that’s okay; Sometimes irrationality is the way forward for a person. AI will never be able to detect when it is supposed to act rationally and when it is supposed to reflect irrational human behavior. So even though machines offer the best portfolio investment options, they will never be able to detect the human perspective. And for this reason, humans will always be part of the investment structure.
In the future, the best combination will be the AI system choosing derivative models and portfolios with the financial advisor as the link to the client.