Why you should only dabble in cryptocurrencies with money you can afford to lose - Sarah Coles

I know. When I tweet a picture of my dog, the only thing that happens is that the local dogwalkers like it. When Elon Musk does it, he gets 340,000 likes, 32,600 retweets, and the cryptocurrency that shares the name of the breed, Shiba Inu, gains over 60 per cent in value.

It seems ridiculous, and frankly it is.

The Bitcoin phenomenon means crypto fans are always on the hunt for the next stellar success, and are keen to buy into anything they think might follow the same trajectory as Bitcoin. Musk is known for his cryptic tweets, and crypto fans hang on his every word, dissecting what it could possibly mean and speculating on coins they think could benefit. It means even a photo of a dog is enough to send them into overdrive.

They have interpreted it as support for the new Shiba Inu coin. After he sent the tweet last Sunday night, the value of the coin has soared. It’s now up 230 per cent in seven days, and 62 per cent in 24 hours. The notion behind it is that it might mean that Tesla could be prepared to accept the currency as payment at some point in the future, paving the way for mainstream acceptance – although absolutely nothing concrete has emerged.

This Musk-watch is alarming in a couple of ways.

The first is that this tweet was deliberately cryptic, as if currency speculation is all a game. It plays on the fact there’s a coin called Floki Frunkpuppy and his puppy is called Floki and was leaning on the ‘frunk’ of a Tesla (it’s a US word for a trunk at the front of a car). It also plays on the fact that it’s a Shiba Inu, which isn’t just the name of one coin, it’s also the breed associated with Dogecoin. So this tweet could have been pumping any one of three coins – or it could just have been a photo of a dog.

Meanwhile, if you’re one of the investors who assumed it was pushing Dogecoin and bought into it in the hope of making a quick buck, you would have been left feeling like a billionaire has made a fool of you, after the photo caused the coin to spike and then fall back.

The second worry is that it indicates something of the nature of the cryptocurrency markets. Although some dabblers firmly believe in the future of certain crypto assets and see value in decentralised finance, the long-term use case is far from clear.

It means much of the market is simply gambling based on guesswork, dressed up as investment, which is persuading people to take huge risks with money they can’t afford to lose.

The FCA is really worried about this, and has issued a number of warnings. In a speech last month, the FCA chair warned that “the hype around them generates a powerful fear of missing out from some consumers who may have little understanding of their risks”.

The rule of thumb around crypto remains as it has ever been. Investors should treat trading in cryptocurrencies with extreme caution, and if they’re really keen to buy into the hype, they should dabble at the edges of their portfolio, and only with money they can afford to lose.

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Thank you

James Mitchinson