A Cryptic Loss

My dumbest investment was in Ethereum. I learned that if it seems too good to be true, and no one seems to understand it, it probably is too good to be true. — Brian J., online

The Fool Responds: Super investor Warren Buffett is famous for steering clear of businesses he doesn’t understand.

Ethereum is one of many “cryptocurrency” digital investments out there — another is bitcoin — that few people understand. Ethereum is a distributed blockchain network, meaning that it’s a platform that can run decentralized applications. If you still don’t get it, you’re not alone.

So what’s wrong with Ethereum? Well, the entire cryptocurrency market is still very young and very volatile. While some people have made good money in it, many others have lost a lot. Ethereum’s currency, Ether, was priced below $10 three years ago and topped $1,000 a year later. Recently, though, it was sitting at $131.

It’s hard to pin down cryptocurrencies’ intrinsic values. Many investors in them are just speculating, buying in the blind hope of hitting a jackpot. It’s also unclear yet whether any cryptocurrencies will be good longterm investments, as technologies can change over time and more newcomers enter the market. Many investors worry whether the digital nature of cryptocurrencies makes hacking a higher risk.

Shares of stock in public companies, by contrast, are tied to actual ongoing businesses, which generally have revenue and even profit.