There is money to be made on the meteoric rise of cryptocurrencies, just watch out that you don’t lose it all on the way back down. Like every bubble, there will be winners and there will be losers.
Like any investment strategy, the potential reward for investment must balance out the risk. At this stage, Cryptocurrencies are both risky and (potentially) very rewarding. Anytime there is “easy money” to be made, there is going to be an eventual collapse, because when the people that flocked to an investment due to a sharp increase in price experience their first dramatic decrease in price, they won’t enjoy it, and will pull out of the market, or switch to another investing medium. “But,” you exclaim “retail investors only account for 20% of the market!”. That is indeed true, but there are two things you need to remember:
- It doesn’t take 100% of people getting out of the market for the price to drop drastically, it only takes people being unwilling to buy at the current price. If nobody is buying, then the people who want to get out the market will force the prices down rapidly.
- Institutional investors have fiduciary responsibility to protect their current investments. That means when the market is going down, they may pull money out out to protect their investments, which forces the market further south.
You probably wouldn’t have guessed it, but I’m actually very bullish on the role that cryptocurrencies will play in the future of mankind. What I’m not bullish about is any particular cryptocurrency. Do you remember the dot-com bust? Remember pets.com? No? It lasted 9 months after it’s IPO. I’m not saying that cryptocurrencies are stocks, they aren’t. What I’m saying is that survival of the fittest dictates that many die out before we find who will provide long term value to users, and eventually long term gain to investors.
I entered the cryptocurrency world with money that would have otherwise been left sitting in a bank account in late 2017. I didn’t bet big, because I was a poor college student. But I did it right, I had a well diversified portfolio of over 40 “alt-coins”. I realized at some point that the current market trajectory was unsustainable, (January 15th of 2018) and took my money out. For those who are wondering what happened in the market, the following 3 months were an absolute blood bath, it tanked, and tanked hard. I only took out what I had put in. I liked to pretend that the rest was “monopoly money” but in reality I still wanted to bet on the crypto currency market. In all I’ve roughly quintupled my initial investment. Am I happy about that? I guess I am, but I can’t help thinking that it was mostly luck. I had no idea what direction the market was going to go, and I had no idea when I needed to pull out of the market, I had no idea that if I left my money in there that the market would eventually come roaring back. I have a lot of friends that jumped in during that time, lost a bunch of money, sold out, and never got any of it back.
I learned a few different things about cryptocurrencies:
- They are volatile. Use this to your advantage. Don’t be afraid to realize gains.
- They are unpredictable. Don’t allow yourself to get emotionally involved in the current market direction. This will cloud your choices. Just because the cryptocurrency market at large or one individual cryptocurrency is currently killing it, doesn’t mean that can’t reverse today and never recover.
- There is no intrinsic value for cryptocurrency, they are simply worth whatever people are willing to agree to pay for them. This means that if someone discovers a bug within cryptocurrency code that can be exploited, the value of that cryptocurrency drops fast, potentially even to zero.
- Exchanges can be hacked. I personally lost a small portion (8%?) of my investments to the “Cryptopia” hack.
- The cryptocurrency market is unregulated. Sketchy stuff happens in unregulated marketplaces. The pump and dump groups are a great example of this. Insider trading is rampant. It isn’t a good enough reason for me to pull my money out, because I’m in it for the long haul.
- Physical crypto-currency wallets are annoying. The more coins you have, the more annoying they are. Even the slickest and most well put-together wallet is annoying to use. If you don’t want your coins to be at risk of hacking, you’ll need to manage that physical device. And be aware that there is a very real risk of loss of that device or it’s passcode.
- Bitcoin, although a favorite amongst those in the cryptocurrency world, holds no chance at long term supremacy. The energy usage of Bitcoin currently stands at about 0.5% of global usage. That is a massive amount of wasted energy, and a bad sign for bitcoin itself.
To date, I’ve although I’ve had many enthusiastic conversations about the technology behind cryptocurrencies, I have not yet counseled someone to buy, and I always tell people to sell. Don’t get me wrong, I’m bullish on the crypto-market in the long term, but I’m not bullish on the average individual being able to pick the winning cryptocurrency. So if you feel some urge to gamble 5% of your investment portfolio on something with serious upside….sure, go for the broad crypto market. Otherwise, stay far away.
For those who are interested in some further reading, allow me to point you to the following link… I’ll warn you that although there are plenty of coherent thoughts in this article on the crypto space, I don’t agree with him that there are zero potential use cases for Crypto, simply that the exuberance seen right now in the crypto market is severely misplaced and is in essence a massive bubble. I especially appreciate what he has to say about NFTs. https://www.currentaffairs.org/2022/05/why-this-computer-scientist-says-all-cryptocurrency-should-die-in-a-fire/