It’s fall 2018 – is it too late to buy into crypto?
I see this question appear every so often on just about any of the cryptocurrency groups and message boards I lurk, and I’ve been banned for giving an honest answer to it at least once.
Someone comes along and posts something like:
The fact that this person is talking about “owning projects” and their “portfolio”, even though they are fictitious, is actually something I see more often than not, and it makes my skin crawl.
For the less familiar, the idea of “owning projects” is a comment people make out to mean that you own tokens related to this or that blockchain project (LTC, XRP, BTC are three examples). I really don’t like this idea because it misleadingly applies part ownership of the actual project in the same way that a traditional share investment on the stock market represents a partial ownership of the company in question.
For example, if you own 10,000 shares of Tesla (NASDAQ: TSLA), you actually own 0.000058620083241% of the actual company. Yes, that number is ridiculously small, and in effect gives you virtually no power over the company’s decisions, but that ownership is a binding legal contract which comes with rights and responsibilities on both sides, and more importantly, the rights you are granted by owning the shares can be enforced by a court of law and the local judiciary system of wherever the stock exchange you are dealing with is located. What does that mean for you? Well if TESLA was to file for bankruptcy tomorrow, a judge would look over their assets and could determine that a percentage of their assets should be liquidated (sold on the market) and the money left over should be paid out proportionally to shareholders. This is kind of really important.
Let’s consider another example, a very popular one among people who are just getting into cryptocurrencies: XRP.
XRP, the token produced by the operation of the Ripple blockchain, is quite popular and has been around for some time, picking up momentum and often appearing in the spotlight as different news outlets report on the progress toward their stated goal: to provide a modern, ultra-efficient and rapid international settlement system. In simpler terms, let banks and financial institutions move huge amounts of money internationally way faster than they currently can and at a much lower cost.
So someone getting into crypto may see the price of XRP at 0.291325$ USD and think, and I’m not kidding about this, “OH MAN! This thing is only 29 cents and all the banks are looking into using it?! I can buy like 1000 of these for 300$ but if it goes like bitcoin and hits 1000$ a piece, I’ll be a millionaire FOR LIFE!”.
I’ve had many people come to me asking for advice and instructions on how to buy cryptos and how to get into the market, and on many occasions, when I’ve asked them to explain WHY they want to buy cryptos, that’s the exact reasoning they’ve given me. Worse yet, many of them intended to borrow money and pay interest on the loan in order to do this.
Can you already tell how wrong this thought process is on so many levels?
The first thing to consider is that the price of XRP was 0.17 USD a year ago in October of 2017, only spiked to just over 3.00 USD 9 months ago, and has been dropping ever since, to find itself sitting at 0.29 USD.
If someone had bought 300$ worth of XRP in October 2017, they would have about 511$ worth today. Is that a bad return? Definitely not, it IS 70% return in a year, after all, but we are very far from the dream of having XRP hit BTC prices (currently 7000 USD +/- 300 daily fluctuation).
I hear you asking “What’s wrong with all that? That sounds great! I wish my RRSP had made me 70% last year instead of losing 3%!”. I’m right there with you, I agree, it looks awesome and if you were among the knowledgeable who could take advantage of that growth, then I’d be very happy for you if you did.
However, here are some things to consider:
- XRP is NOT a financial instrument and no one is under any obligation to do anything with it if they don’t want to
- No legal authority in the world would ever come to your help if there was an issue with XRP, the wallet you hold it in, the exchange you bought it from
- Ripple can decide, if it suits their business plan, to generate any number of additional tokens at any given time and sell them at any given price, effectively drastically altering the value of your holdings
What does that mean for you? Well for instance, if Ripple closed up shop and decided they no longer care about the XRP project, the value would almost certainly make a dive towards 0 and there would be no bankruptcy hearing about what amount of the cash or cash-equivalent held by the actual Ripple team should go to the token-holders.
Secondly, if you made a mistake and lost the wallet you were holding your XRP in, if your exchange got hacked, if your exchange turned out to be malicious, the amount of recourse you would have to recover any of your money would be alarmingly close to nothing.
With all that, lesson 1: When you own cryptocurrencies, you own tokens, the exact same way that if you own baseball cards, you own baseball cards. Nothing more, nothing less.
On the second keyword, “portfolio”, I don’t even want to go into detail because a portfolio in this context is specifically and ONLY about investments, and as you are beginning to see, cryptocurrencies and tokens, to me, are simply a collection of “stuff” and do not fit the definition of investments.
As you’re reading this, you may be feeling a bit of information overload, with the data I listed earlier on, or you may be wondering what point I’m about to make because you already understood the thought process I was illustrating.
Well, my point is that no, it is definitely not too late to get into cryptos, and for as long as cryptos have a market, there will still be some profit to be made by some people.
The real question is: are you one of the people who can make profit?
The advice I’ve posted on forums and groups to people asking the question on how to get into cryptos that has gotten me banned a few times goes like this:
No, it isn’t too late but you really have to be serious so make sure you do the following:
- Figure out how much your time is worth in dollars per hour. If you work for 12$ an hour and that’s the best you can do right now in your life, then you may consider that your value.
- Figure out how much money you’re willing to “invest” given that if you were to lose every last penny, you could get over it and move on with your life without any drama.
- Figure out how many hours of your life the amount of money you want to “invest” is worth. For example, at 12$ an hour, 1000$ is worth 83 hours and 20 minutes.
- Whatever amount of time your “investment” is worth, spend that amount of time educating yourself about finances and cryptocurrencies before you do anything else. As a matter of fact, I would even say double that amount of time! So if you’re my 12$/hour example person and you are planning to put down 1000$, I recommend that you spend preferably 167 hours educating yourself on the material before you even make a transaction on the market. If you’re thinking of taking that money out of your credit card where you pay interest, or putting it towards cryptocurrencies instead of paying off your loans and debts, then I’d tell you to spend at least three times the time studying, and yes that does mean 250 hours of education for the person in our example.
- Get a mentor. A real one. Not one of those people who run a Telegram group and claim to be mentoring you because they post what they buy and sell when, and throw around big words like “resistance”, “bull run”, “bears”, “breakthrough” which sound fancy to you because you don’t really know what they mean but they sound important.
- Again, GET A MENTOR, but someone whom you’ve actually met, who has some experience to show for their claims, someone who understands economics, finance, technology and who just as importantly understands you and can meet you on your level, speak to you in terms you understand, and who is genuinely willing to coach you because they believe in the cause and want to help people be successful. Forget people who need you to pay them for the service before they say anything sensible, forget people who won’t show you their experience or resume. In fact, forget anyone who doesn’t have the patience to have you basically interview them as if they were applying for a job. I know it’s a tall order, but when it comes to your hard-earned money, don’t walk into a relationship that will empty your pockets just because someone sounded impressive.
For those of you who have followed me on social media or met me at events, none of these will come as a surprise. As with everything, the only real investment you are making that can never be taken away from you is your own knowledge and skill. If you want to “invest” in cryptocurrencies, don’t be fooled by big words and big percentage gains, you’re just gambling away your savings and you will continue to do so until you make the only real investment that matters: your own education, your own knowledge, your own experience.
The bottom line for me is that the knowledge, skill and wisdom that will allow you to turn a profit in the cryptocurrency market are things that can actually serve you well in other areas of your life. Understanding market dynamics and economics will help you understand a great many things, from the reason why your land lord raised rent this year, to why the price of gas at the pump keeps going up and down, to why so many people think they are brilliant investors for having made money on Bitcoin in 2016-2017.
If you’re going to be buying cryptocurrencies in this market and do not want to call yourself a gambler, then learn to be a profitable trader, and once you’ve got that down, you’ll be well on your way to becoming a truly profitable investor!
Cryptocurrencies are not an investment, but they can still make you a lot of money
Unless you’ve been living under a rock, chances are someone, somewhere has mentioned the word “investment” around you at least a couple of times. In fact, you may have even gotten the advice that you should be investing part of your income for the future.
I’d like to know what, if anything, you actually know and understand about investments before we even talk about cryptocurrencies.
Investopedia defines an investment as “[…] an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.”
I would like to simplify that. A lot.
To paint a simple picture, an investment is essentially a sacrifice. You give up something you can afford to sacrifice today in exchange for something that will be worth more to you in the future.
If we look at it that way then, a good investment is something that:
- You can afford to live without right now
- You have very good reason to believe will increase in value in the future
- You can sell, trade, or use in the future to gain more benefits that you would by doing so today
Now I’m not familiar with investments and financial instruments outside of the western banking system and the crypto currency market, so I will focus specifically on those, but that doesn’t mean that the following list of examples is complete and all-inclusive.
The most common type of investment people know about is some kind of pension or retirement fund, often managed by a large corporation or some part of your local government that aims to grow with the economy in order to provide investors with money after they quit their jobs.
Another example would be high interest rate savings accounts, which our banks are happy to offer us with generally something between 0.05 and 3 % interest. Ratehub is a great tool for comparing such accounts in Canada. Basically you give the bank your money, and they promise to give it back later, with a bit of extra cash on top for your trouble.
Depending on where you live, real estate can be an investment since according to basic market economics, when the amount of homes available grows more slowly than the number of people looking for a home, prices will increase. This is especially true if you’re lucky enough to live in one of the bigger cities such as San Francisco, Los Angeles, New York, or north of the border in Vancouver, Toronto, Montreal. While real estate is a tried and trusted investment, there are events that can wipe that out, such as the 2008 crash, which left many people out in the cold rain.
Of course, there are other things that you may have heard of, such as savings bonds, mutual funds, etc. but the idea behind the “why” for those instruments (that’s what finance people call them) is essentially the same from the perspective of a normal person looking to save some of their money.
There are also investments that no one really calls investments, such as getting an education or learning a skill that will make you more easily employable or will help you to put a roof over your head and food on your table more easily than you would had you skipped the learning processes, but those aren’t the main focus of this article, despite my believing that they are incredibly valuable.
What about cryptocurrencies?
I personally cannot consider cryptocurrencies as investments. They might quack like a duck, walk like a duck and smell like a duck if you only look at the last 10 years, but the truth is, 10 years is all we have to go by. Yes, the price has increased over time (and also decreased from its peak value) and with a brief glance, the cryptocurrency market looks much like a stock market, but the reality is that there are no indicators of where the price will go in 10, 20, 30, 40 years. In fact, when bitcoin hit 20,000 USD in December 2017, the majority of “Crypto Investors” saw it as a great sign that they were right about it being a solid investment and were completely oblivious to the coming price drop which saw Bitcoin go under the 6,000 USD mark only six months later in June 2018.
Over the last few years, many people have bought cryptocurrencies at some certain prices and have sold them a few months or years later for significantly higher prices, and while that may look like an investment because “they gave up something today in exchange for something more valuable in the future”, the truth is Cryptocurrencies currently behave much more like collectible items than investments.
Yes, there are people who want to buy them, and people who have them and are more than willing to sell them, and that creates a market, but we’re a few items short of going from a decent marketplace to actual investment instruments.
There was a time where people bought baseball cards, collected them and sold them to other hobbyists and during that time, a lot of people managed to turn a profit, but does that make collecting baseball cards a solid investment strategy to guarantee a comfortable retirement?
In truth, cryptocurrencies currently have value in much the same way baseball cards had value: there are a large number of people who are willing to trade them at different prices and that creates a market.
There are many groups of people who work very hard to create software that operates the cryptocurrency market and makes it look and feel much like stock markets and other more traditional venues where investment instruments lurk, but that similarity is almost all skin-deep.
You may have heard people talking about the technological potential of the distributed ledger technology (or blockchain) that cryptocurrencies are built on, how it could replace banks, capital markets, reduce costs for running financial services and maybe eliminate financial institutions altogether.
Don’t get me wrong, as technologist, I honestly believe that the potential is there and the technology is on the right track to reach the capability to do these incredible things, but from the perspective of my experience, I can tell you that the cryptocurrencies that you can buy and sell today are not there yet. Some are very impressive and have amazing potential technologically speaking, but whether or not they continue to increase in value and ever live up to the legends we technology people tell depends on much more than the quality of the technology or the idea.
Because there are a very wide variety of factors that have to be considered to figure out whether or not a cryptocurrency will make it into the future or be replaced by a competing one, and whether or not they will ever see the lauded mass market use, it’s practically impossible for anyone to tell you where a specific coin or token’s price will be in a few years.
Optimists usually side with “well, more than it;s worth today” and pessimists side with “it’s a bubble and it’s going to crash to 0”.
My perspective on the matter? It doesn’t matter.
I hope I’ve painted a clear and convincing picture so far of why you shouldn’t look at cryptocurrencies as long-term investments the same way you look at your 401k or RRSP accounts and that you’re beginning to gain some perspective on why it doesn’t make sense for everyone to rely on cryptos as investments for their future.
In fact, while the stats are rare, I believe that the vast majority of people who have bought into cryptos so far have only made money during specific periods of time where the market was good, and outside of those periods generally stagnate or lose money. There’s a supporting theory on this topic called the Pareto Principle, written by Vilfredo Pareto, a 19th century economist and civil engineer, but that’s way too much info for the purpose of this article which is already getting long.
“But wait, you said it doesn’t matter whether or not cryptos are investments and that we can still make money! How?!”
Well, I did say both of those things and I believe them entirely without a doubt. The reality is that in any marketplace, whenever you have anything bought and sold at different prices, you have what’s commonly called “trading” and whenever you have trading, there’s an opportunity to make money and an opportunity to lose money.
In effect, what I’m saying is that it’s entirely possible to develop the skill to buy cryptocurrencies at good prices and sell them back on the market at a profit later.
Technically speaking, this practice can be called “day trading”, a term you may have heard before, which lets the skilled and savvy traders profit from the volatility of the market.
To give an example, say at 10 AM, IVO coins are trading at a dollar, then at noon, they are trading at two dollars, and then at 2 PM back to a dollar, it’s easy to see that the price has moved up and down a dollar. Well that movement is called volatility (even though volatility can include much more complicated notions, you really don’t need to know them for this to make sense) and it’s what lets some people reliably turn a profit even though no one really knows where cryptocurrencies will be in a decade.
Following my example above, if I was willing to buy 100 IVO coins at 10 AM and was clever enough to sell them at noon for a dollar more than I paid for them, I would have made myself a hundred dollars of profit to keep. If, however I had missed the opportunity to sell at noon and had to settle for selling at 2 PM, then I would have made nothing and could consider that I’ve wasted my time.
You will probably see a lot of people talking about trading like this and using catch phrases such as “buy low sell high”, but the reality is that while it sounds simple, it takes a fair bit of skill, a lot of intuition, a high capacity to tolerate risk, a lot of patience and dedication to learn how to do it properly.
Over the years, many books and articles have been published, detailing how to make money off of trading and many traders have done very well for themselves.
I’d like to remind you, however, that it’s not as simple as picking up a “trading cookbook” from your local bookstore (which of course still exists and hasn’t gone out of business because of Amazon), following a recipe, and putting money in your pocket.
If you want to make money off of cryptocurrencies reliably instead of trying your luck by buying and holding this or that token you heard about on a forum or from a friend, you will have to learn a lot about economics, finance, statistics and trading. There is no way around it and there are no silver bullets.
I sincerely hope that this article has shed some light on what investments are and why you should only get into cryptocurrencies with caution and a determination to learn, if at all. Best of luck to everyone!