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How I think about interest rates and growth

Recently, I made a post on social media encouraging people to teach their kids growth and interest rate mathematics as early as they can to give them an edge growing up and throughout life.  Pro tip: if they aren’t big on math and crunching numbers, talk to them about furry animals having babies… how many bunnies will you have in 3 years if you have 8 today and 2 bunnies make 5 babies a year? Kids love furry animals and “grown up” talk!

Growing up, my family was careful with spending and money, but lacked the experience with credit and interest to really drive home the point of how powerful interest really is into my teenage head, even after I got my first credit card at 18, maxed it out and started paying interest out of my minimum wage job.

As an adult who’s been through quite a bit of financial and economic education by now, I’ve made it a habit to calculate what things cost and are worth with interest almost as a hobby.

For instance, if I have a 1,000$ tax return, one of the first things I will do is go through different investment vehicles currently available and compare interest rates and dividend yields.  This is why when the topic comes up, I know instinctively that the truth is somewhere along the lines of:  with a great promotional rate on a savings account in my bank, this 1,000$ will be worth 1173$ in 5 years (promotional rate of 3.2%) a profit of 173$ over 5 years or 34.60$ per year, but the same money used to purchase shares of this same bank will yield a dividend return of 269$ for the same period of time (4.78% dividend yield) and while the stock could definitely go down in price, a Canadian bank is generally considered a safe investment so I can reasonably expect the share price to remain steady or grow.  In fact, the way I would calculate it, is that I’d look at the average yearly growth rate of the value of the bank’s stock over the last 5 years (in my example, the stock appreciated 6$ or 1% over 5 years, which adds up to about 0.2% per year) and figure that my 1000$ with the historical growth rate should be worth 1100$ in shares plus 269$ in dividend payments for a total of 1369$.

Now compare my 369$ of profit with the 173$ of profit the savings account would generate.  We’re looking at over twice as much money from essentially the same starting point, just a few different clicks with online banking, as long as you know where to look. Information is power. Just from knowing this, I can reasonably expect to make 2.13 times more money than someone who doesn’t.

I gave you a 1,000 example, but what if you’re dealing with a more serious amount of money, for instance 10,000$ you get from selling your company stock options?  The stock and dividend strategy would have gotten you 3690$ over the course of 5 years; a whopping 1960$ more than the 1730$ the savings account would have given you.

How’s that for a treat?

On the other hand, say that you have your 1,000$ and you’ve decided to put it as a down payment on a 10,000 used Honda Civic, because it’s reliable and you could use the upgrade from your old car that’s starting to look embarrassingly dated.

10,000$ with the sales tax will add up to 11,300$, less the 1,000$ of money you’ve got in your hand for a total of 10,300$ that you’ll have to finance over 5 years through your bank, which will usually charge you an 8.99% interest rate these days. The nice rep at the bank will be very happy to tell you that the car is all yours for an easy monthly payment of 213.76$, every month for the next 5 years.

Would you instinctively know how much that car will end up taking out your pocket in those 5 years?  My thought is that you wouldn’t, but you should.  You should know, even if only approximately, that you’ll end up paying 12,825.60$ for that car after your down payment, that’s 2,825.6$ over the ticket price of the car, that means you’re actually paying, factoring the 1,000$ you spent when you got the car, 38% over the value of the car.

How likely were you to buy anything if at the register, they charged you 38% more than the price on the tag?

Yet so many of us never even think of things this way.

Why does this matter? Well, say you decided to stretch your old car’s life out a bit and instead, slapped 1000$ and then 213.76$ per month into some growth strategy, what would happen then?

Well with the simple, savings account strategy we discussed earlier, you’d have all of 15,077$ in your bank account to buy a nice car with on the 5th year.

With the dividend stock strategy, that amount would be 15,828$.

Now I understand that maybe you need that car really band and you don’t have a choice, and I can relate, I’ve been there more times than I’d like to admit and have paid way more interest than what’s reasonable.

My point is, having these numbers, even roughly rounded in your head when making that decision of whether or not to buy the car, make the investment, spend the money will empower you to make better decisions for yourself and will keep salespeople and loan peddlers from taking advantage of you.

In the end, it’s up to you to decide whether you want a car worth 10,000$ today or one worth almost 16,000$ in 5 years… or maybe you like that money in your account growing and figure maybe taking the bus isn’t so bad after all, especially when you think long term and say “hey, I’m planning on retiring in 30 years, if I just keep putting aside 214$ per month until then, I’ll have 181,887$ in my account, and of that, 75,686$ will be money I didn’t get to spend and saved instead, but 106,201$ will be money that I’m just being given “for free” for having saved instead of spent.

Well, if you’re living pay check to pay check, that 214$ can make a huge difference, but if you’re in the Canadian average, chances are that 214$ is something you could easily save if you skipped a handful of drinking nights at the bar every month.

Please understand, this isn’t financial advice; I’m not telling you what you should and shouldn’t do with your money. This is thought advice. I want you to know how big of an impact a few simple facts can have on your life and on your decision making, and most importantly, that you don’t need to go back to school for another degree to understand how these things work and act accordingly.  You just need to develop the habit… and then you’ll start realizing things you never thought of before, like for instance that if you saved that 600$ a month you spend on partying every month, that’ll be an extra half a million dollars in your retirement account, you know, in case such things matter to you.

Enough of the ICO insanity!

Enough of the ICO insanity!

Enough of the ICO insanity!
If you’ve been looking into cryptocurrencies, bitcoin, blockchain and trying to figure out how people make a profit off of these things, chances are you’ve run across the popular practice of ICO or Initial Coin Offering.

There is no shortage of blockchain advocates out there talking about ICO’s are the way of the future and that the days of the IPO of old (Initial Public Offering) as done on Stock Exchanges are over.

Well before you toss all your savings into the flavor-of-the-day ICO hoping to become an overnight millionaire, read this article and let me clarify this point: ICOs and IPOs are COMPLETELY different things and there is very little in common from the investor point of view.

To recap, an ICO is a type of fund raising campaign teams developing blockchain run to, well, collect money and get their project going.

The idea is simple:

  1. Come up with a blockchain project
  2. Get a team together
  3. Launch a blockchain with its own token
  4. Do some marketing
  5. Sell your tokens to the public (against cash or bitcoin) at a price the company determines is good for them
  6. Use the money to grow

The process does work for many of the teams out there looking to raise funds, but does it work for you as an investor?

What are you actually getting if you buy into an ICO?

Let’s step back for a moment and look at how an IPO works on a traditional stock exchange:

  1. An established company already generating revenue decides to “go public” or sell off part of the company on the stock market to generate some money to grow
  2. The company gets their team of accountants to look over the business and show that it’s a good, healthy business with potential to grow
  3. The company fills out an application at their Stock Exchange of choice asking to be considered for an initial public offering (this is called the Listing process, by which a company gets listed on the Stock Exchange with a neat little code such as AAPL)
  4. The Stock Exchange investigates the company to make sure they are not lying, considers the value of everything the company owns, and either rejects them, or approves them for listing, putting a nice note on their profile explaining what kind of risk any buyer could be taking, roughly speaking
  5. The company and the Stock Exchange decide how many shares the company will be broken up into, let’s say for example 100 shares, and the accountants and actuaries determine what each share is worth in dollars compared to the value of the entire company
  6. The shares get listed on the Stock Exchange and on a specific time and date, anyone with an account at the Exchange can buy some, in fact buying a part ownership of the company. I.E. buying 1 share out of 100 from our example company would make you the owner of 1/100th of the company!

I don’t think I need to add very much to this explanation for you to realize that there are some pretty crucial differences between ICOs and IPOs at this point.

Let’s talk, however, about what the actual launch of the coin and the launch of the shares look like from the perspective of someone buying into them, rather than from the perspective of someone launching them to raise money.

Let’s consider how the value of the Token is determined.

If for example, I want to do an ICO selling IVO coins to fund my company, I could make my sales pitch and say “I’ll give you 1,000,000 IVO coins for every 1 Bitcoin you give me”. By doing this, I’d be relying on people trusting that there will be demand for my IVO coins so that they can sell them back later at a higher price and on people thinking “well, if 1 Bitcoin is 7000$ and it buys me 1,000,000 IVO coins, that means an IVO coin is worth 0.007$! Hey that’s less than a penny a piece and if it grows to just 1$, I’ll be a millionaire!”

So here I am, selling 5 Million IVO coins to “investors” and pocketing their Bitcoin.  With the numbers in our example, that’s 35 Bitcoin for the lot, which I can turn around and sell on my favorite crypto exchange at today’s rate, 7000$, and pocket 245,000$.

Now I have a quarter of a million dollars and I haven’t had to even start a company, get a client or produce a product, just as long as I’ve marketed a compelling proposal of what my company and project will do, and a bunch of investors have, between them, 5,000,000 IVO coins.

Well it’s obvious to anyone that I can spend 245,000$ on pretty much whatever I want at this point, either for myself or for the project, and the only repercussions could be that I lose my credibility as an individual and businessman.

Please understand, the team selling coins as part of an ICO is under no obligation to demonstrate any ability to actually do the work they are claiming to be doing, nor are they bound by any law to deliver anything of value in exchange of the token.

So how do people make money on ICO’s then?

Well, for that to happen, either the issuer of the token has to proactively decide to buy back the tokens at a higher price, or the token has to get listed on a cryptocurrency exchange.

In all fairness, cryptocurrency exchanges do some due diligence before listing coins and tokens for sale on their marketplace, but what verifications they do is strictly up to them and they are not obligated to tell you how they pick.

So on the day a token goes on sale on a crypto exchange, many of the coin holders will want to sell at a price higher than they paid so they can make a profit.  In our example, IVO coins were initially sold for 0.007$ so we could imagine that people would be trying to sell them for at least 0.01$.  Whether or not anyone buys any at that price will depend pretty much strictly on the reputation of my company and what I plan to do with the IVO coins, which the “investor” can only know by the marketing and rumors floating on the internet.

Well, let me ask you then, what would prevent me from actually having held on to 1 Million IVO coins and telling the crypto exchange “Hey, I’ll list with you, but only if you set the opening price at 10$ and I’ll give you 20% of the money I make in the first 24 hours”.

Let’s be realistic: as dishonest as the picture I’m painting looks, in an unregulated free market, it’s a perfectly legitimate deal.

So say the exchange agrees, why wouldn’t they, after all, having my coin listed at such a high price will attract tons of “investors” who will make trades and pay fees, which is how the exchange earns its money.

Now D-day comes and my IVO coin opens for trading on my favorite exchange, starting price 10$ per coin.

You can be that I’ve got an order to sell all 1 Million of my tokens at market price above 10$, and if there is enough hype around my project, people will jump in and buy and sell at some price around that 10$ mark.  The original “investors” who’ve paid a mere 0.007$ per coin will be ecstatic and run to twitter, facebook, reddit, to talk about the amazing TO THE MOON profits they’ve made on the IVO coin ICO and I’ll get to benefit from the sweet sweet FOMO (fear of missing out) of everyone rushing to buy some of these coins at 10$ thinking “Hey, if they started at 0.007$ and are already 10$, they could go up to 100$ in no time! I better buy some now!”

If this were happening in a public square, I imagine it would look like a riot of people running around, trading tokens for money, and as the issuer of the coin, I’d be standing on the side, with my cool 10 Million dollars in my hand and absolutely 0 obligation to provide anything in return.

As a matter of fact, there would be absolutely nothing preventing me from declaring the project a failure and terminating it a few weeks or months later and leaving all my “investors” out in the cold.

That, my dear readers, is the very grim reality of an ICO gone wrong.

If you’re being honest with yourselves and are still reading this, please ask yourselves this question “did I already know all that?”, because if you didn’t, I’d strongly recommend you think twice before buying into ICO’s.

“But wait, so what, all investments come with a risk, obviously, how are IPOs on the stock market any different?”

Well, if you remember the description earlier, in the process of doing an IPO, there are ton of people looking into the company, the project, the team, making sure that the price is set at a fair level before the company lists, and once the company is listed the shareholders are actually part owners of the company!

In real terms, that means that the shareholders have certain rights and recourses, and the team managing the company has some responsibilities they must live up to.

You may have heard the cynical perspective that “your employer doesn’t care about you, all they care about is their shareholders” and while that sucks if you’re working a 9-to-5, it’s extremely important if you’re an investor because that means that the team will go out of its way to make sure the shares you’ve bought are actually worth as much as they possibly can!

And since we’re talking about the world of regulation versus no regulation, it’s extremely important to underline the fact that the justice system will take any fraudulent activity by the listing company very seriously, investigations will be launched and the team can be bound by law to compensate the shareholders if a judge deems it fair.

Of course, corporate fraud occurs, money is embezzled, stolen, hidden and laundered all over the world every day, and more often than not, the public and small investors are left out to dry, holding the bill, but with all this information in mind, I think it should be pretty clear that as far as your safety as an investor is concerned, much more is done on traditional markets to protect you from what you don’t know and what happens behind the scenes than what you can count on in the ICO and blockchain world.

The reality is that many, many teams doing ICOs are genuinely good teams with honest ambitions, solid projects and the desire to do right by their supporters.  Many if not most of the people buying into ICOs do so because they believe in the projects, in the teams, and want to live in a world where the projects they buy into are successful. These are the honest people, the knowledgeable people, the people who do their research, follow the news, think things through and make sure they only take on as much risk as they can handle.

There is a place in the world for ICOs and the teams that run them, they are actually an amazingly clever way of complimenting revenues for any business where coins and tokens are relevant, but they most definitely are not a substitute for traditional financial instruments from the perspective of an investor.

Look at it this way: if your idea of investing is having an advisor recommend stocks, bonds, ETFs for you to buy, you may want to consider how deeply you want to get involved into your finances before jumping into ICOS.

As always, be careful, pay attention and never forget: knowledge and education are the most valuable investments you can ever make for yourself!

It’s fall 2018 – is it too late to buy into crypto?

It’s fall 2018 – is it too late to buy into crypto?

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 make you money

Cryptocurrencies are not an investment, but they can make you money

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!