Practical perspectives on the cryptocurrency markets.
Are Cryptocurrencies another Tulip Craze? Another .com bubble? Another housing crash in the making? Maybe, but they are worth taking a hard look at.
I can say that I have lived through enough turmoil to be cautious, even with something I believe will be successful. The final trajectory of a market can be impacted severely by unanticipated events. For example, I had no idea that 9/11 would cut my former company’s revenue by 80% the following quarter. My point is that the future is unpredictable, deal with it that way.
Cryptos are for real
Trends like the internet, eCommerce, video streaming, and others were scoffed at in the past, but turned out to be the real deal. Cryptos are the real deal also. Ignore this at your peril.
This is a long position
While I believe Bitcoin et al are going to be successful, the path to success might not be what we expect. The growth of the internet took a completely up-and-to-the-right trajectory, ultimately unstoppable. Internet-based companies on the other hand, have been very successful in the long term, but there has been a lot of pain along the way. Both had a successful path, but require very different strategies.
This is global in scope
Cryptocurrencies are traded and spent 24 hours a day, seven days a week, 365 days a year. It is the only truly-global-and-always-on market. This is also why it will not follow the rules of fiat currency. Just like the internet plays by its own set of rules that continue to confound governments, cryptos are simply uncontrollable at this point.
Like any software, different cryptocurrencies have different uses
Bitcoin – store of value, large scale movement of money globally
Ethereum – raising capital
Litecoin, Bitcoin Cash – regular commerce
Ripple – fast B2B transactions
FOMO (Fear Of Missing Out) is the order of the day
People are entering the markets based on emotion and greed. Institutional money is not starting to pour in because of the “safe harbor” of Bitcoin, but for the short term opportunity for high percentage gain. That will result in rapid deflation at some point.
I would like to see all of my friends/family have some investment and receive some value from this train that I see coming. I would also like to not see them devastated if it evaporates. My recommendation is:
- Invest money you can afford to lose
- Not more than 5% of your Net Worth or 1-2 months wages.
That is truly enough to benefit if it grows up and becomes a real currency/store of value. It is not enough to lose your home if it goes sideways.
How you respond to the media coverage and other factors is based on your perspective of the market. See the visual that compares the relative size of the largest Cryptocurrencies to the size of the Gold market. The only major market that cryptos have overtaken is Silver. To me that makes it a very small market that is prone to manipulation over the short term.
Is it a small or large market?
The case for the small market:
From this perspective, all of the wild vacillations and instability of the market are because it is so small and immature. It is prone to manipulation (pump and dump, etc) but has more growth potential than anyone realizes: 100 fold. In this scenario you are still an early adopter.
The case for the large market:
You can take the view of growth. Bitcoin alone has scaled from a few dollars to $8,200+ in the course of 4 years. This growth is staggering historically and from this perspective it can be seen as a fairly large, grown up marketplace.
From this perspective you are expecting some stability to emerge as institutional money enters the market at the end of this year and early 2018. You can see validation and maturity in 2018 and Bitcoin starts to replace Gold as a store of value.
On either path are challenges, no matter the trajectory. It is also possible to be very, very wrong.
Until now, only one investment vehicle was available to be traded through traditional means. That singular product, Grayscale Bitcoin Investment Trust (GBTC) has been denigrated until recently as a fraud. It is also a fairly small Trust.
This is about to change. Major markets, major banks, and other institutions are creating ways for traditional investors to jump onto the crypto-train. This is going to bring a new dynamic to the cryptocurrency markets that has not been seen before. It is very possible that there will be MANY unexpected consequences. These will fall into the traditional camps of Bulls and Bears and they will have a very real impact.
Many are assuming that institutional money will bring enormous growth to the markets. This is entirely possible. It will also bring Shorts to the market as well, and investors that know how to trigger certain behaviors in such an immature market.
It is possible that institutional money will bring more volatility to the market in the short term and create some level of chaos.
It’s a gold rush folks
Let’s not fool ourselves, people are getting greedy. I would be lying if I said I did not enjoy seeing my accounts increase in size at this pace. We have to be real about this and keep emotions clear. Just like any other gold rush there will be people who benefit and others that lose it all. I want everyone in my circle to benefit. The only way to do this is to have a basic level of understanding and make a FEW good decisions.
I say “a few” for specific reasons. If you are retired and can afford to pour yourself into this new market to day trade that is one thing. I only know a few people in that position. Day trading is very tempting in a volatile market, resist the urge. This market will bite you very quickly to the tune of 30% in a single miss. I’m for the HODL instead of the gamble…
Here is a quick summary of steps I would take to enter this market.
- Establish your own personal rules of engagement and limits. Do this BEFORE you start the emotional ride.
- Take a look and see if you can purchase GBTC through your IRA or investment account. Seriously consider picking up some shares. It is quick and easy. By the time you read this, other options may be available, consider those also.
- Set up a Coinbase account if you are in the US. This is the safest way to start.
- I would purchase across the major cryptocurrencies at a preferred percentage. I personally have 60% BTC, 20% ETH, and 20% LTC.
- Stick to your rules of engagement and watch.