I write a lot about cryptocurrencies.
But with good reason.
I firmly believe that there’s never been such a unique, fascinating and game changing investment opportunity. And I don’t think there ever will be again.
At least not in my lifetime.
Of course not everyone agrees with that. In fact, it’s still the minority view.
Bitcoin is nothing more than a classic bubble according to Nobel Prize winning Yale university professor, Robert Shiller.
‘The best example (of a bubble) right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story. And I’ve seen it in my students at Yale. You start talking about bitcoin and they’re excited!’
Incidentally, Shiller wrote a seminal book on speculative manias, Irrational Exuberance. It was a deep analysis of the dramas over the centuries in which otherwise sane people drove prices for tulips, stocks, and houses to inexplicable heights.
He clearly knows a thing or two about bubbles.
But when asked in the same Quartz interview what he thought of ICOs (Initial Coin Offerings — the crypto equivalent of an IPO), he replied, ‘What’s an ICO?’
That makes me think the professor hasn’t done the required reading!
Anyway, time will tell who ends up right…
And I don’t want to be accused of merely being a cheerleader and writing only when things are going well.
In the last few days we have seen some big falls in the prices of most cryptocurrencies.
I’m talking 60%+ falls in 24 hours in some cases.
Like most economic outcomes these days, it’s all to do with China.
The Chinese regulator came out with a statement on Monday saying that all Initial Coin Offerings (ICOs) were illegal under Chinese law.
Given the fact that most of the recent ICO hype has driven the crypto price rises across the board, this statement had a predictable effect.
Prices fell as some investors panicked. Traders used it as an excuse to bank some profits on the recent price rise.
It’s not just about being right
So am I concerned? Is the bitcoin bubble about to pop? A Ponzi scheme about to collapse?
No. I don’t think so.
Consider the following.
[Click to open new window]
The graphic is slightly off, as Bitcoin is now worth $71 billion and the entire cryptocurrency market is around $170 billion. But the comparison still makes sense.
Quite simply, bitcoin is a drop in the ocean of ‘money’ out there right now. Bill Gates is worth more than bitcoin. And it’s nowhere near the value of gold or physical money.
Now as a crypto ‘bull’ I believe that cryptocurrencies are eventually going to disrupt all of these other forms of value in some way. Plus do a lot more.
I could be wrong.
And if I am there will be no shortage of smug economists lining up to say ‘I told you so’.
But as an investor and trader my concern isn’t just about being right or wrong. It’s also about working out how much I make if I’m right and how much I lose if I’m wrong.
Cryptocurrencies represent what I call an ‘asymmetric bet’.
In other words, the pay off if I’m right is 1,000%, 10,000% or even 100,000% my original investment over the next 10 years.
If I’m wrong on the other hand, the maximum loss I can make is 100%.
The asymmetry in the two possible outcomes is huge. And I firmly believe there can only be one of these two outcomes.
There is no middle road.
Then what’s the rational play here for an investor?
Well first of all, it’s to be cautious and not invest more than you can afford to lose.
Everyone’s circumstances are different, so you need to think carefully about what’s right for you.
Let’s say you decide to dip a toe in. Are there any strategies you can employ to invest into crypto with a proper game plan?
There are two ways of crypto investing I think make sense right now.
Crypto Investment Strategy 1 – Simply ‘HODL’
‘Hodl’ is an intentionally mis-spelled way of saying ‘hold.’
As well as reflecting the enthusiastic typing speed of the early bitcoin community when telling others to stay invested, it’s also thought to stand for ‘Hang on for Dear Life.’
In other words, ignore the volatility, and play the long game.
The trick here is to make sure you invest in the most promising cryptos, avoid the scams, and learn how to keep our holdings safe.
(We can help with that.)
Then just wait 5–10 years and see how things pan out.
The second option copies the professional investors.
Crypto Investment Strategy 2 – In a bull market just ‘BTFD’
I’m not usually a fan of acronyms, but I like this one.
And it’s not a crypto-only phrase. It was born in the high octane share trading pits of New York, and gives traders courage to buy into market panics when shares are falling.
It stands for ‘Buy The Friggin’ Dip’. (Well, it doesn’t exactly stand for that. But the Editorial department at Port Phillip Publishing won’t let me publish the classic version of the phrase.)
In other words, if an asset or share is in a long term bull market, the smart thing is to buy on every market panic.
You buy the dip, as it were, in the long term uptrend.
And that’s what I think cryptocurrencies are in — a long term uptrend.
In fact, I think the current volatility is being manipulated to a large degree by players with deep pockets. They’re looking to build up positions in cryptocurrencies. But they can’t do it all at once.
Let me explain….
As I stated earlier this week, there are over 55 cryptocurrency-dedicated hedge funds now in existence. With many more to come.
Now here’s the thing…
As the chart earlier showed, the cryptocurrency market is actually not that big compared to other markets. Especially for professional money.
That means if they all came in now and tried to buy, they would push up the prices very high, very quick.
Clearly that’s not something they wish to do.
So instead, perhaps they create volatility in an effort to shake the tree and make more people sell. This allows them to build positions over time, as they know ordinary people struggle psychologically with volatility. Often they can’t handle it, and panic sell.
If you want to invest like a professional crypto investor, wait for these dips and buy in. The danger is of course if the dips don’t come. Or if the dips are actually the start of really steep falls!
I could be wrong about all of this.
But like I said before, I’m willing to take an asymmetric bet on cryptos. For a whole host of reasons beyond the scope of this piece.
If you want to learn more and start to get involved, start here.
Editor, Money Morning