The Great Crypto Divide

I took a straw poll in the office today.

Who bought any bitcoin, or any other cryptocurrency?

Naturally some of the more tech-minded said yes.

Surprisingly, the overwhelming answer was no.

Despite the admittedly insane level of coverage we’ve devoted to the crypto mania over the last year, entrenched opposition still remains.

Someone even helpfully responded with this image, saying, ‘Sorry I confused this for bitcoin’s growth.’

Crypto Mania - Market Progression 30-11-2017

Source: Forbes
[Click to enlarge]

Clearly not a bitcoin holder.

Yes, even in the ‘crypto mad’ offices of Port Phillip Publishing, there’s a clear divide. Between the crypto believers, who have gone down the rabbit hole. And the crypto deniers. Those eagerly awaiting that ‘I told you so’ moment when (if) a big crash comes along. Or maybe even some who are just bored with the whole thing!

Maybe it will crash someday. Who knows for sure?

But that could be a crash from $100,000 per bitcoin down to $70,000 per bitcoin. Or maybe even $1 million down to $600,000?

Nothing is certain…

Perhaps bitcoin will eventually fail and go down to zero?

I’ve a working theory that bitcoin will be replaced by a contender crypto at some point as the world premier cryptocurrency.

Just like MySpace was replaced by Facebook.

And Yahoo was replaced by Google.

This time isn’t now, though.

The crypto mania is still in its infancy, and bitcoin is the first stop for the new initiates. That means a continuing exponential rise, in my opinion. At least for the next few months.

But maybe not forever.

In the kingdom of the blind…

The worrying thing I’ve found from those in both the ‘believer’ camp and the ‘denier’ camp is the shocking level of ignorance.

They are for or against for reasons which make no sense.

That’s a recipe for disaster either way.

The crypto deniers are sure they’ve missed the party, so are waiting for (or wishing for) it to fail.

On the other hand those that are investing have no clue about the risks and specifics of the cryptocurrencies they are investing in.

Consider this text I got from a friend who’s recently started investing in cryptocurrencies.

‘Hey Ryan, I just put $500 into this crypto after some youtubers I like were talking about it. It’s called Cardona and it’s gone up 5X in a week! My question is, do you know much about this? Apparently the tech and team are sound.’

This is a loaded question if ever I’ve seen one!

How do you answer it?

I wanted to say, ‘Run for the hills and take your $2,500 with you!’

Not because I know anything bad about Cardona (I don’t, it’s a crypto minnow which is not on my radar screens) but because his process for investing is a recipe for losing money.

Let’s dissect it a bit… 

Why did he invest?

Because some personalities on YouTube told him about it.

Why is it better than any other crypto?

Not sure. Apparently the tech is good (whatever that means).

When will he exit? He doesn’t know. Hence why he texted me.

This is similar to the trading strategy of buying a small-cap stock from public web forum tips. Nefarious types use the excitement of hype to get people to invest. Usually so they can make a quick buck. Such pump and dump schemes are pretty common in the crypto world.

But here’s the thing.

My mate just made five times his money in one week.

He thinks it works.

And it might, for a while. Through luck or fortunate market timing, he might start to make some nice profits. But it’s not a sustainable strategy.

In the long term the profits he makes now will turn into losses if he doesn’t learn the risks soon.

Trading with a plan

Incidentally I responded with the hopefully tactful reply:

Great result mate, don’t know anything about this coin. Sensible thing to do in any speculative market is to take some risk off the table when you can but let yourself have exposure to the upside if it continues to run. Nice one.

After all, who wants to hear their winning trade was pure luck? No one. And why would I risk telling him to sell? What if it goes on to soar? My mate will never listen to any of my advice again.

Hopefully I can gradually drill into him the importance of risk management, in a more subtle way.

But from experience I know that it usually takes losses — big losses — for people to realise the fickle nature of speculative investing.

Does this mean I think you can’t make money from trading cryptos?

No, of course not. You definitely can.

In fact I think there are huge gains still on the table.

But you need to do it with a proper strategy, a proper method and a proper risk management process. And you need to learn as much as you can.

Get this right and you’ll not only make crypto profits. But you’ll also hold onto them when and if the tide eventually turns.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia