Don’t Trust the Mainstream When It Comes to Crypto
Crypto is dead…
Or so many would have you believe.
The recent price plunge in the nascent asset class has brought out the usual motley crew of haters, sceptics, insiders, and permabears.
Naturally enough, the sea of negativity is making a lot of people nervous, particularly here in Australia.
In fact, we’re number one in searching the term ‘crypto is dead’ on Google!
Relax mate, I say…
Because I’ve seen this movie before.
It’s not dead, in fact, it’s very much the opposite.
Still, it never ceases to amaze me how the sceptics always take such victory laps in any downturn — despite being wrong on the best-performing asset of the last decade (the last two years even!).
And yet, they do.
For example, check out these two tweets from serial crypto critic Nouriel Roubini, aka Dr Doom:
Notice the dates at the bottom?
The first tweet was from last week, the second one was from the bear market of 2018!
He was wrong then; he’ll be wrong this time.
Now, the thing is, Nouriel Roubini is pretty much negative on everything…not just crypto.
As the old saying goes, he’s predicted 10 of the last three recessions!
And, frankly, I wouldn’t trust his opinion on much when it came to allocating my capital.
Take this piece from CBS News way back in 2011:
‘Roubini’s failure to accurately predict the market should have come as no surprise. Just 14 months earlier, on March 26, 2009, with the S&P 500 having closed at 814, Roubini made this forecast: “U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009.”
‘Today, we know that despite Roubini’s warning, the market had just 17 days earlier started one of the greatest bull markets in more than 70 years!
‘You would think that this mistake would have taught Roubini a little humility when making forecasts.’
Look, I’m not here to pile on one particular forecaster. We all get it wrong from time to time, me more than most.
What I do take umbrage at, though, is the mainstream media posting such views as if they come from any sort of authority.
I mean, at least mention how many times (and it’s a lot in Nouriel’s case) a high-profile pundit has got it wrong or their track record.
Something by which we can judge the validity of their critique.
I suppose as this meme shows, the mainstream media has no interest in scrutinising that kind of thing:
Source: Market Watch
And it’s no exaggeration to say that most mainstream media have a huge bias against the crypto industry.
I mean, just last week, the Financial Times ran a headline saying that Singapore will be ‘unrelentingly hard on crypto’.
This fed a narrative that Singapore was completely against the industry.
However, if you managed to get inside the paywall to see the exact quote, you’ll see the headline omitted a crucial word.
The real quote was that Singapore will be ‘unrelentingly hard on bad players in crypto’.
What a difference those two words make!
And the Singapore regulator himself called it a ‘hit job’.
Unfortunately, you can’t trust the mainstream when it comes to crypto because it’s disrupting the cosy monopolies which they themselves feed upon.
So back to cold, hard facts…
The bitcoin-enhanced portfolio wins out
Let’s forget opinions — mine or anyone else’s — and just look at the facts for a moment.
Check this one out to start with…
If you’d allocated just 5% of your total portfolio to Bitcoin [BTC] close to the height of the last crypto bull run in 2017, you’d actually have made better returns that someone who didn’t.
This graphic shows how:
As you can see, a 5% allocation to bitcoin would’ve made you 10% more return than a typical stock and bond portfolio.
And remember, this is comparing a ‘worst case’ outcome — I’m comparing investing near the top of a bull run in 2017 with the current immense downturn we’re in — so no one can accuse me of cherry-picking dates.
Here’s the real kicker though…
You’d get this huge outperformance for less risk as per the industry’s own preferred risk measurement metric (the sharpe ratio is higher for the bitcoin-enhanced portfolio).
You can see the results in the table in the top right.
I can’t guarantee it, of course, but I’m very confident doing the same thing now and adding some bitcoin to your portfolio will result in even better returns over the next four years.
Especially given we’re now at the bottom of the price cycle.
Riding the S-curve
Here’s another fact the naysayers like to avoid.
Like it or not, a lot of people are into crypto…and it’s growing every year.
Indeed, bitcoin is just following your typical S-curve process:
Source: Osprey Funds
And between the extreme cycles of greed and fear driven by the immense volatility in price, adoption moves relentlessly forward.
Indeed, unlike most industries, price is often a leading indicator in crypto.
As venture capitalist firm a16Z pointed out recently:
‘Prices are a hook. The numbers drive interest, which drives ideas and activity, which in turn drives innovation. We call this feedback loop “the price-innovation cycle”, and it has been the engine that has propelled the industry through multiple distinct waves since Bitcoin’s inception in 2009.’
Every cycle sees new true believers — those that survive the downturn come on board — and that means adoption only goes one way.
See this chart comparing the pace of crypto adoption with the internet:
If this trajectory continues, there’ll be one billion crypto users by 2025!
But none of this raw data stops the crypto critics…
As I said at the start, just like clockwork, whenever we get a down phase, out they come to say ‘I told you so’!
Amazingly, even they play the same role in each cycle. They use the same arguments as the critics used in previous cycle downturns.
‘Backed by nothing.’
Like I said, I’ve seen this movie before…
Does that mean there aren’t huge risks?
Of course not!
But just like the dotcom revolution was underpinned by a paradigm shift in what was possible, so is the crypto one.
No doubt, many ideas will fail. But some will succeed. And they will drive new ways of doing things.
Exponential changes are always hard to imagine in the moment, even when they look obvious in hindsight:
Source: Singularity Hub
A lot of people just can’t handle the fact that crypto can simultaneously be a game-changing technological and monetary innovation as well as a dangerous new frontier for unwary investors.
The key is to go in with your eyes open, do your research, and manage your risks…just as you would with any investment.
Sure, you can sit on the sidelines as many did after the dotcom crash of 2000, but then you’ll miss out on what I think is the single greatest monetary innovation of all time.
A hard thing for many to swallow is that opportunity exists hand in hand with fear and doubt.
Indeed, the weirdest paradox of investing is probably this…
Hated investment ideas are often the best kind because every doubter is a future buyer at much higher prices.
And right now, there’s an awful lot of doubters.
A contrarian investor would see this moment as an opportunity…
Editor, Money Morning
PS: One opinion on crypto I do listen to is an investing company with an excellent track record of investing in emerging technology. The venture capital firm a16Z just raised US$4.5 billion to invest in web 3.0 blockchain technologies. You can read more on their rationale here.
Ryan is also editor of New Money Investor, a monthly advisory aimed at helping investors take an early-mover advantage as decentralised finance and digital money take over the world. For information on how to subscribe and see what Ryan’s telling his subscribers right now, click here.