✨ Crypto ✨ Just hearing that word probably evokes some kind of emotional reaction in you. Maybe you believe it’s the future. Maybe you think it’s a bunch of scammy BS. Maybe you think the truth lies somewhere in between. Maybe you don't know anything about crypto but would like to know something.
But let’s get to the point quickly, with links to relevant sections:
- What do cryptocurrencies do?
- Crypto as an investment (risk & reward)
- Should you have some exposure to crypto?
Part 2 → How To (Safely) Buy & Store Crypto
Spoiler alert: none of those questions have one right answer. Different people will give you different responses depending on their own motivations and experiences. After all - it is still early days for decentralized digital currencies.
As always, what I’ll try to do for you here is to give as unbiased a perspective as I can. You should always DYOR - do your own research. The information I offer comes from my listening to many, many differing opinions and attempting to find a reasonable middle ground. It is not investment advice. Of course if things do work out for you I’ll take full credit 😉. Just kidding.
Let’s dive in.
There is a reason why they are called crypto-currencies. Cryptocurrencies were never designed to be a good investment vehicle! Say it again for the people in the back.
Way back when the original Bitcoin whitepaper was first published in 2008, it is clearly described in the first sentence of the abstract as:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
The main utility of cryptocurrencies are as “trustless” digital currencies that would improve the difficult and expensive process of moving value around the world. Currently we still rely mostly on trusted third parties (banks, financial institutions, money service businesses, etc) to do this. It’s expensive, takes a long time, and is prone to mistakes.
Crypto accomplishes the trustless part by using what is known as a blockchain. Blockchains are distributed ledgers. Huh? Please translate into English, you say. Millions of computers from all over the world work together to act as a single massive database of every single transaction that happens. They do this using cryptographic methods. Every transaction on a blockchain is verified and visible to everyone else. Recording transactions in this way makes it nearly impossible to cheat the system. Remember how peer-to-peer torrenting worked? This is similar. Oh what’s that, you never illegally torrented anything in your life? Yeah me neither… Anyways moving on.
K, this is starting to get boring… Tell me how I can get a yacht by finding the next big crypto trend please!
So obviously somewhere along the way crypto changed from just being something you could use to transfer value digitally to a speculative asset that minted many new millionaires overnight. How?
Well a few things happened. 👇
Many of the cryptocurrencies that you may know by name now (bitcoin, ethereum, etc) were designed with a limited or even decreasing supply. For example, the maximum total supply of bitcoin is 21 million. When the bitcoin supply reaches its upper limit, no additional bitcoins will ever be generated. Well as more people have wanted to hold bitcoin, you have a situation with higher demand and fixed supply. Ergo, prices go up.
At the same time, fiat currencies (the money you are used to spending like the USD/Euro/CAD) have been designed to have inflation of about 2% per year. Central banks all over the world increase their money supply. This means that they will naturally devalue themselves against fixed-supply crypto assets over time. Especially in a high inflation environment like we’re in currently - people want a place where they can avoid having the purchasing power of their savings disappear. Crypto can be more resistant to inflation because the overall supply is not being increased continuously. Some cryptocurrencies are even deflationary because the overall supply is being reduced over time.
So instead of fulfilling its mission of being digital cash, people have started treating crypto like digital gold. They think that it will be worth more tomorrow than today and it is treated like an investment. Because crypto is not a “productive asset” (does not create any value by itself), the investment and speculation is mostly based around the idea that crypto will play a bigger part in the future of society. Therefore it will be more in demand. When you think about it, holding fiat cash is an investment too - just usually not a very good one.
Normal fiat currency that you use to pay and get paid today only has value because everyone else says that it has value. If tomorrow everyone decided that the USD was not worth the paper it was printed on, those dollars would become toilet paper. Ultimately that is how any currency that is not backed by something else works. In the same way, crypto only has value because other people agree that it is valuable.
Most cryptocurrencies are very risky. Anyone who tells you otherwise is not being honest at this point in time. Crypto is still quite early in its technology life stage. Relative prices are more volatile than most other stores of value and can go up or down by double digit percentages in a single day!
Ok so I’ve done my job of presenting the skeptical perspective, now for the bullish case! 🚀🌙💯💰!!!!
We are seeing innovative new applications for crypto emerge every day. There are entire sub economies and ecosystems developing based on different parts of crypto including:
- Decentralized Finance (DeFi)
- Decentralized Apps (Dapps)
- Decentralized Organizations (DAOs)
…and that is just a taster. These are not irrelevant or fringe movements. Huge amounts of very smart people are moving in on the space and building off of each other’s work. It’s extremely exciting and potentially could have massive impacts on the way society works. I’m talking impacts comparable to the introduction of the world wide web in the 90s.
There is a scenario in which DeFi becomes the best and most common way of earning yields from your savings.
There is a scenario in which all the current technology companies you know and rely upon all transition to a decentralized structure.
There is a scenario in which DAOs become the primary organizations through which most knowledge work happens.
The entire country of El Salvador, who previously had used the USD as their currency, has made Bitcoin legal tender. Other countries with shaky domestic currencies are considering the same.
The key, like in the early days of the internet, is deciphering what is BS from what really holds promise. And that is quite hard to do in the primordial soup that currently makes up this space.
But think about it for a second - we’re not just talking about a new niche industry. We’re talking about a shakeup of the way that the entire global financial system works. Central banks and governments see what could happen and are scared. Some of them are trying to ban crypto (which is quite difficult to enforce by virtue of its decentralized nature I should add). Some are stepping up to try to be “the leader in crypto”. Most are trying to create Central Bank Digital Currencies (CBDCs) to compete with the growing use of crypto.
If crypto delivers on even half of its promises, we are looking at a total shakeup of the world order. Typically global superpowers have been determined by the reserve currency that is used by most of the planet at any given time. Currently it is the US dollar, but what if it were a decentralized currency not tied to any one government?
The Total Addressable Market (TAM) for crypto is all the money in the entire world. mind blown
Wow, I imagine you saying to yourself. I definitely need to get some exposure to crypto.
While that might not be a terrible idea, it’s important for you to remember a few things.
First, there are many different kinds of decentralized digital currencies and tokens out there. It is still the wild west. You might be familiar with Bitcoin, Ethereum, and a few others but what about all the thousands of alt coins, stablecoins, and shitcoins that litter that landscape. The harsh reality is that many assets in this class will inevitably crash and burn, wiping out anyone who is left holding the bag.
Another important factor is that crypto is still a very technical field and most concepts are pretty technically complicated. Many things are not user friendly at all without a background in the world of blockchain and decentralized contracts. User protections don’t exist like you might expect. Blockchain transactions are irreversible and there is no bank for you to run to if things go wrong.
There is absolutely no guarantee of profits in this space. Crypto values are much more volatile than other asset classes. In a bull market they will be up big. In a downturn, they will be down big. So like any other highly volatile asset, you would be wise to not go “all-in” and to keep a bigger amount of your savings in more stable investments. This should reasonably be a small part of your overall portfolio.
Any money that you use to buy crypto should be money that you are ok losing completely.
Now with all that considered, let’s say that you accept the risks and would like a little exposure to crypto...