I thought I’d take a moment to write some initial thoughts about crypto currencies. These have been all the rage in 2017.
Am I a participant in that rage? Yes I am. Do I recommend it for most investment or retirement portfolios? Usually no.
I buy all of my cryptocurrencies on Coinbase. I’ve found that their interface is the easiest to use and they support the main currencies I’m going to talk about in this post. I don’t hold much stock in any of the other crypto exchanges just based on preference. I have attempted to use Kraken before, but the only advantage is that it offers access to some of the more obscure currencies like Dash and Ripple. At the moment I am not interested in either of these, but will not flat out disregard them; they both have interesting prospects for growth.
So for the time being Coinbase is my exchange of choice. They seem to add currencies as they become better established. An added benefit is it discourages compulsive purchases of currencies you may not necessarily understand.
If you sign up for Coinbase using this link, you and I will both get a $10 gift of Bitcoin. This shouldn’t be your motivation for signing up, and it’s certainly not mine for referring you. But $10 of Bitcoin can become $100 on a long enough timeline 🙂
Back to the matter at hand… cryptocurrencies… evil or not evil?
I think the quickest way to lose money is to buy something at the top of its value. Think of it this way: If the price of Jordan’s dropped to $20 a pair, what do you think most people would do? THEY WOULD BUY A DOZEN PAIRS OR MORE EACH! And what would people do if the price rose to $600? They still might buy a pair, but they’d definitely do some analysis as to what their reasoning would be.
The fact is, the most surefire way to make money is to buy valuable things for less than they are valued. This sounds a lot easier than it is, though. Value means different things to different people. The value of something is not what you think it’s worth… it’s what everyone else thinks it’s worth.
If you bought a pair of Jordans for $600 because you love the brand, but suddenly Chuck Taylors were on the rise again, odds are the market would not value your Jordans the same way. So even though you think they’re worth $600, the market might think they’re worth $200. So if you tried to sell them, you’d lose money.
The same goes for stocks and really just about any other asset.
Your goal in making money with investments of any kind should be to buy those investments which you believe have intrinsic value to them, and which are priced for less than that value. If you are certain that Apple is a $200/share stock, but it’s trading at $110, then it is a valuable acquisition.
With cryptocurrencies, we have a problem, in that the actual value has yet to be established. This is evidenced by their dramatic sweeps back and forth daily, sometimes by 20+%. Every now and again a market will correct by large numbers, but for this kind of volatility to exist day-in and day-out, we must be careful.
Additionally, there are lots of people who call the rise of cryptocurrencies “parabolic.” If you remember from high school math, a parabola has a very distinct shape… and what goes up must come down at some point. Many critics believe that cryptocurrencies have reached their peak.
If we were to believe these people, then we would be buying an asset at its peak value. In other words, we would never make money on it unless the market, some day, recognized that is value was worth more.
I take a much more conservative approach to investments in cryptocurrencies. I look at what the currency is, rather than what its price is and what its history is (although its history should come into play at some point). If you look up the white papers on most of the new cryptos, they all sound very similar:
“We are a decentralized, disruptive, distributed platform for engagement of dynamic blah blah blah blah.”
Unless you know what all of that jargon means, you probably shouldn’t invest in it. Too many times I have met with people who have advised me to buy cryptocurrencies, who, when asked what they are, have no real answer. Often I get “Well, it’s really complicated, but they are poised to skyrocket!” If someone can’t explain what they are invested in, or why they are invested in it, don’t buy the snake oil.
Personally I feel the crypto market is too high at the moment. I don’t believe in timing markets or trying to ride the wave. I think it can work out with luck, but that’s about it.
If you are interested in buying cryptocurrencies, I suggest you do it frugally, and with money you are willing to lose. Think of it like a trip to Vegas. Everyone goes to Vegas to win, but everyone goes to Vegas with X dollars earmarked for loss. If you get lucky on a cryptocurrency, you stand to make a lot of money. The odds definitely favor the house though, and more likely you will lose your investment.
The three picks which I like the most, at the time of this writing, are also the 3 most prominent. I think they’re the most prominent for good reason. This doesn’t mean I advise buying them right now, but I think it would be wise to watch their prices and see if you can buy a dip.
Bitcoin
Bitcoin is the daddy of them all. Although not the first cryptocurrency, it’s the most well-known. Being first to market has a lot of advantages. In Bitcoin’s case, there are a few limitations to its currency, but those limitations have been offset by its first-to-market advantage. I see Bitcoin worth many times more than what it’s worth now. When that will happen, I have no idea.
Events have been set in motion in the last year or so to establish Bitcoin as the cryptocurrency. As it gets accepted at more and more retailers, I think its position will only be further sealed. I’m waiting for it to take hold at the giants like Walmart and Amazon, and then will love to watch it soar.
I own some Bitcoin but it is about a 10% portion of my cryptocurrency portfolio.
Ethereum
Ethereum is a lot more than a currency. Its goal isn’t actually to be a currency in the same way as Bitcoin. My understanding of it is more based on the infrastructure it helps to create for developers and other companies. There’s a lot to be said about Ethereum which I won’t try to rehash here (I know, I sound like one of those “it’s complicated…” types), but it would be my preferred investment in cryptocurrencies.
While I think Bitcoin will be the established digital currency, I think Ethereum offers so much more to the world as far as versatility goes. I think of Bitcoin as something I keep in my wallet to spend, and I think of Ethereum as an actual investment.
I own Ethereum as my major holding in cryptocurrencies.
Litecoin
I do not own any Litecoin, but I recognize some value in it. It is proposed that Litecoin fixes some of the disadvantages of Bitcoin, such as the time to mine or add blocks to the chain.
The reason I do not own Litecoin is because I think it is valued where it is currently only because of Bitcoin’s movement. Even though you can buy portions of Bitcoin, people see a $10,000+ price tag and freak out. Litecoin’s $200+ tag looks a lot more attainable even though $200 US is the same as $200 worth of Litecoin, which is the same as $200 worth of gold, diamond, etc. It’s like asking what weighs more, a pound of feathers or a pound of bricks?
Eventually I think Litecoin will enjoy a successful, and warranted appreciation. I do think it will be worth more than it currently is, but I’m not interested in riding the roller coaster up to that point.
Honorable Mention: Refereum
I’m very interested in follow the development and growth of Refereum. I think the platform has a lot to offer, and I support their overall goal. It is designed with gamers and streamers in mind, to make the monetization of online gaming and streaming more… streamlined.
There are thousands of cyrptocurrencies, and this one just happened to catch my eye because I grew up as a gamer and recognize the market that it caters to.
There are estimated more people streaming or watching Twitch than there are watching Sunday Night Football. That’s a HUGE market with LOTS of potential for profit.
Refereum has partnered with some major players in the gaming industry, including Twitch, Steam and Unity Engine. These are significant (even if unofficial) backers.
I do not own any Refereum, but I think it’s worth a gamble if you can afford it.
I don’t recommend cryptocurrencies for the accumulation of wealth
Over the long term, I believe there will be several successful key players in this market. Unfortunately things are so volatile now that I don’t think it’s a market worthy of investing in unless you truly can consider that money to be already spent.
Remember, we make money by buying valuable things for less than they are valued. Cryptocurrencies are valued way more than they should be right now. However, I firmly believe that some of them will have intrinsic values that are far beyond what they are currently.
My wife and I have no goals to make cryptocurrencies a part of our investment or retirement portfolios. Anything we make on them will be icing on an already baked cake. We will consider profits as “fun money” depending on how much it grows.
What are your thoughts on cryptocurrencies as an investment?