Sunday, December 31, 2017

Bitcoin et al - Making Sense of Cryptocurrency

Like every economy bubble in human history, i.e. Tulip mania in 1600s, silver bubble in 1980s, Dotcom bubble in late 1990s, housing bubble that led to subprime crisis in 2008, etc,  this cryptocurrency mania will also end badly. However, it doesn’t mean that we should avoid it entirely.

From investment point of view, there are 3 things we need to be very clear about bitcoin and its sort of altcoins like Ethereum, Litecoin, Ripple (XRP), etc.:

  1. FIRST: Speculative. It is highly speculative for now. You really should not say you invest in bitcoin or any other cryptocurrency (altcoins). You can only say you put a bet on bitcoin or altcoins.
  2. SECOND: But it is REAL. The technology, i.e. blockchain, behind cryptocurrency is revolutionary and is REAL. It will change the world entirely and significantly. It will especially change the global financial and banking system in probably a decade or two. Not now. There are also real and practical economy usage for these cryptocurrency especially on the international trade and settlement front (on top of the black markets for drugs, guns and sorts., smuggling, tax evasion, money laundering, etc.). It will eliminate inefficiency in international trade and payment settlement. 
  3. THIRD: Scams in the name of cryptocurrency. In this unregulated wild wild west of cryptocurrency world, there are a lot of scams. There are many pyramid schemes and outright scams disguise as ICO, cryptocurrency and even as exchange. They use the name of cryptocurrency to con investors. Be very very careful.

We must know clearly that cryptocurrency at this point of time is like internet company before dotcom bubble. Some will survive the definitely inevitable crash, but MOST will fail, will lose all its value and will never be seen again.

We cannot ignore crytocurrency. They will change our world for sure. But we must know, at this point, any digital coins we bought are akin to venture investment. It is a BET on new start-ups (refer to the teams who created digital coins.) with highly speculative valuation. It is not a safe value investment.

In another word to common persons like you and me, for simplicity, buying coins is a bet, not an investment.

Lesson from History (Before we BET)

Let’s us refresh our memory of a not so distant history. There were only a handful of websites like Amazon and ebay survived the burst of dotcom bubble in year 2000. They proceeded to revolutionize the world entirely, bringing the original vision of internet to our life. But numerous websites like Pets dot com, etoys, etc. failed and disappeared forever. Their investors lost all their money. Some dotcome companies like AOL, Yahoo, dragged on for years into obscurity.

IPO price of Amazon was US$17. At its height before the dotcom crash, the price was $100. Right after the dotcom crash the price fell below $10. Today, Amazon share price is above $1,100 per share. IPO price was $11. The price fell to mere $0.19 before the announcement of liquidation. US$300 million of investors’ money were wiped off to zero.

You just have to pick the right horses. (and yes, again, it is a BET. Not investing.)

For cryptocurrency now, at the end of year 2017, it is like the dotcom companies at probably 1998 of the build-up of internet dotcom bubble. The CRASH is inevitable. The questions are, when? And which coin(s) will survive subsequently and prosper into greatness to change the world?

Buy only with the money that you are ready to lose all. Don’t bet your life savings for sure, and don’t even bet with an amount that you will feel painful to lose. Cryptocurrency is a highly speculative play for now.

1. Bitcoin et al - Making Sense of Cryptocurrency