The founder of Ethereum (the second biggest cryptoasset) put it succinctly:
There are some good ideas, there are a lot of very bad ideas, and there’s a lot of very, very bad ideas. And quite a few scams as well.”
Let me address those in reverse order.
1 - The scams. There are many. The biggest by a mile is Bitconnect, which is a pyramid scheme and not even trying to hide it. It’s going to implode very soon. There’s nothing to say here but stay away.
There are also enormous red flags that the biggest exchange (Bitfinex) is insolvent and it’s substitute for dollars (USDT/Tether) is literally printing money and doesn’t have the dollars to back it up. If you decide to take a step into this space, stay as far away from these as possible. The only safe exchange IMO is coinbase.
2 - The very, very bad ideas. I would put 95% of the assets created in the last 12 months under this heading. And you’ll never be able to tell which is which. Bitcoin is already volatile enough, so messing with anything that’s not already established is taking far too much of a risk. I’ve been doing this for years and I don’t even touch anything that hasn’t existed for at least a year. That doesn’t mean everything older than that is in the clear. Because of....
3 - The very bad ideas. There are some established assets that I wouldn’t touch with a ten foot pole. Ripple/XRP being the one that stands out the most. The economics of the system are simply unacceptable for any sort of “investment” into it. It’s not even worth going into detail.
4 - The few good ideas. The first rule of crypto is “never invest more than you can afford to lose.” Because even though there some of the genuinely good ideas - Bitcoin and Ethereum are worth billions for a reason - none of this stuff is proven yet. I hope we can get to the point where enough people understand the technicalities and economics of the systems enough to intelligently discuss them and take them seriously as a new asset class. And I’m willing to engage anyone on any questions. I “invest” in this stuff because I understand what I’m investing in, not because I’m chasing a get rich quick scheme. But I know we’re not there yet in traditional investment circles. So of course no discussion about crypto is complete without addressing the elephant in the room.
Is it a bubble? Emphatically YES. All the elements are there. It’s obvious to almost everyone at this point. But that doesn’t necessarily mean you shouldn’t consider investing in a small amount. Bubbles tend to form around technologies that change the world - railroads, telecom, the internet etc. This space is getting bubbly because a lot of very smart people see the potential and are investing considerable amounts into it. But I will be the first person to tell you that at some point in the future there will be a reckoning and the scams and bad ideas will implode, and it will likely drag down the good ideas with them to some degree. How much is unknown, but the implosion is a near certainty.
But unlike housing, dotcoms and everyone’s favorite tulip bulbs - there are some unusual economic dynamics at play here. For one thing, there’s nothing else to peg this stuff to where you can definitely say we’re in the late stages of a bubble. People have been calling it a bubble for years because we have no idea what a reasonable real world value for this stuff is at this stage. Because nothing like it has ever existed before. It’s substantially different enough from existing assets that you can’t directly compare them. I know “this time is different” sounds like typical bubble talk - but these are literally as different from stocks as bonds and commodities are. They’re still bound by the same economic principles as everything else, but they’re a different type of asset. And within the broader context of crypto there are multiple different subtypes of cryptoassets as well.
Another important dynamic that upsets the typical bubble paradigm is that the more expensive a cryptocurrency it is, the more secure - and thus valuable it is. That sounds bizarre, I know - but that’s how the economic incentives work out. It’s an abstract network of value. It’s virtual but it's still real and has intrinsic value - but ultimately the system is worth what the world collectively decides its worth. Security obviously plays a large role in that. If it was a stock you’d be able to say it’s fundamentally overvalued if it’s PE is too high. But it’s not a stock. That’s not to say that it can’t be overvalued. But because high valuation creates a positive feedback loop, you can’t just look at the massive returns and pricing and declare it a bubble on that alone.
Right now bitcoin is worth $150 billion and altogether crypto is $250 billion. The dotcom bubble peaked at ~8 trillion and took years to get to that point. We could still be in the very early stages of the bubble and a conservative (in crypto standards) investment might still be worth quite a bit more than it is today on the other side of the implosion. The dotcom bubble gave us idiocy like pets.com, but the stuff that survived like google did go on to change the world. Another important thing to understand is that we’re not dealing with companies here - they’re open source, self sustaining decentralized networks. Bitcoin and Ethereum can’t go bankrupt any more than the internet itself can go bankrupt. As long as there’s at least one node in the world (and there are hundreds of thousands and growing) - they will continue to exist. There isn’t really a plausible scenario anymore whether your investment in them goes to zero, just as you could say the same for gold. It’ll always be worth something. Whether or not it’ll outperform stocks - literally no one can tell you that. The only really clear thing about it right now that they’re highly uncorrelated to other assets. On its own it’s risky but as a part of your portfolio a small investment in bitcoin can actually reduce your risk through diversification. A 1% allocation won’t derail your future in the worst case scenario and could potentially have enormous upside in the best case scenario - particularly if your other assets have a bad streak. That’s the only case I’ll make to a crowd as conservative (and rightfully so) as r/personalfinance.
Get your emergency fund straight first, have a properly balanced and allocated portfolio of traditional investments first - but don’t write bitcoin/crypto off because you don’t understand it and the risk is difficult to quantify. Lots of very smart people are doing incredible work in this field right now and even though there will be a massive implosion at some point in the future - when the smoke clears the good ideas will stick around, and I think it’s unusually easy to spot the winners and the losers here.
But in either case - don’t invest in anything you don’t understand. Learn about it first, then make up your own mind. At the very least if you’re into finance and economics it’s fascinating stuff. If you can’t take the time to do a little research on how it works and why it’s a good idea, then you shouldn’t be putting your hard earned money into it.
Submitted November 25, 2017 at 09:22PM by Darius510 http://ift.tt/2AwEuhd
