When everyone thinks alike, there isn’t much thinking taking place — Jesse Livermore
In this article, I will introduce you to the wild, weird, and tangled world of crypto investing. I have spent a fair amount of time watching the YouTube influencers and reading the articles. For the most part, it is a lot of crap. There are a few sane voices out there, but I find them to be rare in the crypto information ecosystem. In my experience, what passes for objective analysis is often just naked hype and click-baiting.
I left the ground floor express elevator to take the stairs
I came to crypto from a different place. I was an early adopter of Bitcoin in 2010. I had been buying gold and silver right up to the 2008 crash. As my modest gold and silver holdings took off, I made a handsome profit. Looking for somewhere to put some of that money, I started researching Bitcoin. Getting Bitcoin back then was a pain in the butt. But I came from a technical industry, and while it took a while (I think it was three or four weeks of legit effort) I owned Bitcoin.
If I remember correctly, I had a few hundred of them—maybe more, maybe less. It was a small amount and I remember I held them for about a month or two and just deleted the wallet. They had ‘crashed’ from like .20 cents to .10 cents (or something like that) and I figured it was all just a big joke. The amount of ‘skin’ I had in the game was so low, it did not make sense to jump through all the hoops to sell the stuff.
When Bitcoin started hitting thousands of dollars it was like getting a kick in the biscuits. I also knew that I never—and I mean never—would have held Bitcoin until it made me rich. I would have sold them off for a tidy profit as soon as Bitcoin hit $5 or $10! There is a lesson here and I will explore it a little further on.
When Bitcoin started hitting thousands of dollars it was like getting kicked in the biscuits
Cryptocurrencies came to my attention again a few years later. After I graduated law school, I started a Master of Laws in Financial Services, specializing in compliance and risk management. A lot of my research centers around securities, bankruptcy, and financial crimes. While writing a series on anti-money laundering regulations for the Banking Law Journal, crypto came into my view again. My research left me unimpressed with the state of cryptocurrencies at the time (around 2015). Six years on, things have changed quite a bit.
The new old world all over again
Today there are thousands of digital coins and tokens flying around the internet. Almost anyone with modest technical skills can create a new coin or token. The crypto space today reminds me of the early days of the internet. As the ‘dot-com bubble’ blew up, thousands of ‘internet’ companies sprang up overnight. Companies, often with little more than a website and an idea that might work, ended up with massive initial public offerings (IPOs) and received gazillions in investment.
There are obvious parallels to today’s crypto space. Much like the dot-com bubble, the barrier to entry for a new entity is extraordinarily low. Likewise, the revolutionary potential of crypto is massive. Before the dot-com bubble burst, almost all of the money that came in, especially from retail investors, was purely speculative—it was basically a bunch of digital wildcatters running amok. To be sure, a lot of people made a lot of money during this time. And, a few years later, many were left broke, disillusioned, and bitter.
Roughly the same thing is happening today, though on an arguably wider scale. Is the crypto economy in a bubble right now? Almost certainly. Does that mean you should avoid investing? It depends. Amazon rose from those ashes when no one in their right mind expected them to. So did eBay and Priceline. Point is, somebody is invested in the next big thing right now — and they do not even realize it. Most people are not. Question is, how comfortable are you with those odds?
Getting started is quite easy these days. Compared to when I got my first Bitcoins back in 2010, it is darn-right simple! Much like the early days of the internet, the rules of the road have not been established yet. But prudential regulators (especially in developed economies) are stepping up their surveillance of crypto markets. That said, I can almost guarantee you a lot more industry regulations are coming soon. I am still not sure if that is a good thing or not.
Nevertheless, here is a quick step-by-step:
· Open an account at Coinbase (user friendly)
· Complete the know your customer (KYC) process
· Deposit money (debit card, ACH, or bank wire)
· Pick a listed coin or token you like
· Follow the steps to buy it
Just like that, you are in the game. If you are wondering if you can use your credit card, the answer is generally ‘no’ without resorting to a cash advance (please do not do this). So, now that you are in, what is next? That is the trillion-dollar question!
In my experience, crypto enthusiasts tend to treat crypto assets as novel instruments. There is a pervasive sentiment that crypto is an entirely new way of thinking and doing business, and that somehow, the ‘old’ rules no longer apply. I look at things a little differently than the fan-bois. The Securities and Exchange Commission (SEC) has already published numerous bulletins and guidance about cryptocurrencies and tokens. The short answer from the SEC? These things are securities, just like stocks.
A rose by any other name…
Before you start investing, there are some important caveats the YouTubers tend to overlook when click-bait hyping their latest ‘This Coin Will 1000x Next Month’ scheme. First, there are very few prudential regulators watching the crypto market. When the cat is away, the mice will play as the saying goes. In the absence of regulation, the field is littered with criminals, scammers, fraudsters, rug-pullers, and hackers, all of whom can put your actual money at risk.
To be fair, the legacy financial system is littered with the same types of people. Bernie Madoff comes to mind? Not to mention HSBC, Wells Fargo, Deutsche Bank, Western Union, and thousands of others. Point being, I think the world of finance—not just crypto—is a magnet for crooks of all stripes.
Before the SEC and ‘blue sky’ laws, stock trading looked a lot like crypto trading now. Rug pulls, fraudulent offerings, worthless investments, Ponzi schemes, pump and dumps, shilling, and everything else you see in crypto today was happening with stocks back then. But it was also a big business that made a lot of money.
Before the SEC and ‘blue sky’ laws, stock trading looked then looked a lot like crypto trading now
That is one of the main reasons it did not get banned outright. Instead, regulators focused on keeping the masses out through financial accreditation. Basically, ‘accredited’ investors get a ticket to play early. Stock promoters are allowed to shill them and capital seekers can approach them. The rough thinking being they can afford to lose money. Their upside though, is high potential yield with high risk.
Meanwhile, the masses have to wait until a public offering to buy-in. But there is safety in that, because getting a public listing is an enormous undertaking. For a company to get through that process is a strong indicator of its potential to succeed. Thus, investing in it is far less risky than putting money into a fresh start-up. The upside for them is a modest yield with much lower risk.
We don’t need no stinkin’ rules
Without any regulation at all, that is the basic direction crypto is going all on its own. The current ecosystem has two main areas of interaction: the large centralized exchanges (CEX) and the wide open decentralized exchanges (DEX). Getting a coin listed on a ‘Tier One’ CEX, like Coinbase is much like getting a stock publicly listed on the New York Stock Exchange. CEX are where the Reddit folks are, and the meme-coin buyers, and the budding YouTubers, and the projects that likely have real world potential. It is the retail space for the retail crowd.
The sharks are swimming the DEX. If you are new to crypto, you should definitely ease into buying DEX coins or tokens. You are competing with technically savvy, and crypto-rich early adopters that can absorb high-risk losses. For an inexperienced investor, buying on the DEX is a great way to turn $1000 into $850 (after costs and fees) for the privilege of holding high-risk tokens. This is assuming they do not trade it for a loss a week later to buy another DEX coin they heard about on YouTube.
In future articles I am going to write more about safely navigating the DEX and how to effectively do your own research (DYOR). Until then, let me just say be careful on the DEX. So, what to buy on the CEX? There are a ton of options, but here are some ideas:
· Polygon (MATIC)
· Chainlink (LINK)
· Cardano (ADA)
· Polkadot (DOT)
· The Graph (GRT)
I own Polygon and The Graph. I think Chainlink, Cardano, and Polkadot are pretty solid ideas too. They are all just suggestions. The point is, no one can say which project is going to ‘take off’…it is anyone’s guess. The reason you hear otherwise is that survivorship bias permeates the crypto information sphere. So, pick something you like. Choose something that interests you, and that you see a use for. Do that, and your learning will be a lot more fun. And, you might just get lucky!
As to a strategy, after you buy, I would recommend you look at the crypto investing kind of like a child treats a toy. Do you want to be the kid that keeps their toys to look at and admire? Or, do you want to be the kid who plays with their toys and trades them for other toys? That is roughly the difference between being a hodlr and being a trader. There are other ways to make money in this space, but that is for another article.
To return to my Bitcoin experience, I got a new toy, took it out, ran around with it, got bored, and threw it away. That taught me a lesson about being too impulsive when I play with my toys. Now, I might sell a toy if the price goes way up, but otherwise, I find ones I like and keep them in the package.