Crypto is the latest investment fad. With celebrities endorsing it, it’s no wonder that many have gotten caught in its lure and many promises.
Even though the technology behind crypto could lead to amazing results, as an investment they still have a lot to answer for. And we know this because we can take a look at the history of finance.
Photo by Pierre Borthiry on Unsplash
We’ve been here before
One of the greatest arguments in favor of crypto is that it will revolutionize industry just like the internet did.
From an investment point of view, that’s not a great comparison.
The internet has led to some of the most world-changing industries. In fact, you wouldn’t be reading this without the internet!
But despite people hoping to invest in the next Amazon or Facebook, when the internet first started, it led many investors to disaster. A bubble formed in the stock market from massive speculation in companies using the new technology. Finally, the “dot com” bubble burst at the start of the century.
The blockchain technology is still getting figured out. Most likely, the “Facebook” of crypto hasn’t even been created yet! Heck, the “Myspace” of crypto probably doesn’t exist yet either!
History doesn’t repeat, but it does rhyme. What will be the crypto equivalent of the dot com bubble?
No, really, we’ve been here before
There is no way to regulate crypto. Aside from the moral and legal implications of this (e.g. there is no way to enforce copyright – if someone creates an NFT from something you created and sells it, there’s no way for you to get your ownership back!), this has led to lots of fraud.
Again, history rhymes. And this rhymes with the stock market in the 1920s. Part of the reason the Great Depression happened was because there were so few laws regulating the stock market at the time. This lawlessness also led to many people getting frauded out of their money. It was such a prevalent occurrence that it led to a series of “Blue Sky” laws. Thanks to those laws, when you invest in a company, you can rest assured that the company actually exists.
You don’t have that same protection if you invest in crypto. Anonymous developers hype up a new crypto, and either never finish the project, or simply take their ill-gotten gains and run. Whether malicious or not, it happens so frequently that there’s a term for it: a “rug pull.”
No, REALLY, we’ve been here before!
The stock market is more accessible than ever to common people. Through relatively new tools like index funds, investors can buy a diversified portfolio. Previously, investors would need thousands of dollars in order to create that same diversified portfolio.
This meant that the market was completely out of reach for normal people without taking on incredible amounts of risk.
The crypto market has not yet developed those tools, meaning that investors have no way to diversify their holdings without huge sums of money to pour into their investments.
The same risks that plague people buying individual stocks also plague crypto speculators. No new technology undoes those very real economic threats.
WE HAVE REALLY, REALLY BEEN HERE BEFORE
If the headlines are getting more excitable, it’s because the common thread is this: the technology has great potential, but if you speak to a speculator, you’ll find they haven’t thought through how the crypto might actually be used and deliver value.
Let’s imagine that a new crypto is developed that solves all the issues that detractors have brought up (most aren’t even mentioned here, and range from environmental concerns, to concerns about privacy and cyber security). Imagine a perfect crypto is created, and it’s finally usable as a currency.
What happens to the value of the rest of the crypto market?
This has happened in countries where a currency has suddenly lost lots of value. Sometimes, those nations have had to print out an entirely new currency as legal tender.
What happens to the old currency? Worthless.
All that money that people have poured into crypto will go up like so much smoke.
What can we do about it?
History has taught us many things. We can see parallels between today’s crypto market and some of the lowest points for investors throughout history.
History rewards those who use science rather that speculation.
It’s time to stop speculating, and start implementing the science of investing. If you’re interested in learning how to implement it in your portfolio, click here to sign up for a free Bronze Account. A licensed advisor will reach out to schedule a meeting with you.