The Crypto Craze

Coinbase Crash at $20K
This year, and particularly these last few months, have seen an exorbitant increase in the value of Bitcoin, Etherium, Litecoin, and even a handful of the newer and lesser known cryptocurrencies. Enough of an increase that had you converted the entire sum in your trading account into Bitcoin at the start of the year, just as an example, you would currently be sitting on a twenty-fold increase. That’s 2000% in one year, without having to spend any time trading, analyzing charts, looking at fundamentals, or any of the other activities that we follow as disciplined traders.
One very popular Forex forum I frequent has lately seen all of its once fascinating threads regarding the intricacies of the Forex market devolve into discussions on cryptocurrencies and how people will move all their holdings into Bitcoin for 2018 expecting it to continue rising. And why not? After all, it would have been a very effective strategy had you followed it exactly a year ago. Well, there are several reasons why not, and you don’t need to agree with me on any or all of them, but you really should pay attention to them. Foremost among the reasons is what every trader should know by heart, past performance is not a good indicator of future performance. But there are many more. Here’s my list.
  1. What goes up doesn’t necessarily keep going up: This should be familiar to everyone, especially when there is no good reason for something to have gone up in the first place, other than hype and people’s emotions. Bubble, anyone? Not a scenario particularly conducive to good trading. In fact, when everyone else is saying that there’s no possible direction except up, that’s precisely when you want to start looking for the exits.
  2. Most cryptocurrencies represent nothing: This is key. Cryptocurrencies aren’t backed by anything or anyone, they do not represent any real value. There is no reason for Bitcoin to be trading at $100, much less $20,000. In fact, the thing they resemble the most is a classic Ponzi Scheme. Current price is supported by new buyers, prior buyers are still able to exit with profit by taking money from new buyers. And if everyone decided to cash out, the market would quickly run out of buyers, causing an instant crash; a crash with no bottom since there isn’t any underlying asset with a real value. Tulips at least had some use, you could plant them and enjoy the pretty flower they produced.
  3. Theories on why Bitcoin has value make no sense: Some people point to Blockchain as the underlying value. Not so. Blockchain is absolute genius as a technology. It will revolutionize the way we record transactions and will impact almost every human endeavor, in a good way. It adds value. But Bitcoin (and other crytpocurrencies) aren’t the blockchain. The blockchain’s value as a technology does not transfer over to Bitcoin. That’s like saying that my company has value because I print my balance statements on gold paper. From there, the theories quickly veer off into fantasy. Someone I know who should know better went as far as saying that the number of Bitcoin in existence made it scarce, thus driving up its value, and that this would continue. Scarcity of a worthless instrument does not equate to value, anyone who knows economics should know that. Especially if they’re claiming to be a trading instructor.
  4. Mining operations are getting more and more expensive: New Bitcoin are created by miners. These are computers solving complex formulas that produce the new hashkeys for the next chain in the blockchain. As time goes by, the effort needed to calculate these hashes grows, requiring more and more computing power, which means more electricity. Mining operations are already set up in some of the cheapest places on Earth when it comes to electricity, but as time goes by, even that won’t continue to be cost effective. Not to mention the ecological footprint all this is producing. As soon as it ceases to be cost effective, mining operations will start to shut down. This isn’t a guess, it’s the same thing that happens with actual mining operations for a real asset (silver) when the spot price drops too far. If it costs $20 to extract an ounce of silver from the ground, but silver is only recouping $15 per ounce, then you have a problem.
  5. The crash is coming: A correction on Bitcoin and other overvalued cryptocurrencies is way overdue. It may be a correction all the way down to their real value of zero, or a series of corrections with periods of renewed attempts to go higher, until ultimate failure. It can happen tomorrow or a year from now, or even longer.

So should you be buying into the craze? I wouldn’t. That doesn’t mean you can’t make money off of the craze while it lasts, though. Some of Bernie Madoff’s investors made money, the ones that pulled out early, taking with them the money of later investors. So if you choose to jump in, at least use what you know as traders and investors. Don’t put all your eggs in the same basket. If you want to gamble on Bitcoin or any other cryptocurrency, do it with money you can afford to lose, and be prepared to lose it. A diversified trader is less likely to blow up. And whatever you do, don’t mortgage your house to buy Bitcoin. The last time people were mortgaging their homes to bet on a market that couldn’t possibly go down was in 2008. Anyone need a history lesson?

Lastly, don’t pay some opportunistic scammer for a class on cryptocurrency investing. It’s not complicated. Let me save you thousands of dollars: So long as you believe it will go up, buy it. As soon as you don’t believe it will continue to go up, sell it. And here’s a free $10 to get you started. Class dismissed.

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Founder and Director of Special FX Academy, Andres is now a full time trader, mentor, and writer. In the past, Andres has held director level positions at venerable trading exchanges including New York Stock Exchange, Euronext, and Fannie Mae. Buy his Forex Trading book here!

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