Speculators “Once-in-a-Generation” Opportunity
When I first began following Bitcoin, I thought the largest opportunity for me at the time was trading this new online thing-a-ma-jig. By being “early” to this new “digital asset,” I could learn how to trade it and be successful over time, while others were not yet aware it existed. Essentially, my lack of experience trading any financial instrument at ALL could be replaced by time spent studying Bitcoin while others were not yet aware it existed, or didn’t care to look into it. I quickly realized it was much more than a speculative tool — Bitcoin was, and is, a speculator’s “generational opportunity.” It’s millennials’ “internet” moment. After all… at some point everyone is going to use Bitcoin to transact or move value across borders, right?
Less than five years later and we find Bitcoin’s narrative being pushed as the new “digital gold.” Bitcoin is now a store of value that every major financial institution should invest in if they care at all about fiduciary responsibility during a time when fiat currencies are inflated and the Fed is seemingly making decisions based on a broken monetary experiment. The narrative has shifted dramatically from a free, fair payment rail revolution to the king of all value storage. There’s a mounting debt crises that will take down our modern economy, shifting the entire axis our financial world has been built upon, so you better buy Bitcoin in order to survive…
And we wonder why these Wall Street folks are hesitant to join the party?
Our message has changed drastically alongside a massive market crash for crypto, and many still aren’t buying this change in narrative or the underlying value that is denominated by Bitcoin’s hard-coded, distributed aspects.
The position today that Bitcoin will flourish if a larger global recession occurs is rather flawed. As various “emerging-assets” have come to market over the years they too have seen price destruction in a recession alongside their more traditional counterparts. Post-dotcom bubble, real estate was characterized as the safe bet in an evolving economy only to be turned into wreckage by shady banks and lending institutions. When the world feels like it's ending people pull their money out of everything, universally. Just because Bitcoin is “hard money” does not mean it can act as a safe haven asset in a recessionary period. Bitcoin’s general volatility and recent extreme crash in 2018 does not help its case either if we see a recession in the next 3-6 quarters. The pain of broke VCs and hilarity of investment funds down 80+% will not leave the traditional financial world in such a short period of time.
However, a larger crises surrounding the decimation of our current fiat-backed economy could lead to increasing adoption of Bitcoin - a global currency not connected to any government or sovereign nation. This is why you hear most of the more institutional crypto players focusing on Bitcoin as a “hedge” against our inflating fiat currencies and chaotic monetary policy. The trade war with China, overextended equities bull market and movement towards the digitization of money could be the perfect backdrop for Bitcoin over the next 6-18 months.
Bitcoin has evolved incredibly quickly as either a way to “transfer value” or as a “store of value” asset. In five years, it will likely have additional utility or at least a narrative that is entirely different than today. I don’t think it’s too crazy to think that crypto itself could be the Trojan horse that causes a recession if greedy institutional players reach too far for returns during a time over the next two years when returns are sparse in traditional financial assets.
This new digital gold has proven itself over 10 years by surviving, not necessarily through some level of adoption outside of retail speculation. The latest growth for crypto has embellished this narrative of “institutional adoption.” Don’t expect Wall Street to trust Bitcoin’s longer term value proposition only 10 years after one of the largest real estate meltdowns in modern history. It seems likely to me that most of Wall Street will treat Bitcoin as an additional value creation tool — that is, an emerging asset that can be traded, recreated and manipulated for wealth creation. After all, basic retail speculation has been the focus for most adoption of Bitcoin and other cryptocurrencies. Bitcoin certainly presents a choice to those who don’t have the benefit of the U.S. or other first-world countries where value transfer is simple and fiat currencies provide strong protection of wealth (relative to other countries like Greece and Venezuela), but speculation still makes up the majority of usage in first-world countries.
I don’t see speculation as the dominating factor for crypto-adoption changing anytime soon, but that doesn’t mean there isn’t value in investing in this emerging asset class. If you’re investing in Bitcoin today, you are speculating, plain and simple. You’re gambling - it’s just that the value proposition is stronger than it was four years ago. If you’re not willing to bet your entire net worth on the fiat system thriving or surviving over the next 5-10 years as inflation continues and the Fed potentially burns down, you shouldn’t be committed to bet that same net worth on Bitcoin thriving or surviving over the same 5-10 year period as an alternative way to transfer value, store wealth or hedge against a global economic debt crises that weakens fiat currencies. Greed is good, but not in this case. As a good friend says, “You never go broke taking profit.”
Market Cycle Setting: FAST
Bitcoin and all of crypto is often characterized as “volatile” as a way to explain its inherent risk. While crypto is indeed volatile, the term they’re looking for in this context should be used to describe the velocity with which crypto prices move and market cycles change. As an emerging asset class, crypto is relatively illiquid and small, allowing for forceful moves up or down in price that make up “accelerated market cycles.”
This tendency towards fast market cycles requires investors to understand the broader crypto-economy vs. an individual asset itself. Arguably, putting your money into an index of traditional stocks and bonds is a better 5, 10 or 20 year bet than doing the same with a basket of cryptocurrencies. This is because at a hard end date of ‘x’ number of years in either investment, you have a greater chance of finding yourself in a bearish market cycle for cryptocurrency than you would in a basket of traditional assets. When factoring in the speed of innovation around new technologies, you might find some of the assets in your crypto basket are no longer traded or functioning in 10-20 years, while IBM, Apple, treasury bonds and real estate have theoretically grown steadily and captured value over time.
If you’re looking at investing in crypto as a speculative tool to build wealth, you have to follow these market cycles.
Hopefully, as crypto emerges as a new asset class, we see additional structures and participants that help increase liquidity, slow volatility and lengthen market cycles, but for the time being I think we continue to see chaotic six-week price moves of double or triple digit percentages within 12-24 month market cycles.
Altcoins = Tokenized Startups, Kind of
It has been my belief for some time that cryptocurrency as a whole will emerge as a new alternative asset class before Bitcoin finds significant adoption as an alternative to fiat currencies. This is largely because of the way that most people treat Bitcoin as a speculative tool today. My bet is that as alternative investment options within crypto (re: altcoins) continue to increase in quantity and mature in terms of quality, we’ll see narratives that precede value creation improve within the altcoin category. This isn’t a statement that legitimizes the altcoin category today, but instead assumes the existence of altcoins will continue and not be stomped out by Bitcoin’s growth. My bet is essentially one that assumes the largest speculators will find alternative crypto-assets to bet on before fiat currencies weaken significantly enough to once-and-for-all prove Bitcoin’s non-sovereign, distributed, hard-money focused utility. Its further likely that those “alternative crypto-assets” are not just pure altcoins as we see today, but some bastardization of innovation within crypto that can be easily traded and sold to the uneducated.
Today altcoins represent a way to increase liquidity within startups that exist in a niche category of technology. Typically, you do not see altcoins at any stage representing giant existing companies, but instead representing startups focused on blockchain technology in some form or fashion. They’re brand new and no one really understands why they raise the funds that they do or why the token price of some skyrockets. Because of the fundamental differences between a truly decentralized, hard-money asset in Bitcoin, and the typically more centralized, pre-mined altcoin, you end up with increased instability and chaos in the altcoin category. Speculation to the MAX.
In evaluating these ever-criticized Bitcoin-alternatives you’ll find that almost all of them have a broad, conceptual end goal (and many don’t have an end goal, purpose or solution at all). By simply striving for “adoption” or “some utility” these altcoins are marketing a future that likely does not exist. However, by looking at altcoins as a category, instead of each as a separate individual asset that is trying to dethrone Bitcoin or Ethereum, you can begin to conceptualize how one altcoin could be undervalued or misunderstood relative to other similar altcoins. If 99% of altcoins are to fail that leaves 25-30 that make any meaningful contribution to this industry. Finding them and timing a bet appropriately has made many uber-rich over the years.
Market cap is a poor representation for token value, but still acts as a baseline metric for most altcoin investors. Additional metrics to look at could include:
- Token type (store of value vs. ‘utility’)
- Network participation rates (token holders : token usage or transaction numbers)
- Protocol function (Proof of Stake?) and how this function affects market supply over time
- An experience-based “gut feeling” as to whether or not a token will garner attention and investment from an uneducated audience who could give the token some limited, yet intense, price action… (Unfortunately this is what most will solely rely on. Good luck, you’re going to need it).
Similar to startups in emerging technology, most altcoins will fail in the long term, but because of their increased liquidity and the ability to speculate on them in minutes, days, weeks or months you see giant waves of trading volume and price action across market cycles. Holding altcoins across multiple bullish and bearish market cycles is generally suicide for most investors, as it increases the length of the gamble dramatically. All the while, said altcoin will likely experience fundamental problems and speed-bumps towards real growth as general crypto sentiment worsens in a bear market.
As the infrastructure around Bitcoin continues to improve and grow, so will the narratives for altcoin investment, allowing traders and investors to treat altcoins as a longer term venture investment. We’re still a long way from institutional adoption of altcoins and crypto as a whole as an emerging asset class, but it seems foolish to me to assume these altcoins will fail to improve and grow with changing regulation and extreme innovation from some of the brightest minds our world has to offer. For now, understand altcoins are Bitcoin-like tools for speculation to the extreme, and if you’re not trading/investing in them full-time you’re likely going to get ruined by those who are doing this full time, and with larger amounts of capital at favorable entry prices pre-project launch.
What? Why Crypto? I don’t get it.
Where are we left today with these cryptographically-focused speculative tools? As more of your friends purchase these random digital coins, do you jump in as well? Bitcoin only, or do I throw a few bucks on altcoin #1892 that sounds and looks like a college science experiment gone wrong?
For the most part, look at crypto as a way to build wealth, not store wealth over time - at least for the foreseeable future. Your friends and family are gambling on a generational speculative opportunity that is backed by revolutionary technology. If they’ve gone full-time crypto in any form I’d bet that their focus is speculating and getting rich versus some philosophical underpinning that drew them there. Those are the heady folks that drew them into crypto, but 99.9% aren’t there for that philosophical martyrdom or mission.
Speculators follow the real innovators and visionaries who are defining narratives and themes for growth or decline in this bleeding-edge technology. Some of us will make money, others will lose money, but we are all speculators trying to convince you of some larger freedom that may or may not exist if you join the party. Why crypto? Because crypto is the largest speculative opportunity for anyone with internet access, underpinned by technology and narratives that continue to prove themselves truthful and legitimate over time.