Caveat Emptor: Here’s What You Should Know Before Jumping on the Bitcoin-Crypto Bandwagon

A word of caution to those swooned by the big gains and “mass adoption” of cryptocurrencies

Hansel
Hansel
Nov 27, 2020 · 12 min read
Photo by Harrison Kugler, Unsplash.

If you’ve been following the rally on the equity markets or technology stocks, chances are, you might have noted how cryptocurrency prices have also surged in recent weeks. Bitcoin (BTC) has surged over 400% since March and is near its all-time highs while Ethereum (ETH) and many altcoins have also seen hundreds of percent gains (if not more).

Besides these big numbers that are luring you in, the media is too, with big names like PayPal, Square,and JPMorgan publicly declaring their moves into the space. You might even come across even more niche news like how ETH is due to move into POS (Proof Of Stake) on 1 December, or about how DeFi has grown tremendously in the past year.

So you’re ready to put your hands up and say “I want in”, and here’s where I have to give that warning — “Wait A Minute”. From someone who has been following the crypto space for a short while (since 2017), who is positive about the future of cryptocurrencies, I’m asking you to reconsider about buying in.

I bought my first crypto in 2017, weeks before the incredulous rise, rode the whole wave up, and held most of my positions the whole way down (Ha, I know right). My first major lesson was about BTC and ETH forks, followed by the ICO and Ethereum dapps craze. I got so excited learning I decided to write a book that addresses crypto as a technology and as an investment, and even picked up technical analyses to try and time the market.

In the longest bear market ever, I reflected on what actually happened back in 2017–2018 and gave ideas on to How To Spot The Next Crypto Bubble, in a time when most people felt that crypto was dead. And here I am, about 80% positive that we are in a crypto bubble – just as we are in a housing bubble, equity bubble – and it’s only a matter of time it pops.

This is why I’m writing this article, to serve as a warning. Don’t get me wrong, I’m positive about the future of crypto; I just think that it’s not time yet. The article will be broken down into several parts:

  1. What has changed for crypto between 2017 and now
  2. What is driving this insane rise, and why it’s not sustainable
  3. Zooming out to look at the overall state of the world, where the economy is and where other markets (equities) are at
  4. Foreseeable challenges (and risks) in the crypto space
  5. What you should watch out for if you want to get in on the action

Part 1: Crypto Market, Then And Now

It was 2017. I was alerted by the rise in ETH prices, from around $8 in January to $50 in March/April, and $180 when I decided to buy my first ETH. What is this insane rise, and why is it happening? Later in the year, the ICO craze led the markets to rally to its highest ever, and then came the longest bear market as we now know it in the years to come.

Looking at the state of development now, BTC has not changed much. Sure it has forked countless times, even its forks have forked, and its rewards have halved twice. Yet, the Lightning network does not yet look ready.

Not counting the developments (or lack of), the original BTC that has been designed to function like gold still works as it had previously. Add to that more HODLers and institutions buy-ins, and increased scarcity, it might explain why BTC has become more expensive. But widespread adoption? Think again.

The ETH space presents a much more optimistic picture. With the rise of DeFi applications, which is a wonder and a whole separate topic on its own, it once again flagged out limitations with the current ETH system. But hey, with ETH2.0 arriving on 1 December 2020, it’ll magically solve all the scalability issues right?

Technically, that is true. But if you were to dive in a bit on the phases of launch, you should get that it’s not going to be like a light switch that goes on. While I’m excited about the launch, I’ve also learnt to be patient with development and implementations. It takes time. It’ll be used when it’s ready.

Having said that, there is one major change in crypto markets — it’s how much easier people can now buy altcoins. Previously, you’ll have to first secure your BTC or ETH, transfer them to an exchange to trade for alts. Likewise, you’ll have to do the reverse if you want to sell the alts. These days, many exchanges already offer direct altcoin-to-fiat pairings.

Part 2: What Is Driving This Crypto Rise

So are these changes driving the price rise? Possibly. But remember that it’s also the media narratives that are influencing people’s expectations, which is what I posit in How To Spot The Next Crypto Bubble.

This is possibly the strongest narratives, and in my previous article, I illustrated with the price chart how the price increases in the past year corresponded with the halving of BTC block rewards and ETH2.0 final testnet launch.

Having said that, increases caused by these tend to be of a slow-and-steady nature (relative to crypto price movements), and not like the sudden surge in altcoin prices we’ve experienced these two weeks. So while I believe that this factor is a contributing factor, there’s a great deal of speculation that’s causing the excessive rise.

You might think that crypto is more widely adopted, and the honest answer is no. Sure, it has become easier to buy and own crypto, which also means that it’s become more liquid, but that just means there could be widespread speculation, not adoption.

Most businesses still do not accept crypto. Whether it’s because they can’t account for it properly, or perhaps they still don’t trust crypto, the fact is most people still don’t get it. So if you’re buying into the widespread-adoption narrative, think again.

PayPal opening up crypto to all its merchant is not adoption either. When merchants and users cannot withdraw the cryptocurrencies, and settlement is still in fiat currency, it’s essentially just another currency layer – another unit of measurement. When you can’t withdraw your crypto, it defeats the whole purpose of crypto.

To give PayPal the benefit of doubt, perhaps it’s a stepping stone to get people familiar with crypto without bearing the risks and complexity of owning crypto in their own wallets. But it’s hard to imagine how they can transition away from that because they’ll be operating in the crypto exchange space should they allow crypto deposit and withdrawal functions, which will open themselves up to a whole different set of regulations.

Crypto has had a positive correlation with the equities market in the past couple of years. A strong and rising equities market could have also led to optimism and positive sentiments towards the crypto market. Having said that, I’m of the view that this is the largest bull trap ever – equities AND crypto.

Nevertheless, with a “stable” stock market, it’s not hard to picture a crypto market that follows. Likewise, with a “stable” BTC at above $16.5k, it’s not hard to picture an altcoin boom that follows. Hint: Keep track of different markets even if you’re invested in just one. Sometimes, one might precede another and give you a buy or sell sign in the other market.

There’s also a related argument that money is becoming less and less valuable with QE (more about that later) or with excessive stimulus money given out worldwide, which encourages people to convert fiat into other assets – gold, property, equities, crypto. But really? I get how stable assets would appreciate, but crypto still feels more like a risk asset today.

With that said, you should be considering the validity of these reasons and whether they necessarily translate into a rise in price. How much of that rise happened due to real growth and how much due to speculation? Perhaps I’m wrong and people have come to realised how undervalued crypto is and are starting to appreciate it now — I’m conceiving that possibility but am doubtful because the truth is, most people still don’t get crypto.

Part 3: The State Of The Global Economy And The Role Of Cryptocurrencies

Image by Bill Oxford, Unsplash.

Since learning about crypto and having picked up technical analyses, one other area that has influenced my world view are the macroeconomics factors. In learning more about what drives different markets and how different countries’ production, exports, and sectors mutually affect one another, it has also changed my understanding of money, which underlies all these transactions.

In a pandemic-stricken world, where businesses are closing and unemployment rate high, it’s not a healthy sight for the economy. Many people might argue otherwise — that the markets know better and move ahead of the actual economy. Rather than an economic collapse, it’s a shift of sectors, and resources (money) are moving towards sectors that are benefitting from the pandemic.

I acknowledge that and think it’s a possible reason why major US indices have not dropped. Perhaps, we’re all taking the time to adjust to the new normal, which includes a great deal of digitalisation. But the question I keep asking myself is: Has there been progress, growth, or development in the society as a whole, that warrants a higher overall valuation?

To illustrate my point, when engines were invented, they increased productivity and led to “Faster” and “Better” — more precision, more speed, more output. Likewise, the Internet era brought about efficiency, data, and information at our fingertips, and this technology revolution has since increased our overall output and productivity.

When we look back at the past years, has there been any major happenings that changed our output such that current asset prices should be more expensive? In my opinion, our economy is barely recovering if not regressed, which is also why many people have that instinct deep down that current asset valuations are overpriced. Of course, we can talk about the expansion of money (or more specifically credit), and that would explain the price increase, but that’s another discussion too.

Perhaps then, cryptocurrency is the new revolution — 10 years in the making. This progress and development is a sign of a new world order, where the dollars will be replaced, by a superior currency ruled by code and not by institutions.

This is it! Look at all the digitalisation efforts, payment systems going online, the rise of decentralised applications. They’re all a sci-fi utopia that’s slowly unfolding. With ETH2, the blockchain will become infinitely scalable with all the benefits of immutability and decentralisation.

Frankly, I’ve considered that world. I was and still am excited by it — one where the IOT (Internet Of Things) makes us all inter-connected, and oracles make our worlds smarter and more efficient (IOTA ftw, shill warning) — that sci-fi dream. Yet, we are some way off that reality, and it will take quite a while for the many kinks to be worked out.

Just last year, Facebook’s Libra had a really strong pitch that would have brought us closer to that utopia. Yet, it’s also because how life-changing and threatening it could be, which led to Libra being stopped in its tracks by the regulators.

Most of us know so little about cryptocurrencies to fully utilise it. Thus, if all the inflow of money into the crypto market now is speculative, we’re likely headed for another historic crash. If you prefer to believe the media who are citing institution buy-ins, the question is: Why didn’t the smart money come in during the mid 2020s? Note: They probably did, and if they still are buying now, it’s probably meant to get the dumb money in.

Part 4: Why The Ideal World Of Crypto Is Not What The Media Now Depicts

I acknowledge the wider applications of crypto beyond a monetary system, and believe that is the future of cryptocurrencies. Nevertheless, it’s good to discuss about the monetary system because it raises questions as to what is being this bull run.

Most people can describe the problems of this monetary system: How it’s debt-driven, how QE is leading to a lot of money printing, how trustable is this system if more and more stimulus money can just be created.

I used to buy into these “facts” easily, until I started questioning them.

  1. If we were to move away from USD, which is currently the world reserve currency, what would be the substitute?
  2. Why is the substitute superior? How does it solve the problems of the currency monetary system?
  3. More importantly, how will the transition happen? Fast and quick, or slow and unnoticeable? How will other assets behave in the midst of this transition?

Then I come to learn that, QE is not money printing. Quantitative Easing is meant to “ease financial conditions” not by increasing the monetary supply directly, but by promoting the increase of supply. For example, reducing the interest rate encourages borrowing (which increases money supply), but as to whether the loans are actually taken out, that’s independent of what QE does.

Further, if you were to consider how the dollar became the central medium/currency for global transactions and how it functions, the closest replacement in crypto sense is what Libra proposed with an underlying basket of currencies, commodities, and assets that floats. *It’s the most similar to our current system, and not something as different as BTC (closer to gold than dollars).

Without jumping into further details, the point is that we can’t break away from the USD system just like that. And where Libra failed, PayPal is unlikely to succeed either, at least not in the near future. So there’s definitely some way to go before crypto become the main mode of payment.

Over the past years, crypto has also become more functional and usable. Exchanges, interfaces, and wallets have become more friendly, which means that the user base of crypto has most definitely increased.

However, on the regulatory end, it’s always been a challenge for crypto exchanges who have to comply with KYC (Know-Your-Customers) and AML (Anti Money Laundering) procedures. There’s also the nagging question as to whether crypto functions as a currency, a security token, or an asset.

While all these are being worked out, there is a systemic risk of owning cryptocurrencies. Whether it’s for tax accounting purpose, or the possibility that it might be banned, or you cannot trade it for fiat, these are all the risks of owning and holding your own crypto.

With time, these challenges will be worked out. But it also means that we’re not going to wake up one morning to experience sudden changes in regulations, institution adoptions, or new implementations. The world will be ready for crypto eventually, just not now.

Part 5: Beware Of These Before Buying Cryptocurrencies

Having said that, you probably get what I’m saying. It’s a bubble, it rose, it can still rise, but it’s going to burst. Many of you want will still want to get in anyway, perhaps because that’s a money you can afford to lose.

So here are some tips, things you should look out for when buying your own cryptocurrencies, because crypto is a pretty complex and dangerous world.

  1. It’s not safe to store your crypto on exchanges. You can trade it on exchanges, but if you want to keep it for the long-term, transfer it to your own private wallet. Get a hardware wallet just to be safe.
  2. Crypto prices can jump by hundreds of percent or more. Don’t be shocked if it does but don’t expect it to happen all the time either.
  3. Crypto scams will be on the rise. Always keep your private keys to yourself, and if it sounds too good to be true, it probably is.
  4. Don’t try to trade to increase your pool of crypto (unless you are a pro or you want to learn from losing). If you want to go long, a simple buy-and-hold strategy will actually work better.
  5. Don’t be surprised to see prices drop by 30% or more in a day. Most of us in the space have already lived with 90% or more in losing positions when we held alts; this rise has barely brought us to break-even levels.
  6. Don’t buy into all the different altcoins. You still have to get some BTC and/or ETH, but in terms of “diversifying”, just keep it to 3 to 4 alts.
  7. If you’re not keen to learn more about crypto. Either buy and forget about it, or don’t buy at all. Most uninterested people who jumped in and saw insane losses were out within a year of the bear market.
  8. Don’t fall in love with a particular crypto. If you want to profit from it, you will have to sell it. If you’re hoping for a big payday when that crypto becomes mainstream, it’s more likely that you’ve forgotten or lost your access to it.
  9. If you want to make a profit from crypto, learn what it is. More importantly, pick up investing and portfolio management basics because you will need some take-profit and stop-loss strategies.

Above all, don’t take any of these as investment advice. I have an opinion on cryptocurrencies and the crypto market but it doesn’t reflect what will actually happen. I’m just writing this as a cautionary tale, to share my experience and hope more people benefit from it.

If you’ve any thoughts, questions, or disagreements, please comment below; I’ll try to address them when I can. If you’ve read to the end and this article helped you even just a bit, hit the Clap or Share button so more people can read it. Thank you!

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Hansel

Written by

Hansel

I write to clear my mind – with topics from crypto investing and trading, to marketing, and life.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +799K followers.

Hansel

Written by

Hansel

I write to clear my mind – with topics from crypto investing and trading, to marketing, and life.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +799K followers.

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