Why I dumped all my cryptocurrency (and why you should care)
First of all, let’s get things straight. Despite the flashy title, the purpose of this article is not to:
- convince you to sell all your crypto assets
- spread FUD (fear, uncertainty, and doubt) regarding cryptocurrencies
- diminish the importance of blockchain technology as a whole
The purpose of this article is to:
- help you start asking the right questions before you decide to invest your hard-earned money
- shed some light on the less talked-about aspects of cryptocurrency
- explain my investment strategy of value over hype
Who am I?
I first got into Bitcoin about two years ago. As a student at University of Michigan studying computer science, I’ve always been intrigued by the disruptive blockchain technology behind Bitcoin and the thousand or so other cryptocurrencies.
This year I joined Wolverine Crypto Trading, which has given me an opportunity to connect with some of the brightest students on campus. As a group we meet every week to learn the ins and outs of crypto trading strategies, and more importantly the technology behind these cryptocurrencies which we believe will change the world in the coming years.
Personally, I’ve held positions in many altcoins ranging from Bitcoin to Chainlink, from Ethereum to Ark. But on January 10th, 2018, I sold it all.
The “Crypto Bubble”
These days, the word “bubble” has become just as big of a buzzword as “blockchain” or “artificial intelligence”. As cryptocurrency investors, we hear this term used almost every day, but many of us are actually too young to have experienced our bank accounts zeroing as a result of a bubble popping.
When I first got into crypto, I had to grit my teeth and hold with steady hands as the value of my assets fluctuated up and down, staying in the red for months at a time. But over the past few months, cryptocurrency investors have had a different narrative.
Everyone has been trying to predict the next coin that will provide 10x returns, but if you missed that boat your consolation was still at minimum a 2x or 3x profit. This is the exact reason everyone has been so apt to pour in money — it feels like a low-risk, high-reward investment. Over the past few months, as long as you avoided the coins that had just pumped up 300+% in the last 24 hours, you essentially couldn’t lose.
Now ask yourself, what happens when the crypto market slows down on this nonstop upward trajectory? Will people be so quick to put a second mortgage on their house when the risk of losing all that money actually becomes a reality? Will investors continue to throw money into cryptocurrency “hedge funds” after they get crushed and realize that their 1000% return rate was merely a product of the previous bull market?
Many experts predict that while a few coins will prevail and their valuations will go to the moon, the vast majority of coins will watch their price plummet to zero. Now that prediction may urge investors to enter positions in top 100 or top 25 market cap coins, but does their current market standing really indicate whether they are here to stay?
How does Litecoin maintain its value proposition when other coins offer faster transactions and lower fees? What’s the need for Ethereum when Bitcoin finally makes a core update offering smart contracts… or when another coin makes it easier to create apps using widely-known languages like python instead of Ethereum’s native language solidity?
When this bull run finally comes to a halt, and valuations become more about value and less about hype, these are the questions we will need to be asking ourselves in order to have any chance of succeeding in the cryptocurrency market.
Value vs. Valuation
Currently, cryptocurrencies are priced based on speculation rather than value. Since most of these cryptos don’t have real services, or are not usable on a daily basis, the only reason people buy the coins are because they expect someone else to pay more for the same coin sometime down the road. This pricing model simply isn’t sustainable.
To illustrate this point, let’s compare cryptocurrencies to something we all know and love: pizza. Now, imagine that no one has ever tried a slice of pizza, and instead of selling slices directly, a new restaurant opens up selling only coupons for pizza. Intrigued by the prospect of a new delicious treat, people begin buying these pizza coupons, hoping to cash in at a later date. As time goes on, customers realize they can resell the coupons to their friends for a higher value, and their friends then turn around and do the same, thus increasing the going price for one of these now sought-after pizza coupons. This is called valuation based on speculation.
However, once the pizza is finally ready and the coupons can be exchanged for a slice, people realize that a slice of pizza is actually only worth a couple bucks, so the valuation of the coupons comes tumbling down to meet the actual price people are willing to pay for a slice of pizza. This is called valuation based on value.
While it may seem fairly outrageous to compare cryptocurrencies to pizza coupons, and there may be a few more factors involved in the pricing, the main point holds. Most cryptocurrency investors are paying for something which they don’t know how people will ever use or value.
This becomes a major problem, specifically for coins that try to function as an economic system. Siacoin, for example, aims to serve as a marketplace for decentralized data storage. The economic idea behind Siacoin’s price is rather simple: as the demand for decentralized storage increases with a constant supply, the price of a Siacoin will increase as well. As supply and demand reach an equilibrium, the price will stabilize at an amount buyers and sellers deem fair for storing data on the cloud. In practice, however, we never see this economic equilibrium because the vast majority of Siacoin holders are not actually participating in this data storage marketplace, and are instead holding the coin based on speculation of the price increasing.
Many of these cryptocurrencies like Siacoin offer immense value propositions to businesses and consumers, but as long as investors treat the coins as speculative assets, they will never be accurately priced to reflect their true value. As investors, we haven’t done anything wrong, per se, by betting on the future of these coins, but it is important that we distinguish true value from price valuation when deciding where to invest our money.
Regulation and the Market
In recent months, cryptocurrencies have had somewhat of a rocky relationship with government regulation. Between China banning ICOs in September and South Korea contemplating a full on crypto ban in the past week, trends no longer favor the generally unregulated market that cryptocurrencies have known for the extent of their existence.
Investors are often quick to reference the sharp increase in cryptocurrency prices that occurred in the months following China’s ICO ban, but in reality we have not even begun to see the effects, both positive and negative, that these regulations will have on the cryptocurrency landscape. I mention positive effects because while regulation may hurt prices, it is an important step toward removing nefarious actors and legitimizing these extremely young currencies in the eyes of governments around the world.
On the downside, it is undeniable that regulations have, and will continue to, play a role in the falling prices of these cryptocurrencies. The Asian market is a major player, and by creating more barriers to entry, people who would have otherwise flooded money into the market will be left on the outside looking in.
Beyond the laws themselves, news related to recent events in South Korea has not done much to help the price of cryptocurrencies. As a South Korean citizen, when you see a headline like “Authorities Raid South Korea’s Largest Cryptocurrency Exchanges”, your natural reaction will likely not be to throw money into crypto markets. As quickly as the opportunity to make a quick buck can drive people into crypto, fear of being arrested for money laundering or tax evasion can drive people away, even if those laws don’t actually exist yet.
About a week ago, Reuters released a statement about South Korea looking to impose sanctions on certain exchanges. The market experienced a slight dip, but bounced back quickly the following day. Then, a week later nearly every major coin crashed, losing between 20% and 50% of their values. These sharp declines don’t happen instantly, but as we see new narratives take hold it’s not surprising to see drops like this occur.
And Asia is only the start of the coming avalanche of regulation. Unbeknownst to many American crypto investors, the recently-passed GOP tax plan considers any cryptocurrency transaction a taxable event. That just becomes one more headache (and wallet-ache) anytime you want to make a transaction on your favorite exchange. This new tax law, combined with the IRS’s requirement for Coinbase to disclose information on any user trading more than $20,000, suddenly puts the United States on the more aggressive end of the stick when it comes to cryptocurrency regulation.
The Real Reason for Selling
I commend any cryptocurrency investor who was able to make it through my bearish narrative. It’s often not easy to hear the less optimistic side, but in order to be successful investors it is important that we analyze both sides of the coin. Like I said, my purpose in writing this article was not to have you sell your crypto assets, but for you to walk away asking the right questions that will allow you to make more informed decisions on your investment strategies.
As someone who invests so much time learning about cryptocurrencies and blockchain technology, I will not be staying out of the market forever. We’ve seen prices correct from all-time highs over the past few days, and we may continue to see them drop in the near future, but the progress we have made in terms of blockchain technology is here to stay. This is an extremely young field, and I have no doubt that multiple cryptos will prevail and make some people very rich.
By personally taking a step back from my positions in crypto I’ve found myself more capable of analyzing the market from a less biased perspective. Continue to invest as you see fit and don’t feel pressured by my opinions to pull your own money out of the crypto market. If you take away one thing from this article it should be to think analytically and focus on asking the right questions when it comes to why you are deciding to invest in a certain asset.
Note: cryptocurrency prices have dropped greatly since the time I started this article. My personal strategy has always been to avoid selling off at a low point, so do not take this article as investment advice, but rather as a resource to help you make more informed decisions. Timing the market is an impossible strategy, but in the long run when these cryptocurrencies do rebound, making analytical economic decisions and understanding the blockchain tech behind your investments will enable you to have success in this highly volatile market.
