I’ve been non-casually observing the cryptocurrency ecosystem since 2010. At some point along the way, I began to see patterns emerge again and again. Some are utterly hilarious, but all are interesting. But, like the 5 stages of grief, the progression is always the same. But, in these stages, I see my own journey from 2009 until today. I don’t mean to poke fun at anyone but myself here. The following are my observations:
Stage 0: Bitcoin (cryptocurrencies) is/are just a scam
This is actually a very necessary stage for someone to go through. As my friend, Michael B. Casey says: there might be something very wrong with you if you don’t question that this whole thing is a scam. I mean, without knowing the tech behind Bitcoin, this all resembles a big scam. This stage can take years to get through. My hope is that once you graduate from this stage, you’ve taken the time to look into the tech and not blindly aped your friends in a desperate FOMO response.
Stage 1: There’s no intrinsic value
People like Peter Schiff were here for a very long time. Peter has actually moved on to stage 4, but this stage is still noteworthy for those who are gold absolutists. People usually graduate from this stage once they realize they can’t get rich from buying gold. Gold should be considered insurance and not a speculative investment like bitcoin. You buy bitcoin hoping it will increase its purchasing power, asymmetrically. You aren’t buying a blue chip stock looking for a 5% dividend, you are buying a piece of the future. Bitcoin’s intrinsic value is its network of users, which is growing nonlinearly. This is an extremely good deal for people wishing returns on their investment.
Stage 2: Only criminals and terrorists use it
Big government and establishment types usually never make it out of this stage. They can’t bring themselves to realize that there are much better ways to send illegal transactions than via cryptocurrency. They are also threatened by the rise of cryptocurrencies either because they hold only fiat currencies like the US Dollar, only transact in fiat currency trading pairs, e.g. USD to equities or have a vested interest in the currency, e.g. they are part of the government or the central bank. A self-aware person in this stage would realize that cryptocurrencies aren’t the problem, but a symptom of the problem that the central bank and government are helping to create. Instead, the question should be: “What is it that we are doing to drive people to buy assets that aren’t controlled by us or our government?” or “Why would an ordinary investor and institutions want to risk their capital in these cryptocurrencies in the first place?”
Stage 3: Governments will just ban it
This was me for a long time until I realized that this is an eventuality. This will not kill cryptocurrencies just like it did not kill the gold bullion market after FDR banned holding gold bullion in the 1930’s. But let’s use a more recent example of a central government taking punitive action against cryptocurrencies. China has already, effectively, banned cryptocurrency at the top level yet there is a vibrant, some would say the most vibrant, market. For a long time, the popular meme “Hello Internet? China ban Bitcoin!” was the rage. The price of bitcoin would tank, but recover very quickly. What doesn’t kill crypto only makes it stronger.
Stage 4: This is just a bubble! It will crash to ZERO in the next 5 minutes.
I do find it strange when the same people who take their “stimmy” checks and pile the whole thing into their Robinhood account to buy AMC stock would turn around and say this sort of thing. I am not criticizing buying stonks; apart from the fact the the CCP owns a good chunk of AMC, I am a fan. Every market is manipulated by traders attempting to direct your behavior in their favor. Before you buy anything, at least know if what you are buying is cheap or expensive. Bitcoin has unique utility and, therefore, is extremely unlikely to crash to zero. Stonk speculators will not allow this.
Stage 5: I don’t need crypto because my bank account and credit cards work fine
This is where most middle to upper-class first-worlders ought to be. If you aren’t the type to want to learn anything new and your financial system works for you, then go with God my friend. A case could be made that some day your financial system could leave you in the lurch, but this could never happen, right? I am sure printing trillions of dollars per year and giving everyone stimmy checks will have no consequences. Additionally, what if your government becomes tyrannical requiring everyone to take some sort of medication in order to conduct normal existence? Seems far-fetched, but I guess it could happen. If you don’t want to take said medication or can’t take it, what then? I guess you want to just withdraw your assets from institutions that your government has power over and leave the country. Good luck with that. If the government is forcing you to put something in your body, they will certainly use financial sanctions too. Expect the best, but plan for the worst.
Stage 6: It’s Blockchain not Bitcoin
OK, this one irritated me circa 2016, but I’ve seen many people go through it. The people stuck in this stage are bankers, brokers, CPA’s and insurance types, bless their hearts. What they are really saying is: I am super pissed that I missed the boat on this Bitcoin thing, so I’ll downplay the Bitcoin part and promote some new vaporware that I can get in on the ground floor. What they don’t know is that if a new Bitcoin-type technology did get started, they wouldn’t recognize it and they would miss out on that too. It is OK not to be an early adopter. Cautious people usually do OK in the end.
You can’t separate Bitcoin from “Blockchain”. It wasn’t as if there was this thing called “Blockchain” sitting there and all of a sudden Bitcoin came along and started using it.
Satoshi Nakamoto wrote software they named Bitcoin. The genius in this software was a data structure that was later termed “Blockchain”. Sure, you can take the data structure out of Bitcoin and create whatever you want with it, but Blockchain is just a generalization of Bitcoin. Remember that Bitcoin with a capital “B” refers to the payment network, of which The Blockchain is the implementation, whereas bitcoin with a lowercase “b” refers to the token that is transacted on Bitcoin.
Stage 7: It’s too volatile
People who say anything is too volatile probably has too much invested in that thing. If they have nothing invested but still claim that something is too volatile, I need to ask “compared to what?” Compared to the Euro, yes, there is volatility because volatility in the Euro is engineered out by the ECB. To me, volatility is a hint at emerging price discovery. It is also a hint that there is opportunity for people to arbitrage between exchanges, which means more market participants, which means less volatility in the future, but it is the market and only the market that brings less volatility and not some central bank.
Stage 8: I would get in, but I missed the boat already
So you missed the boat up until now, but now the boat is throwing you life preserver and you are refusing to take it? Implicit in this is the assumption that the price of these assets has peaked. The price, historically, peaked at $0.17, $1, $30, $100, $1200, $4,000, $21,000, $44,000 and $60,000 yet somehow, magically, it is different this time around? What will you say when the price heads past $100,000? Did you still miss your opportunity?
Stage 9: OK I bought some, but the priced dropped a day later, so I sold
And….you made some bitcoin whale even richer. They thank you from the deck of their yacht. The trick is to not get emotional. This is not financial advice, but this is my thinking: buy and hold. Set a target price to sell a small portion of your holdings. Sell when the price hits the target. Invest 80% of the proceeds in something that pays you to own it. Keep a good amount liquid for when the price drops (volatility is your friend).
Stage 10: Bitcoin has value, but these other “s%*# coins” have no value
Another stage that annoys the holy living s%*# out of me. People! You came all this way and you just stop, plant your flag and say, “that’s far enough, no need to go any further”. Huh? It is like getting in your wagon headed west, you make it to Arizona and say, “well, it has been desert for a thousand miles and it is warm enough here, so let’s just stop and set up shop here”. Well, California is just a couple of hundred more miles, high taxes not withstanding. Could it be that there is nothing left to learn from any of these alt coins? Are they really all the same -and- bad? Are you just lazy and don’t want to look into anything else?
Stage 11: This Ethereum thing looks cool, this is the future of this space
Turing complete smart contracts are very cool, but what is on the horizon? Is there anything or anyone competing with this? Does Ethereum have any drawbacks. Hint, it does. Ethereum was first in the smart contract space, but their technology is, shall we say, not great. Other smart coins recognize this and are competing quite nicely in the space. Chances are, new smart contract coins will not allow Ethereum to keep their hegemony. Undoubtedly, new smart contract coins will keep raising the bar. This space, as of the time of this writing, is still up for grabs.
Stage 12: Stable coins are the new frontier
Why are you making a facsimile of your crummy fiat currency in the cryptocurrency realm? I understand the banking on and off ramps almost necessitate a stable coin. I never saw the point in storing value in a stable coin apart from market arbitration. I certainly wouldn’t store value in a stable coin.
Stage 13: Just buy the top ten coins (by market cap) like you would an index fund
Please don’t do this. In fact, buying index funds, in general, are a poor excuse for doing your own research on companies and cryptocurrencies.
Once you hit stage 13, you should be ready to take the final step which is the one that we, as a space, haven’t been able to take. That is, careful evaluation of each cryptocurrency for its fundamental qualities. With this information, we can compute its true discount rate over time. Then the market can reward coins that are doing things right and ones that aren’t serving any purpose. I would carefully evaluate what your true time horizon is for trading cryptos. Are you looking to buy Doge today and sell on Friday? Dangerous game, my friend. This is you being the casino player. The house always wins at the end of day. Always be the house and never the player. Never place a bet when you don’t have an edge either probabilistically or information that the other players don’t have.