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A few thoughts on cryptocurrencies

Crypto-Investing in the Age of Whales

For those unfamiliar with cryptocurrencies (CCs), this is a great read on how they work and how you can invest in them. But it compelled me to break my rule of not showing my bias on CCs. First and foremost, CCs do not have any value. Therefore, what are you actually buying? Are you simply buying the potential for future gain? If so, why not invest in something that is at least derived from something tangible? For instance, buying and selling futures can provide significantly greater returns than CCs.

Now, it can easily be argued that futures do not have value either. This is true, but there is a key difference. Futures contracts expire and very few investor think of them as long term holdings (well, unless you are using futures to hedge long term risks). CCs are also viewed by many as a long term holding that will only appreciate in value (unlike futures, which are cyclical). Not long ago millions of people thought home prices only appreciated in value. And about 8 years before that millions of people thought technology stocks will only appreciate in value. I could go on, but in all of these cases, millions of investors lost everything.

To top it off, CCs are a prime target for manipulation. In other words, as the article title says, “whales” bid up the prices by buying everything and when they want to get paid, they sell everything and the price collapses. This hasn’t happened on a cataclysmic scale yet, but eventually these big guns will find a new scheme to jump in on and they will cash out of the CC market. Those left will be crushed.

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