The year 2021 was a cryptocurrency boom, with a market cap of $2.9 trillion, which was pretty amazing. Now, with only about a trillion market cap left, it’s a good time to slow down and think about investing without fear of missing out.
I haven’t read every white paper of cryptocurrencies in detail, so maybe some of the view points will be different from the original authors or the original team, so I’ll start with an investment perspective.
Disclaimer: this article is a personal opinion only and is not an investment advice. Cryptocurrencies are still risky and may have drop to zero value. Due to its anonymity, there is no way to recover funds in case of fraud or hacking. Please do your own research and make your own judgement.
Fundamentals of Bitcoin
Bitcoin, the originator of cryptocurrency, was invented by Satoshi Nakamoto in 2009. The market cap of Bitcoin currently accounts for 41% of all cryptocurrencies, about twice as much as the second place Ether. Although the transection speed of Bitcoin is slow compared to other cryptocurrencies and has no other applications (like smart contracts). It is the most traded cryptocurrency, the first to emerge, the most popular, and the center of belief in the cryptocurrency community. It is the preferred cryptocurrency for large US companies, and is one of the fiat currencies of some countries (I am curious if it is really used for everyday use even though it is a fiat currency).
People treat bitcoin like a non-yielding store of value, just like gold, the value comes from people’s belief in it. While gold has industrial uses, it is not a majority. Bitcoin has no industrial use, it is simply a store of value. Bitcoin’s beliefs seem to be getting more and more solid, as evidenced by the increase in the number of participants and the amount of funds.
Since there is a maximum supply of Bitcoin, the price of Bitcoin will only get higher relative to the ever-inflating fiat currency with no change in the overall belief value.
Centralized Decentralized Cryptocurrency
Centralized Decentralized Trading
Cryptocurrency transactions do not need to be intermediated by financial institutions. Everyday financial activities require intermediation by other institutions credit cards, remittances, etc, except for cash. Deposits are also held in financial institutions. In the early years, cryptocurrency transactions were indeed decentralized and carried out by both parties to the transaction (just like cash). But because cryptocurrency transfers are irreversible, when offering cryptocurrency in exchange for goods or services today, this time lag without an impartial third party to ensure the transaction is executed creates a trust risk. Today, most transactions between cryptocurrencies (or with fiat currencies) take place on centralized exchanges. When you buy goods or services with cryptocurrency, a centralized company provides you with a debit card to use and then debits your cryptocurrency account.
Centralized Exchanges Get Rich
As we all know, the financial industry is a very profitable industry, but the financial industry is a licensed industry in every country, and is regulated by the country with many restrictions. For example, banks accepting deposits and insurance companies collecting premiums cannot be used for high-risk investments, and the brokage firms can’t have any insider trading, sell high-risk commodities to everyone, and so on. But none of these rules exist in the cryptocurrency market, and exchanges have a lot of valuable information, while the traditional financial industry is restricted by regulation from investing large amounts of money in the cryptocurrency business. It’s like a Wild West and full of opportunities, but people with planes and cannons can’t come, so how can an exchange not get rich?
Selecting Exchanges
It is best to find an exchange with a high volume of transactions, many users and no negative news to reduce the risk of the exchange being hacked or absconding with the money. You can find information on trading volume and number of users on the coin market cap website.
The Real Decentralized Finance
The underground economy is where decentralized cryptocurrency transactions are truly realized. Disclaimer: I have not been involved in the underground economy such as drugs and money laundering, the following is purely imaginary.
Before cryptocurrency was invented, drug transactions were done in cash, or in US dollars if they were cross-country. This is when cryptocurrency transactions became truly decentralized and more convenient for cross-country transactions, when there were proven ways for both parties to ensure that transactions were executed correctly. There’s no need for tea-can luggage or tying money to a person’s body to get them on a plane, and there’s no risk of receiving counterfeit money. But because bitcoin is so volatile, I think most of these transactions are conducted in stable currencies, which is really one application that supports the fundamentals of cryptocurrency, and one of the two applications I’ve seen so far with the most stable fundamentals (the other being betting financial products on the exchanges).
The Ponzi Economy
The ponzi scheme is an investment in the name of absorbing funds from investors and claiming a stable high return, but not really taking the money to invest, and the high return is paid by the funds of investors who join later. The number of people who join will not be unlimited, so those who join later will definitely lose all their money. Many of the projects in the crypto-industry have their currency prices rising from the later capital, which is to some kind of extented ponzi scheme. But people claim that they are not deliberately trying to scam, but are just looking for a long-term operating model, and are only temporarily replacing the former money with the latter.
This wave of cryptocurrency frenzy has come as more and more money is coming in, including many large institutional investors and governments, so it’s not wrong to call it a ponzi economy. LUNA, which bankrupted earlier this year, attracted capital with a 20% annualized rate of return on a stable currency, claiming that the return was from lending, and got a lot of attention because its market cap was once in the top 10 of all cryptocurrencies. Wouldn’t you wonder how many people would take out a 20% APR loan? Do borrowers who only get 20% APR loans have the ability to repay? At the beginning, 20% was also given because people kept investing in it, and most of them didn’t invest in it for a long time, so they withdrew their money as soon as there was a sign of trouble, down more than 99% in less than two days.
Long-term Investment in Cryptocurrencies
The total market value of cryptocurrencies is currently about US$1 trillion, and the size of Taiwan stocks is about the same. The market value of global stock markets is about US$100 trillion, and the market value of gold is about US$10 trillion. There are three major applications for cryptocurrency: value reserve, exchange, and underground economy. I believe these three applications have great potential for growth. In addition to the applications, there is still a lot of capital that has not yet been invested due to regulatory restrictions or lack of understanding of cryptocurrencies, so I personally decided to invest in cryptocurrencies (not an investment advice). I am not the first to enter the market now, but I am definitely a pioneer. It is important to note that not all coins have these three values, just like the only coins backed by exchanges are their own issued cryptocurrencies (such as BNB or FTX), not related to other cryptocurrencies. Not all cryptocurrencies will be used as a store of value either.
In the stock market, the most convenient tool for long-term investment is the market capitalization-weighted ETF, but there is no such tool for cryptocurrencies. I only buy a little bit of each to avoid buying coins like LUNA, and I don’t have time to research the future of each cryptocurrency. I currently invest mostly in bitcoin and ethereum (they account for about 60% of the total market cap of cryptocurrencies), and buy a little bit of other cryptocurrencies, starting with the coins with the highest market cap. Frankly speaking, I bought them with the mindset of buying lotteries, with high chances of going to zero and low chances of making a fortune. At least in a “ponzi economy”, the overall cryptocurrency market has positive expectations, while the lottery has negative expectations.
Cryptocurrencies still have risks to go zero, and because of the high risk, I only dare to invest about 1% of my assets. If it grows 100 times in 10 years, my total assets will have doubled, which is good enough.