…and should stop finding excuses
Crypto assets are a red flag for your portfolio? You’re still busy finding excuses why bitcoin is too volatile, too difficult to understand, too risky — a scam anyway? Finding excuses is easy, educating yourself and having a long-term retirement plan is not. Your future self might thank you for not finding another excuse.
The door to the world of decentralised finance (“defi”) is directly in front of you, widely open. It might not appear obvious, might look different than other doors and will probably lack a long queue of people. But you cannot miss it. In this article, I will show you how to find the entry to defi world and help you go through the door.
I’m not saying that the path behind the door will be easy and straightforward, many roads are still in the progress of being built. But luckily the trails behind this door have been equipped with handrails every now and then — like twitter, for example, to help you get much information first hand or podcasts to help you get a deep dive into specific topics often by the founders and experts themselves.
The deeper you dive into defi, the more doors will be appearing. They are not always wide open and can become harder to get through. This article will show you how to find other entries in order to expand your knowledge and continue the exciting path in the defi world. (Hint: Not just windows, but also CryptoKitties can be an entry point for one or the other).
Lack of investment opportunities in the traditional financial world
The worst thing you can do is doing nothing. Leaving your money in your savings account does not only give you any interest any more since we live in a hyper low-interest-rate environment. After inflation, you will actually lose part of your money just because of doing nothing.
The next best safe haven for money used to be investments in fixed income products like US treasuries or bunds. But good quality securities backed for example by solvent states are also low or even negative-yielding, while high yielding securities are coming at a higher risk.
Investing in dividend-paying companies can be a good alternative to generate constant income like interest rates or bond yields. However, the risk attached to stocks is higher than bunds. While equity investments generated double-digit returns in the past, less growth and only low to mid-single-digit returns can be expected for equities after the past 10 years of the bull market run.
No more interest, no more yield, few passive income opportunities combined with low growth outlook and governmental supervision. So what are your options? What’s the best store of value for capital preservation and growth potential? Concrete gold like real estate, which is often already overvalued and almost not return generating anymore? Commodities like physical gold which can be regulated by governments?
The answer to all of those questions is crypto as an entirely new asset class, including bitcoin, ethereum and many other blockchain-based digital assets and dapps building on top of them. Crypto assets are decentralized by nature, uncorrelated to traditional assets, offer high growth potential and various investment opportunities to generate passive income.
Typical skepticism and top 10 critiques towards crypto assets — that shouldn’t stop you from entering defi
First adopters of crypto were in particular convinced by the mere ideology of anti-state, anti-system and anti-establishment. Other believers were not just drawn to it out of philosophical reasons and the concept of separating money and state. But rather by the economics and technology behind it: cutting out the middlemen by peer-to-peer-transactions and using this scarce resource with limited supply as a store of value, medium of exchange or unit of account.
Many opponents see more shortcomings and obstacles than the above-mentioned advantages. Here is a demystification of the most prevailing prejudices:
#1 — Bitcoin is only used for money laundering or scams
Indeed, the first major users of bitcoin were black markets such as Silk Road. However, by now, most cryptocurrency exchanges are regulated and obliged to conduct KYC (know-your-customer) and AML (anti-money-laundering) processes. According to Bloomberg, with around USD 517 million less than 1% of Bitcoin transactions are illicit purchases by now (as of July 2019). Money laundering in the traditional world amounts to 2–5% of global GDP (USD 800 billion — 2 trillion) according to UNODC, United Nations Office on Drugs and Crime. Actually, cryptocurrencies can allow even better identification and prevention of illegal activity than traditional payment systems due to the fact that blockchain is a complete and immutable record of asset transfers, secured by multiple digital signatures if required and which cannot easily be altered or reversed.
#2 — Bitcoin is a Ponzi scheme
A Ponzi scheme is a form of fraud that pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. Bitcoin does not comply with this definition as
- There is no central entity or individual behind the generation of bitcoin
- Value is dependent on price discovery across many global markets, not from a centralised entity
- There is no fixed or periodic return guarantee
- There is no reward structure for recruitment
- The function, operation and potential of the network is open and transparent
#3 — Bitcoin is not backed by real assets
Bitcoin is not backed by real assets — just like the USD. Currencies worldwide used to be redeemable for gold at a future point in time. But this is not true for the USD anymore either since President Nixon decided in 1971 to unpeg the dollar from gold. Since that moment in time, the dollar is backed by nothing but faith in the good word of the Federal Reserve Bank and the U.S. government whose current president is Donald Trump. With regards to bitcoin, what can be better than an absolutely scarce and at the same time completely programmable decentralised asset?
#4 — Warren Buffet is an opponent, therefore it must be a bad investment
None of your friends are invested and the biggest investor of all times does not believe in the technology? That might have to do with the fact that some people didn’t find the right access and resources to see the potential and value-add of this new asset class or simply didn’t have the time to properly dive deep into the complicated topic. While experts like Buffet have already admitted in the past that they were not always right with their views and assumptions, there are also other sophisticated investors like Peter Thiel supporting crypto. A whole list of the bitcoin bulls and bears can be found here: https://www.bloomberg.com/features/bitcoin-bulls-bears/
#5 — What is even the fair value?
While some KPIs like the Meyer Multiple help to indicate whether the bitcoin price is cheap or expensive based on the 200-day moving average, no model has yet been identified as prevailing for finding the fair value. Many academics and companies are working on that, focus on factors like the number of transactions in a day, transaction speed, transaction cost, utility, cost of mining, scarcity, scalability, work put in (by developers and miners), price, volume trends and more. Most recently Plan B presented their view on how scarcity and the “stock to flow model” is a good fit to value bitcoin. It will probably take several more years until a final model will be established.
#6 — It’s too late — I missed the bull market run
Since 2009, crypto is in a constant bubble and burst cycle. Forbes named bitcoin the best investment in 2013. In 2014 Bloomberg named bitcoin one of its worst investments of the year, while in 2015 bitcoin topped again Bloomberg’s currency tables. In summer 2019 bitcoin was down 80% from its all-time high of almost USD 20,000 at the end of 2017. It is hard to tell when the next bull market run will appear, but developers around the world continue to establish a strong ecosystem. Additionally, there are other drivers like the bitcoin halving next year, demand from institutional investors and increase in products (like bakkt bitcoin futures or bitcoin ETFs).
#7 — Security Issues — It’s too risky
The blockchain itself has never been hacked, only exchanges have. Even though the track record since 2009 is stable, this doesn’t mean of course that the technology can never be hacked. One security issue might be yourself with regards to the storage of the keys of your cold wallet or the risk of having a bug in the code of smart contracts. But fraud and attacks also happen in the traditional world. Hacks of credit cards resulted in USD 1,48 billion of total fraud losses in 2018. Hence there will be no full invulnerability in either of the two worlds.
#8 — Governments will regulate and ban crypto anyways
In July 2019, US Lawmakers realized that it will be almost impossible to ban cryptocurrencies. In their hearing Jeremy Allaire, CEO of Circle, explains that most crypto assets are based on open-source software, implemented by anyone who has internet, making digital assets moving frictionless. The code cannot be regulated. The Forbes article further states that the best way to kill cryptocurrencies would be for governments to become more competitive in terms of monetary policy and financial freedom.
#9 — Bitcoin has a high electricity consumption
…which is comparable in absolute terms to that of Switzerland for example. However, the absolute comparison is not a fair one. Compared to gold mining, gold recycling, paper currency, and minting as well as the entire banking system, both the energy used and the gross yearly costs of bitcoin mining are actually significantly lower. Nevertheless, the proof-of-work consensus algorithm, which causes high energy consumption is not the best solution. Therefore the more sustainable proof-of-stake consensus mechanism is already used for several blockchains or is in the transition phase to using it in the future (e.g. for the second-largest cryptocurrency by market cap “Ethereum”).
#10 — Speculative bubble and too volatile
Nobel laureates have claimed that bitcoin is merely speculation and casino money. While in 2017 there was indeed a lot of speculation during the ICO hype, a huge infrastructure has constantly been built at the same time. The volatility of the price has already come down and the concept of stable coins is spreading. As adoption matures, volatility will naturally fall further and bitcoin might increasingly become a medium of exchange. We are currently in a transition and development phase, away from pure speculation towards long-term investments. Ivy League pension funds such Yale and Harvard with long-term investment horizons have already started to allocate to this asset class as well.
“We are now at a point where I would argue that it is irresponsible for an investor to have 0% exposure to Bitcoin in their portfolio,” Morgan Creek co-founder Anthony Pompliano, stated earlier this month.
How to start investing today and enter the defi world
As Pomp says: stop excusing yourself, start educating yourself! On-board yourself by learning about the technology. Besides many books and videos of crypto OGs on the ideology and technology, I personally like and can recommend the weekly recap of Circle Research or Token Economy to stay up to date for recent developments of the market and projects. If you have the chance to attend a meet-up or conference, this is another great way to get personally more involved.
Crypto does not just offer growth potential, uncorrelated assets for portfolio diversification, superior Sharpe ratio, lending, and borrowing or passive income opportunities but also decentralised voting mechanisms, active involvement in the space as well as an open and fast-developing community.
Today you have more options to invest and get exposure to crypto than a few years ago when access was even more technical and complicated. The options today range from indirect exposure (e.g. CME bitcoin futures), semi-direct (e.g. bakkt futures, crypto funds) and direct exposure (e.g. exchanges, wallets).
As in the traditional world, you should of course only invest what you can afford to lose. Don’t forget to also have some fun experiencing with crypto and related topics like NFTs. Start entering the defi world and exciting journey today and let me know about your experiences.
Why you still haven’t invested in crypto was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.