- Should any sane person put money in cryptos?
There are many people who have asked me why we should invest in cryptos. There are others who tell me why they do or don’t do it and generally the usual sentiments I hear are anything ranging from, I am going to get rich and retire now versus it’s all such a scam, cannot believe why anyone smart really wants to put money in cryptos. I know that the current crypto market doesn’t make this any easier with still lot of unknowns.
Taking the emotion aside, I want to build a case for whether there is a rational basis to invest in cryptos. I believe I am quite typical of most of the general public who are generally conservative and fiscally prudent.
Since time-immemorial, humans have saved things for a rainy day as well as have made attempts to grow their fortune. Excluding the risk takers who have gone to invent new things or new industries creating value where nothing existed before, let’s consider the vast majority of humans and their behaviour. In the really old days, they would have saved grains/meat for a rainy day, buy surplus livestock for food as well as barter, save gold as a store of value, buy land to increase farming , etc. If we shift to modern day humans we are not too different, we save some cash in the bank ( for minimum to no interest), buy a home or more property (land or house) to get appreciation and rental income, invest in stock-markets etc to get capital appreciation. The reason we do this is because we consider this to be generally safe. Money in bank is generally safe if within the limit of what’s covered by the deposit scheme. A property as home as well as rental would need regular maintenance and there is risk of negative equity but the perception usually is that it mostly works as a strategy over a period of time. Investing in stocks is risky, there are historical corrections that wipe value but again you can diversify across countries and sectors and hope for a general compounding effect and pray that any major financial events do not impact your savings in a major way.
So why do we invest in the way we do in the asset classes we commonly do
- We believe in the power of compounding.
- We follow patterns of behaviour and do what our environments/friends/parents teach us to do — save in banks, open ISA’s, buy a property, do buy to let (These behaviours are all good — as human beings when we share knowledge we prosper and limit risk).
- We don’t think of ourselves as speculators or reckless gamblers.
- We think we make informed decisions based on information available to us, a news article talks about how great tech is doing and you then go out and buy tech stocks.
- We trust in an expert (a financial advisor or a magazine) and follow their advice.
So hopefully I have established that our traditional choices do carry an element of risk and unknown factors but because they are so common we are confident to take these choices and not worry a lot about underlying risks.
Now let’s get a few things straight. Cryptos are completely speculative and risky. You get none of the protections you have when you keep your cash in bank or invest in properties or in stocks. If you are greedy and want to make tremendous returns I am afraid I have no words to comfort or encourage you.
The underlying technology like DLT and the trend towards decentralisation will definitely change our world but how will the current cryptos and ICO’s and products and services fit into that is something we are learning every day. To the regular reader, it’s absolutely fair to wonder how does one actually invest and get returns from cryptos and ICOs.
However – look at it this way
- Are you willing to diversify (say a minor 5% of you total savings capacity) in a risky asset class like cryptos? As a rational being is this a reasonable risk?
- Is there an upside to this decision? I would think there are some, you get to support a new eco-system, you learn and invest in new technologies in this frontier and there is potentially a gain over the years. This is not like P/E or Angel Investing – but where else apart from maybe crowdfunding ( which is what some ICO’s feel like) do you get a chance to get involved at such an early stage of an enterprise as the regular person? Remember by the time a company matures and goes public, a lot of the gains would have already been captured by the backers and the bankers.
- Your worst downside – you lose all the money that’s put in this. There is no guarantee that your tokens or crypto currencies will retain any value.
- As a comparison, in private equity/VC/Angel investments (where they accept that some of the supported ventures would fail), if there is a willing buyer and company is growing and has value – the initial investors are able to exit with profits, I have not observed anything similar in a crypto space, where token holders are rewarded if a company is acquired-if you are aware of any such use cases please let me know.
- You might wonder — then does anyone have any investment or exit strategy around cryptos? Yes but this requires some patience/conviction to hold these for a couple of years. The simplest outcome is to hope that some of your cryptos are still around in 3 years, have appreciated in value because of their potential and utility and people are willing to buy them at that price , so that you can exit and capture those gains. More sophisticated scenarios could be acquisition/buy-outs where token holders are compensated in some form, even for goodwill or utility value but again these are not scenarios I have come across yet.
Conclusion: So why did I write this article? There is so much hype as well as gloom on this technology frontier which I believe is definitely one of many key defining advancements happening in our world. It has potential and risks and I just wanted to share my views on how some should approach such a new frontier. I would say that it’s quite rational and savvy to try and invest in a new asset class as long as you limit your exposure, understand the upsides and downsides and if that trade-off is comfortable for you. If you decide not to get involved again a completely sensible decision as well and is a reflection of your risk appetite and investment goals . Good Luck and hope you enjoyed reading this.
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