Finance, to some it is a scary word while to others it could stand for something pure evil, after all it was big bad Wall Street that is always responsible for the market crashes. In case you cannot tell there is a lot of sarcasm in the last part of that sentence. Blaming the financial crisis on Wall Street solely is like saying that Robert Openheimer single handily built the atomic bomb or Werner Van Brahm single handily put the US on the moon (if you happen to think we even went there at all). As with both of these cases the reality is that it’s exponentially more complicated than that. But I am not here to debate either of these issues, what I want to talk about is something that could have the potential to revolutionize and possibly turn financial markets on their heads. I am talking about Cryptocurrency.
First, I would like to say that I am not a financial expert, but it is a passion of mine. So nothing of what I am going to say below is any sort of financial advice, I simply wanted to talk about an idea that I think is cool. Plus it involves finance and new and exciting ideas do not happen all that often in finance, at least nothing like this.
When I first heard about Bitcoin I had no idea what it really was or how it worked. Fast forward a few years and honestly I still do not really understand it. Regardless that does not really matter for investing purposes. I know if you listen to individuals like Warren Buffet who claims that he does not invest in anything he does not understand, then you will miss out on some big big gains. I get what he is saying but look when Apple and Microsoft first came to the market no one knew what a computer really was or how it would revolutionize society and the world. Without the computer, Bitcoin and any number of other markets would not exist. I do not think Buffet could have imagined what the computer would eventually lead to. I still do not truly understand how a computer works, but I would certainly buy Microsoft or Apple stock now, especially Apple. My point is that while there can be some extremely convoluted investments in finance, such as credit default swaps or when you really get in to put and call options, but Cryptocurrency is nothing of the sort. I will admit that the technology is difficult to understand but again as I pointed out above, that really does not matter.
I don’t want to get into the technology of Cryptocurrency because honestly I do not understand it, but I wanted to talk more about the aspect of investing and how it could affect financial markets in the future. What I think is most interesting is that very prominent and powerful financial people have all put in their two cents (pun intended) about it. Jamie Diamond says it’s a fraud while the leader of the IMF says it is too expensive for her at the moment to invest in. Not to mention that China has banned it but then Japan has made efforts to legalize and regulate it. It looks like there everyone has an opinion and what I think is the most fascinating, they could all be right or none of them could be right. The point is that no one really knows. Cryptocurrency is such a new and unique financial instrument with nothing to compare it to that no one really knows what the future holds for it or what is an acceptable price for it. Which I think is one reason why Wall Street is somewhat scared of it, because they do not know how to price it. I have seen where some analysts say there is a bubble that is going to burst while others say that a Bitcoin could be worth as much as $100,000 in the future. That is quite a large range, and I honestly cannot think of another “asset” that there is that much discrepancy about its true value. For any other asset on the open market everyone has an idea of what that asset is worth. Most of the time you can look at that asset and tell if it is cheap or potentially overpriced.
With Bitcoin no one knows any of that. I am sure some day we will look back and say goodness I can’t believe people were paying $5K for a Bitcoin, or they could say goodness I am glad I bought in back in 2017 as now the price is $50K a coin. Those are some stupid returns.
Because no one asked I will give my opinion on Bitcoin. So as with any investment the market will be affected by news, both good and bad. Lately most of the news about Bitcoin had been good and from what I have read it looks like much of Wall Street is really looking into the idea of setting up a legit Cryptocurrency trading desk. I think if that happens and a few of the big players dive in, the price will certainly skyrocket. Now does that mean $100K, I don’t really see that happening. I think, and I know next to nothing, the price would level out somewhere in the $10K range per Bitcoin. If you want more average people to invest I think that will be about the maximum price, the $100k I think could deter the average investor like me. At that price it would really be hard and I mean really hard for anyone not trading near millions of dollars to make money. The point is that you would have to trade such a large volume to make it worthwhile, so that is why I do not think that price is realistic.
The other thing to keep in mind is that there is no dividend with Bitcoin. The only way you can make money is if the price goes up or down. So a buy and hold strategy is nice if you get in early, but not sure about the long run. But if you were able to get in a few years ago you will have certainly made some nice cheddar. If you get in now and the price goes to $10K you will certainly make some nice money. However, if you are just now entering the market, unless you are trading a very large volume, I am not sure you will make much money. Again I am not saying you cannot make money right now, what I am saying is that if you think you can invest in Bitcoin and make a fortune you will need to invest a small fortune. If you invest a few hundred dollars you will have to catch the market after some bad news has brought down the price. Then you could make a nice little profit when it rebounds. After I finish explaining my thoughts I will throw out my long term strategy.
Another thing to think about is fees. When trading stocks everyone has to pay a fee to the broker to execute that trade. Usually that fee is about $3-$5 somewhere in there. The only good thing about that is that those prices are locked in and that is your cost per trade. So it does not matter if you are trading $10, or $10,000. When it comes to trading Bitcoin the brokers are making a killing. There are many different apps and trading platforms, so you have to pay attention to the fees for the one you use. The one I use has what I think are steep fees, but I am use to traditional broker fees. If you want to buy $200 or so of Bitcoin and have cash in your account it will cost you $2.99 for the trade, not too bad. What I like is that you can also purchase Bitcoin with a credit card, but the fees are higher. That same trade will cost you $7.98 with a credit card. The problem with these fees is that if you are trading smaller volumes like $2K or less the fees are really going to eat into your profits unless there are wild price fluctuations. If you want to buy $2500 of Bitcoin and you have cash in your account that trade will cost you about $30 to execute. So if you have the cash to buy 1 Bitcoin the fee is going to be about $60, somewhere around there. This to me is a major hang up with Bitcoin trading. The fees go up on volume which is nice for the broker but in my opinion really limits what type of investor that can enter the market. There are also fees on the sell, but from what I can tell they are not quite as steep, but still noticeable.
So for investors how should you view Bitcoin? That is a loaded question, and again honestly, right now, there is no right or wrong answer. Personally I am viewing Bitcoin as an alternative investment similar to a mutual fund or index fund. However, I am not going to use the same buy and hold strategy I use with normal index funds. That strategy implies that the investment will continue to grow and gain value. The problem here is that we do not know what the ceiling is. Again it could be $5k, $10K or $50K, we just do now know. That is what makes this one difficult, you almost have to look at the price daily to make money. But I do think that in the next 5 years there will be a large increase in price due to Bitcoin going mainstream, then after that I think the price will level out and start trading in a somewhat more narrow range. So there will be a big opportunity for small investors to make money in the next 5 years, maybe less. BUT, if the SEC or some other big time organization bans it or does something to Bitcoin then you could see a large drop in the price much like the 30% drop after China banned it. I do not see that last scenario happening. Again this is not investment advice, but it looks like Bitcoin is here to stay and within a few years could be traded on Wall Street. If that happens I would buy and hold my position until that happens, then after a few months, again, I think the price will somewhat level out. I’m not saying that there won’t be any more large gains, but I think by the time this hits a regulated market its price will be stable.
Despite it not going anywhere there are still some issues. For one depending on the platform or website you use to buy, sell, or trade cryptocurrency you will more than likely get a different price. That is really strange to me. So basically depending on which site you go to you could pay more or less per coin, there is no standard or actual price. That to me is a big issue. While I am sure there are crypto traders out there that love this aspect as it creates arbitrage opportunities, but for the small time investor it can be an issue. This is one thing that could potentially be cleared up when or if this market goes mainstream or is regulated. Along with that the bid/ask spreads on trades are insane, literally the highest I have ever heard. Normally that spread on normal stocks is a few cents at most, but with crypto you are looking at sometimes $20 sometimes $30, and I have read that at one time there were $100 spreads out there. That is insane. Then on top of that when you factor in the fees that are involved with a trade you are really making it difficult for new investors to enter the market. I think if this market becomes regulated this could potentially be cleaned up as well, but right now it is really tough to decide how to trade this.
If you think you are going to take $50 and make a fortune trading Bitcoin, because of the issues mentioned above, it is going to be quite difficult. It’s possible but you will really have to study the markets and know what you are doing. However, if there are large gains still out there you can certainly make some nice money. I personally do not see how it will be possible, but what do I know.
It is worth mentioning that there are a ton of other Cryptocurrencies out there as well. Ethereum and Litecoin are some of the other big time currencies. I have also hears a lot about Ripple, but the app I use does not trade that currency. Again the problem with these is that you also have to trade a large volume to make some real money after you factor in fees. But with Ripple it is still in its infancy so you can buy a ton of it for $100, and IF it takes off you will make some money.
So my strategy right now is going to be…… wait. What scares me is that currently the price is trading at an all-time high. Which is not a bad thing, but if you want to buy into the market, I do not recommend buying in when any investment is trading at the highest price in its history. That makes it a little difficult to make any money, BUT this is such a unique situation that and again we do not know the ceiling. I am going to wait a week or so to see if the price comes down and maybe buy some more. I bought some a few weeks ago and recently sold it for a whopping $12 profit. (Hey have to start somewhere.) The way I look at it is that I made $12 in two weeks basically doing nothing. That is quite a bit better than most investments you will make on the market given my $200 investment.
Long-term what I would like to do, if I had the money, would be to buy 1 full Bitcoin hopefully at around $4200 then hold till it rises to around $4500 or so and you will make a few hundred dollars. Then repeat. If you could buy it for less, great, if you could sell it for more even better. If you had $10-$20K sitting around I think you could make some real money, but for most of us normal peons that is not possible. Plus I would not recommend putting that type of cash into such a risky investment, unless you have that much to lose. I say risky because the SEC and whomever else could ban it, then you will be in some trouble, well maybe.
I say maybe because I honestly do not think that any government can stop Cryptocurrency in any way, which is why it scares them. Yes they can ban it, but that does not mean anything. In my opinion it is already too big to really stop. A country could refuse to recognize it in terms of its mainstream, but that does not mean that it won’t exist or that a person could not still invest in it. So regardless of what happens I do not think it is going anywhere for a long time. It’s only going to grow and get bigger. The only thing I could potentially see happening is that for whatever reason Bitcoin and all of the Cryptocurrencies out there now fail, but the next round will be what makes it. Sometimes it is the first generation of a technology that makes a huge splash, but no one really understands it so it kind of fizzles, then the next generation is better and the consumer is ready for it. Or there is a better competitor in the market. Even though I just made that argument, I do not honestly believe that this will happen.
What does it all mean? I have no idea, I just know that there is money to be made if you pay attention. But for a person looking to invest a few hundred dollars I think maybe just a buy and hold strategy is not a terrible idea as I mentioned above. I think it is still really early in terms of investing. So if you have a few hundred dollars you can bare to part with I buying some and just holding it till something big happens is not a bad idea. With that strategy you don’t have to worry as much about spreads and fees, but you don’t want to pay out the ass either.
That is all I know about cryptocurrency. What I think is most exciting is that we now have this thing that has no tangibility that is valuable and people are able to make money off of it. Also, it is independent of the government which is really cool and somewhat scary. So it will be interesting to see how all this plays out, and honestly what comes next. Think about all the game changing technologies that have come about and then think about the second generation of that technology. While cryptocurrency is exciting it’s the technology behind it, Blockchain, that is really cool. From everything that I have read this technology is going to change a lot of industries. I am not really sure how, but everyone seems excited about it. So if that’s the case then I am excited too.