Over the past couple of years, many people have become aware of cryptocurrency and its underlying technology: Blockchain.
Crypto is a highly speculative technology which some believe will do EXTREMELY WELL in the future.
Others believe these digital currencies are worthless and will soon go to zero.
Since the start of the 2017 Bitcoin mania, you might have heard statements such as:
Bitcoin is going to the moon.
Bitcoin is going to a billion dollars.
Bitcoin is a scam.
Winners don’t do Bitcoin.
And so on.
Bitcoin came on my radar in 2011, when I was a fresh college graduate with some change to spare. It was then worth $2 a coin.
I was immediately interested in purchasing some BTC (Bitcoin) but did not believe in the concept of cryptocurrency.
Ironically, I remember thinking money would evolve into a digital, paperless form when I was a kid – maybe an implanted chip that tracked our bank balances as we shopped.
The idea came from my 5th-grade teacher, but we thought of it as more of a futuristic fantasy that would occur hundreds of years hence.
We never imagined the foundation for this technology was already being laid by the Cypherpunks community in the late 1990s – a time when very few of us even used the internet.
When I heard a version of this already existed in 2011, my reaction was somewhere along the lines of, “we’re not ready for this. It’s too futuristic.”
Perhaps I had been thoroughly uneducated in college, where I learned about Keynesian economics, T-accounts, and toxic assets.
I first saw Bitcoin as digital coins stored on a hard-drive and not, more accurately, as The Internet of Money.
Eventually, I learned the block-chain is a code-based ledger, where transactions are processed, validated, and recorded by various members of a network, all on the internet.
It is a decentralized form of record-keeping and transaction processing, which would make it extremely difficult to hack or alter and therefore less susceptible to various types of fraud.
It is the beginning phase of the futuristic money we imagined in my 5th-grade classroom – only it’s a ledger on the internet and not a computer chip.
With a better understanding of the basics regarding crypto’s underlying technology, I began to imagine the impact it could have on various inefficient and ineffective business processes.
Consider the following applications for block-chain:
- Banking – international wire transfers (lower fees and quicker turnaround)
- Music – royalty payments for downloads and streams (fewer publishers, better deals for artists)
- Pharmaceutical – supply chain (multi-level production tracking, less counterfeiting)
- Elections – digital voting (real-time results, no more paper ballots)
- Financial reporting – tax compliance (more transparency)
Have you ever wired $100 overseas? I have, and the cost is outrageous.
Have you ever heard of a recording artist that got shafted by their publisher?
Counterfeit prescription drugs? Recounts? Fraudulent financial reporting?
And that’s to name a few.
You can view more potential use cases here.
The block-chain is still in its early stages, and further development will likely spawn more applications and capabilities in the future.
Think of artificial intelligence, the internet of things, robotics, 3D printing and so forth. All these technologies could intertwine with block-chain.
In an interview with Ludvig Sunstrom for the podcast Future Skills, Martin Sandquist – a billionaire hedge fund manager – mentioned he believes block-chain has potential to be the internet 2.0, with the ability to share information more securely and efficiently.
Mr. Sandquist doesn’t believe blockchain will work as a currency due to lack of scarcity, but he admits he could be wrong.
In another podcast with Ludvig, he stated “The faith in currencies is going away because we’re printing too much of it. That’s when gold comes in handy. I think we’ll go back to some type of gold, whether that’s a gold-backed currency or gold tied to some type of crypto-thing, like block-chain. We need to tie the currency to something tangible because fiat doesn’t work.”
Scarcity is a crucial concept when delving into cryptocurrency because detractors say it lacks this quality and therefore will not work.
The primary objections to crypto are the following:
- BTC and other cryptocurrencies are not backed by any intrinsic value (such as gold or silver) and are created out of thin air.
- BTC and other cryptocurrencies are used by hackers to scam people or for illegal purposes.
- BTC and other cryptocurrencies are not issued by a government, so it is not real money.
Let’s delve into these.
Critique #1 – No intrinsic value and created out of thin air.
This point could just as well be made about the U.S. dollar. What is meant by intrinsic value is that it isn’t backed by an asset that is valuable on its own, such as gold or silver.
The truth is we have not had a gold standard in the U.S. since 1933, and anything resembling it was abolished in 1971. Since then, the U.S. has had a FIAT monetary system, which means the U.S. dollar (the world’s reserve currency) is not backed by any asset.
Fiat money is also created out of nothing – usually from the issuance of government bonds which are purchased by the federal reserve.
The federal reserve has added AT LEAST 3.5 trillion U.S. dollars to the money supply since 2008.
I would argue that cryptocurrencies have been created out of technological innovation.
Legitimate projects have required thousands of hours of coding, as well as additional time and resources for mining.
If you don’t believe mining takes time and resources, watch this video.
Some say cryptos can be ‘forked’ and thus are not finite or limited, making them no different than fiat currency.
Peter Schiff, a prominent Bitcoin opponent, has said, “changing from a paper fiat monetary system to a digital fiat monetary system is not an improvement.”
I believe there is a disincentive for cryptocurrencies to ‘fork’ or create unlimited supply.
In a market of competing currencies, the most valuable, reliable stores of value will achieve mass adoption.
The others will disappear, which would include coins with unlimited supply or valueless forks.
Critique #2 – Used for scams or illegal purposes.
U.S. dollars have been the primary currency used for illicit activity for decades now.
One study even suggests 90% of U.S. bills carry traces of cocaine.
While there may be a substantial amount of illegal sales and purchases executed with cryptocurrency, we can’t place the blame entirely on the technology.
Currencies will be used for illicit activity whether USD, crypto or other.
The majority of pump and dumps over the last century have been perpetrated via the stock market using U.S. fiat currency.
Scams are pervasive in world markets, so they were bound to spring up in crypto as well.
Critique #3 – Not Issued by Government.
U.S. fiat currency is not issued by the government either.
It is backed by the full faith and credit of the U.S. government and is enforced legal tender.
The latter means the government has obligated businesses and individuals to accept U.S. fiat currency for payment and settlement of debt.
Our money supply is controlled by the federal reserve, which is not part of the government.
Fiat currency is issued in the form of federal reserve notes, otherwise known as dollar bills.
For a more in-depth understanding of the federal reserve, you can read The Creature from Jekyll Island by G. Edward Griffin. It is available for free here.
If any of these objections to crypto were legitimate, the U.S. fiat system would have never been adopted.
The truth is crypto has massive potential.
It is internet money for the internet age.
It is also the best investment you can make RIGHT NOW.
I’m going to show you why.
The first thing you need to know is the market frenzy of 2017 was all hype and greed.
Around the peak of the BTC boom in 2017, John McAfee famously predicted a price of $500,000 by 2020 and promised to eat his penis if he was wrong.
Many a Bitcoin purchase was executed at $20,000 because of such claims.
Others purchased after watching a YouTube video or hearing a sound clip.
This is how the majority of pump and dump schemes work.
Everyone and their grandmothers buy with the hopes of getting fabulously wealthy.
Times like these are exactly when NOT to buy.
Those that do often hold until their investment is all but worthless, only to sell at the very bottom.
Here we are in December of 2018, with the price of BTC down to ~ $3,400.
Many will undoubtedly see this as the end for crypto and proof that blockchain is worthless.
I suspect we will see a massive overcorrection – probably even lower than where we are right now.
Maybe $3,000, maybe $2,000 – I can’t say for sure where the bottom will be.
But this creates a massive opportunity for us, my friends.
Let me begin with a quote by the most successful American investor of all-time.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffet
I do not advise you to be greedy. I will propose another approach that is less risk-averse.
In markets, especially when dealing with highly disruptive technology, there is much opportunity to be had when others are panicking.
ONVO – an example of a support level – is the ticker symbol for Organovo, a 3D printing company focused on bio-printing human tissues.
ONVO – 5 YEAR CHART
Organovo stock has gradually decreased from it’s high of around $14 but shows a support level at $1.
The company is not profitable.
An investment in ONVO is essentially a bet that it’s technology, if completed one day, will revolutionize the medical field.
Many jumped in during the 3D printing mania a few years ago and jumped ship soon after.
The tried and true refuse to sell their stock even at $1, and there are additional buyers at prices below $1 which keep the price hovering around this level.
The current price would be a risk-averse entry point because any dip below $1 would be a clear signal to sell; there is also significant upside potential if the company gains any momentum.
Of course, success is not guaranteed, and there is no timeline for any breakthroughs to occur.
I am not suggesting you invest in Organovo – this is just an example.
3D printing is a promising technology that could revolutionize manufacturing, BUT there will be no use for it until it is perfected.
This is why 3D printing stock prices have been stagnant for quite some time.
Crypto is different because it is a viable solution for many applications right now.
If you’re reading this in late 2018 (or even 2019), you are possibly reading this at the perfect time.
To elaborate, let me tell you about a book I read when I was a youngster.
It was called The Millionaire in the Mirror.
The premise of the book was straightforward.
These are the rules.
Rule #1: You should avoid catastrophic failures.
We all have setbacks – they are part of life. You cannot be afraid of failure if you want to succeed.
You should seek that which makes you afraid, which most times is nothing more than failure.
Catastrophic failure is something different.
Don’t get into massive debt, don’t get addicted to crack, don’t commit a felony, etc.
Rule #2: Roll the dice when the dice are loaded.
You might feel stagnant at times.
But if you stay in the game long enough and avoid catastrophic failure, you will eventually come across a loaded die.
What this means is that various circumstances will align so your risk is reduced but the upside is tremendous.
You may be asking, but how does any of this apply to cryptocurrency?
Let’s start with U.S. fiat currency.
It can be printed at will by the federal reserve, watering down the value of your savings through inflation at a supposed 2% per year – some think it is much higher.
The increased money supply will end up in the banking system one way or another, which allows banks to increase their lending via fractional reserve banking.
They can lend up to 10 times the value of their ‘reserves,’ otherwise known as our checking and savings accounts.
Did you know your deposits are a loan to the bank? You are, indeed, lending the bank your money with an annual interest rate of about .01 %.
They can then lend out ten times that amount at 24.99% APR.
In the event of another financial crisis, you will be volunteered to pick up the bill through taxation for another round of bailouts, or further inflation by way of quantitative easing.
If you are getting up there in age, your pension may be sacrificed for the health of the financial system.
In 2008, we kicked the can down the road with trillions of dollars’ worth of bailouts and money printing.
A Rolling Stone article from January of 2013 states “The only reason investors haven’t run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed.”
According to the same article, a one-time audit of the federal reserve revealed 7.7 trillion in secret emergency lending which had been handed out to banks and corporations.
Forbes reported as much as 16 trillion in financial assistance.
The U.S. national debt is now at just about 22 trillion dollars, an impossible amount to pay down.
A ‘bubble’ in economics is an artificially inflated asset class that will pop and thus lose half or more of its value very rapidly.
In 2000, we had the dot-com bubble.
In 2008, we had a subprime mortgage bubble.
Our potential bubbles of today include the following:
- Real Estate
- Stock Market
- Student Loans
- Credit (Bonds)
You can view one of his talks here.
What all of this means is that our current monetary system does not work, and we will soon be faced with severe economic stagnation – that’s on the optimistic side.
During the next recession, you will see alternative stores of value such as gold, silver, and platinum rise in price. This is all but guaranteed.
Precious metals are difficult and expensive to produce, and more importantly are finite.
They increase in value as other assets become devalued.
Let’s compare a few asset classes in terms of total value in USD. These figures are as of October of 2017.
- Silver – 17 Billion USD
- Apple Stock – 807 Billion USD
- World Gold Supply (above ground) – 7.7 Trillion USD
- Global Stock Markets – 73 Trillion USD
- World Money Supply – 127.2 Trillion USD
- Global Real Estate – 217 Trillion USD
How about crypto?
Cryptocurrency is a tiny asset class. Take a look at this graphic.
The total market capitalization of all cryptocurrencies is currently hovering between 100 – 200 billion USD.
That makes it the 2nd smallest asset class next to silver as of December 6, 2018.
Big money investors typically liquidate stocks and move into cash and precious metals during bear markets.
This goes for institutional investors as well.
Bonds are also an investment option for times of severe economic turmoil, but bond markets are in a bubble and will be out of the question as safe havens in the years to come.
This is where cryptocurrency comes in.
Cryptocurrency is unique as a technological development because it is a store of value.
Where will all the money flow when each of the bubbles in the economy burst. Do you think the institutional investors will move to real estate or USD? I don’t think so.
Their job is to move into a hedge against potential losses, which means they will need to find asset classes that are underpriced and near their bottoms.
Silver, gold and crypto, anyone?
If we go by the numbers from the graphic, there will be tens of trillions worth of USD flowing out of the stock market alone.
Wealth will flow out of the stock market in much higher quantities than you’ve ever seen before, causing prices of other stores of value to increase exponentially.
Let’s look at the numbers again.
Total Stock Market Value – 73 Trillion USD
Total Silver – 17 Billion USD
Total Crypto – 100 – 200 Billion USD
This means cryptocurrency’s current market cap is valued at a measly .27% of the total stock market.
Silver is currently valued at around .02% of the total stock market.
We have an economy that is beginning to sputter, with the velocity of money as low as it has ever been.
Numerous rounds of quantitative easing have spiked the U.S. money supply and continue decreasing the value of the dollar.
We are in the last stages of the most epic of stock market bull runs and have not had an economic recession since the ‘great recession’ in 2008.
Bitcoin just had an ~82% retracement, which has happened about four times in its history with all-time highs following in the months or years afterward.
We continue to make incredible strides in technology. The internet will play an ever-increasing role in our lives as we keep moving forward.
We learn online, communicate online, network online, shop online, work online, date online, etc.
Do you think money will be exempt from this trend?
I just came across an article titled Facebook developing crypto for WhatsApp transfers.
Do you think big money investors would pass on a hedge for their wealth based solely on idealism?
“I don’t believe in crypto John, so forget the hedge! I’d rather lose half of my fortune in the stock market than participate in such ridiculousness. The stock market always bounces back anyway!”
I believe in blockchain as a method of freeing up and decentralizing our monetary systems, but don’t think mass adoption is necessary for its value to increase.
All that is needed for crypto prices to skyrocket are a few trillion dollars to be dumped into the market.
IF BTC and other cryptos are accepted as stores of value and, therefore, effective hedges against the downside of the economy, this transfer of wealth will happen.
This does not mean the crypto-sphere is without flaws, and there will be many scams and losers in the crypto markets.
99.5% of coins will fail. At least in the beginning.
Nouriel “Dr. Doom” Roubini, who previously predicted the financial crisis of 2008, recently said in a Senate hearing that 99% of cryptocurrencies are worth zero (shouts out to the Uneducated Economist, who put me on to Roubini’s testimony).
Coinmarketcap.com currently lists 2000+ cryptocurrencies.
If 99.5% of them are going to zero, that leaves us with about 10 coins that could do very well.
Bitcoin has lost 82% of its total value since December 17, 2017.
Severe drops in market value do not always correlate with declines in real value.
Amazon went public in 1997 and was valued at $18 per share for its IPO.
During the buildup of the tech bubble, it reached an all-time high of $89.38 per share, before crashing all the way down to $5.97 in 2001 for a 93.32% loss.
Those that invested at the peak of the bubble – and held – did very well, despite the massive crash.
Amazon reached $2,000 in August of 2018. That is a whopping 33,400% up from its low in 2001.
Many internet-based companies evaporated during the early 2000s, but there were opportunities for massive gains for those who were able to identify the legitimate projects.
This is the scenario we find ourselves in with cryptocurrencies, only with an economy stacking itself in favor of alternative stores of value as we head further into the internet age.
If you want to win in this market, you will need to buy when everyone is selling and sell when everyone is buying. And you must also choose your coins wisely, or you will lose.
As in the stock market, the whales and institutional investors will cause significant fluctuations in the price of assets.
Your job is to hold the right cryptocurrencies when the next major move happens.
Mass adoption usually starts with individuals, followed by wealthy investors, and is capped-off by institutional investors.
Once institutional investors arrive, the bulk of the opportunity is gone.
Now is the time to do your research.
You can also stay tuned for further discussion on some promising cryptos and block-chains.
Until next time,