Too much rhetoric isn't good for crypto. OK, so first off, despite what Jordan Belfort, Robert Schiller, Joseph Stiglitz and other so called financial gurus say, it is important to understand that they have a high chance of being right whatever they say.
I mean, the crypto market will either crash, or it won’t.
Furthermore, it will crash this month, or it will crash in six months.
Again, if you are going to say it will crash, please, for Crypto’s sake, at least give me a time frame for when it will happen. Even mountains move a few inches every thousand years.
Stock markets crash, commodity markets crash, debt markets crash like it is nobody’s business, and my computer crashes too.
Suffice to say, a crash isn’t going to wipe me out.
More importantly, it is not going to wipe blockchain technology out.
So if the big guys are blowing the ‘it’s a bubble’ trumpet all over news channels, good for them. At least, now they can hope to move the sentiment and then profit by taking positions using the newly introduced futures market.
Just so you know, Economists have an unbeatable track record of being wrong.
In fact, I can’t think of another profession where the professionals are as frequently seen making predictions, and moreover, shouting about these predictions so the entire world can call them out for being wrong.
An MIT Economist named Olivier Blanchard published a paper in August 2008 about the state of macroeconomics. His conclusion?
The state of macro is good
On 15 September 2008, Lehman Brothers declared bankruptcy, and started the unraveling of the worst credit bust in history.
I just hope Olivier was short Lehman stock.
Ben Bernanke, for former Chairman of the Federal Reserve Board, said something similar around the same time, and concluded one of his talks by saying that the 1990s and 2000s should be considered one of the most ‘stable growth periods in economic history’. This is despite the dot com bust of 1999 — 2000.
In September 2008, the world came crashing down. Not just debt markets — every kind of financial market, especially in the developed world.
Here is a chart which shows how good Economists are at predicting the rate of economic growth:
The solid line is the actual rate of economic growth.
The dashed lines are estimates by economists at various points in time. It’s not even funny how wrong some of these estimates are. These are not predictions by high school students; these are the results of the most complicated mathematical models known to man, which have been developed by PhDs from the world’s elite universities.
Trust me, I nearly applied for a PhD in Finance in 2011, and when I realized that I would basically be pushing numbers through mathematical models nobody really understood (I certainly didn’t), I gave up on that grand plan and started a school instead!
Time for a joke:
An Economist is walking on the road and he sees a $100 bill on the ground.
He walks by as if he hasn’t seen it.
“Why didn’t you pick it up?”, his friend asks.
The Economists says, “It is impossible, a $100 bill would already have been picked up by now”.
Now back to bubble talk.
Most of the economists and pundits who are eagerly anticipating (or even hoping for) a crash are from elite Universities. More importantly, they are schooled in very old (200 years, some older than that) models and theories of government and economy. They swear by economic theories that start with assumptions like ‘every consumer is a utility maximizing individual’ and ‘economic agents are assumed to be rational’.
For example, Joseph Stiglitz, as brilliant as he might be, starts his ‘bitcoin is a bubble’ argument with the following words:
“One of the main functions of government is to create currency”
So as you can see, cryptocurrencies are a very real and direct attack on orthodox Economics thinking. Cryptos start with the assumption that a government, bank or other centralized institution is not needed to create or transfer currency.
After all, you can imagine how people reacted the first time that they heard some dude with a Japanese sounding name had created a currency using some code…
What I honestly feel is that Economics and Finance have to evolve as disciplines to be able to make better sense of cryptocurrencies.
Using the theories of Keynes and Schumpeter to make sense of bitcoin is a bit like expecting a 1999 Ericsson phone to enable access to the App Store. It just won’t work. You have to upgrade the phone to current technology to be able to understand and access the rest of the tech ecosystem.
The technology of economics and finance is broken. It has been for quite a while. And yet we have business schools and universities teaching students about outdated concepts and theories.
What most people are doing is trying to use current financial theory to estimate a value for bitcoin.
Now, as I mentioned earlier, the orthodox economic and financial establishment doesn’t have a theory for Crypto! You won’t find crypto in any economics or finance textbook.
In fact, back in 2011, when I was doing my Masters in Finance at Cambridge, I asked the course director why we weren’t studying about bitcoin, at least so the class could gain a minimal understanding. “It doesn’t deserve much attention”, was what he said and we never spoke about it after that.
Do you know how financial analysts calculate a value for a share? They estimate how much cash the company will produce for the rest of its lifetime, then calculate how much that is in today’s money and assume that the ‘value’ of the share is the sum total of all future cash flows. If the price is below this value, it is said to be under valued. If the price is above that value, it is said to be over valued.
Yup, it’s a lot of fluff and a whole lot of assumptions. Yet, they think they’re doing something very scientific since it involves a lot of calculations. Sure, some analysts have a lot of skills. Usually however, such calculations give the illusion of accuracy but they also turn out to be wrong fairly often.
The key ingredient in almost all financial calculations is this estimate of future cash flows.
We can do this very accurately for bonds (especially those issued by governments), fairly accurately for shares and quite inaccurately for currencies. Despite the wide differential of accuracy in using such estimates, it is all that we have.
Now, with crypto, there are no estimates of future cash flows. Not yet anyway. Furthermore, there are no interest rates, such as those set by the central banks all over the world.
But this shouldn’t imply that all crypto is a bubble — we need to update the way we theorize and think about this technology.
Yes, we need to start thinking about crypto as technology, and not purely as a financial asset which is speculative in nature.
In fact, most crypto tokens almost certainly are not financial assets! They are best thought of as rights to use a particular software or technology. In addition, they might have some other rights attached to them. Put another way, they are unlike any financial asset that has ever been created before!
Those who are in it purely for speculative purposes will get burnt at some point in time. That is guaranteed.
But we also need to start looking at various other metrics which will make valuation and understanding this market easier.
Take for example the case of Ripple. Ripple is a blockchain company which makes international payments easier, cheaper and much faster than the current banking system. Its native currency, XRP, has soared nearly 1500% since I bought it 6 weeks ago. This is not purely on speculation though — the company has announced some very big deals with banks and payment providers to start using its Ripple network, and there is a good chance that Ripple will become the global standard for international payments if the company keeps growing at this rate. Ripple is using blockchain technology, not very unlike that of Bitcoin, to solve some very real and long standing problems in global finance.
So what is more important than ‘fundamentals’ is how some of these tokens and cryptos are resulting in huge disruption and change. This comes from an understanding of the underlying technology and also from envisioning use cases that don’t yet exist. That is something you won’t find in any economics textbook. So you are going to have to study and research the space deeply so you can start linking the dots together to make sense of what is happening.
And you certainly shouldn’t wait for Joseph Stiglitz or Robert Schiller to tell you which coin you should be investing in!
So, the result is that people are mistakenly concluding that just because we can’t calculate ‘fundamentals’ for bitcoin, it doesn’t have any value. Or that it is ‘overvalued’.
That is not how one should think about it.
The way I prefer to think of crypto is as follows:
“Is there reason for the price to deviate far from where it is currently, assuming the technology continues to scale and grow?”
OR,
“What problems does this technology have currently? Are these going to get solved?”
Given that there are 1300 coins out there (I use the term ‘coins’ loosely to mean any cryptocurrency or token), this requires considerable research and engaging in constant dialogue with those who are close to the action (SF!).
Personally, bitcoin is a relatively small part of my portfolio, for various reasons. That is a topic for another post perhaps. It has a number of problems (not unlike other cryptos) which it needs to sort out before I can be confident that it will continue to be the gold standard for cryptocurrency. Rohith Salim and I spend considerable time discussing these things and plan to talk a lot about them at The Crypto University. So I don’t really care if Bitcoin crashes.
Another thing about this space is to realize that there are a whole lot of scams. There is a whole lot of exuberance. And there will be a whole lot of losers.
What you need to do as an investor, or participant, is to keep yourself updated on what the various teams are working on, and continuously reassess your assessment of their technologies.
I have had friends send me links to many videos where they delight in letting me know that Bitcoin is a bubble. Frankly, I don’t care. If it pops, I won’t be the one hurt.
This is what Eugene Fama, another Nobel Prize winning economist, has to say about ‘bubbles’:
“I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”
Furthermore, he says that markets give indications in advance. Often, people don’t pay heed to these signals. Speaking about the credit crunch, he says, “prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that”.
So there you go — whether bitcoin is a bubble or not, whether cryptocurrencies itself are a bubble or not is not going to deter me from staying invested in this space. Sure, the prospect of quick returns does keep me on my toes, and considerably excited. But the real reason is that for the first time since I started studying finance, I see potential for a technology to truly revolutionize very many aspects of finance, and also other industries.
After every bubble in financial history, the markets have come back and reached the same valuations, albeit after extended periods of time in some cases. Stock markets are nearing or have already had all time highs after the credit crunch. But nobody seems to be shouting about a crash!
One more word of caution, which I apply strictly in my own crypto investing:
- Invest only what you can afford to lose (and don’t mind losing) [as with any other investment]
- Cash gains periodically (If and when the market does crash, you don’t want to be the guy who saw his wealth rise 5 fold over 3 years and then crash to zero in one night!). Cashing gains means that your gains will be much lower than if you did not sell out, but that is more a matter of reconciling yourself to being ‘happy’ and not ‘delusional’.
- Stay away from coins which don’t make any useful improvement in existing technologies. There are a ton of those!
- Follow teams on twitter, reddit, medium and other blogs so you can separate the fluff from the solid teams
- Definitely don’t leverage; don’t sell your house to invest in bitcoin or any other crypto!
To conclude. I don’t care if the current market cap of crypto falls from $700 billion to $50 billion tomorrow. It won’t change my net worth all that much. The technologies enabled by these coins won’t vanish. The point is to invest sensibly, using a variety of methods (buying crypto is not the only way!) and to be opportunistic in how you pursue opportunities.
And always remember, if there is a crash, that is when things will get really interesting!
Thanks for reading! I am one of the lead instructors at The Crypto University. We are just about a month away from launching our Crypto Masterclass — one of the most definitive online courses on blockchain and crypto. If you liked this article, definitely do check out our Indiegogo Page for some awesome perks!
We currently have two free courses out. One is called ‘Bitcoin Simplified’ and the other on ‘Monuments in Bitcoin History’. Check them out and let us know what you think!
Oh, one more thing before you go. Another reason my friends are freaking out is because they’ve been following these gurus and been waiting for a crash. As a result, they have stayed away from crypto. In the process, they have basically passed up the easiest gains in human history — in 2017, Bitcoin is up 18x, Litecoin is up 30x and Ethereum is up 25x.
Play these markets sensibly. Is all I am saying. Don’t worry about the rhetoric.
Markets crash. That’s what they do!
A lot of people I know are basically suffering from ROMO — Regret of Missing Out. But there is still loads to play for. If cryptocurrencies grow to anywhere near the size of the gold market (a store of value) or the size of the currency market (payments and transfer of value), then we still have a lot of room for growth. This is something I will cover in another post!
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