Crypto Currencies as an Asset Class

Finance |

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Bitcoin, the world’s first crypto currency, had it’s 10th anniversary just a few days ago. It’s price has risen from nearly zero to a whooping $20,000 per “coin”, although it went down from those all time highs and now it’s trading for about $6,500. As anyone would expect, such a phenomenon cannot avoid generating a lot of drama and controversy.

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Here are my thoughts on Bitcoin and the crypto market as an asset class.

Origins of Bitcoin

Some people assume that the whole story started with the publication of the Bitcoin white paper, the document outlining the system’s high level design. The working prototype had followed shortly after the white paper, in the form of an open source software that can be run by anyone who has a PC. You don’t even need an Internet connection to participate in the Bitcoin network, you can use a satellite dish or any other means of data transfer.

I think that understanding the roots of Bitcoin can help us to understand it’s original purpose and future potential. Unfortunately, no one really knows for sure where it came from. Even the real name of it’s creator (or creators) is a big mystery. There are many wild theories on who is behind Bitcoin, ranging from accusations that it is the CIA pet project to arguing that it was backed by drug cartels and it’s sole purpose is to make the life of criminals easier.

That’s not a lot of information to start with but here is the thing with the open source software: it’s not static. Most of the people who are directing the project now are pretty public and everyone can check their credentials. I won’t name any names but that’s what I found to be the common traits among the Bitcoin developers who worked on that project since the early days:

  • they are not filthy rich, which may be surprising for an outsider
  • they are highly competent and they take pride in that
  • it’s clear that they value their privacy much more than the average person does
  • many of those people are cypherpunks, here is a quick summary of the cypherpunk ideas

If we dig a bit deeper it’s not hard to figure out that Bitcoin is not the first attempt to create an inflation-prone digital currency or “digital gold” but all of the previous attempts have failed. It’s important to understand that Bitcoin didn’t come from anywhere, it’s architecture is actually an attempt to fix the problems which led to the demise of all of it’s predecessors.

What About Other Coins?

The early days are long gone and there are thousands of crypto assets now. The biggest coins and tokens are usually listed at Coinmarketcap

Almost all of them inherited a big chunk of Bitcoin’s DNA but each of those projects is unique in some way or another which leads us to one of the most important properties of crypto assets: the level of correlation in their price movements is huge and that gives us very little space for diversification. Some people might argue that every coin is a totally different thing but the market doesn’t seem to agree with that so don’t fool yourself into thinking that you can cut the risk of your crypto investments significantly just by diversifying into several coins or tokens. Bitcoin is the most stable crypro asset by now and adding any other asset will most likely increase the amount of risk in your portfolio.

Believe it or not, some crypto assets made even more money than Bitcoin although their volatility was also higher so it can actually make sense to buy a few altcoins. Just beware of the con artists, there are thousands of Ponzi schemes presented as prominent crypto projects.

Should I Invest in Bitcoin?

I think it mostly depends on your reasons for investing, there are 3 widely known motivations that drive investment activities:

  • money
  • status
  • fun

Money

Does it make sense to invest in Bitcoin or other crypto assets, money-wise? I think yes, it is a rare case where the upside potential is practically limitless and the downside potential is limited, you cannot lose more than you invested. The best case scenario for most companies is to become monopolies in their market sectors but even that wouldn’t allow them to extract an unlimited value from their customers because the demand is limited and the competition is always ready to enter the scene and take their market share, bringing the profits down. Bitcoin can actually have an unlimited growth in value, it can even become the value definition itself. There is a hard limit on the amount of Bitcoins in circulation but there is no limit on the amount of goods and services produced by our society and that amount grows at the average rate of 3% a year since the Industrial Revolution so it’s not unreasonable to expect an unlimited growth for any widely adopted inflation-prone store of value.

Satoshi Nakamoto, the mysterious creator(s) of Bitcoin, expected it to be “huge” or disappear completely but there is a lot of space in between. Personally, I agree with this “all or nothing” vision but it can also end up as the niche product which can stabilize it’s price and limit it’s growth potential at some point in the future.

Status

Will Bitcoin satisfy an investor looking for social status? I’m not sure about that. A lot of people who are involved in crypto projects do not like talking about that. I guess there is some kind of social stigma about that and it’s not hard to understand why: how many people can prove that they’ve got their crypto assets legitimately? And don’t forget about the plain envy, a lot of people would call you a lucky gambler if your investment would be successful and they would probably think that you are naive and stupid if you lose your money in crypto so it’s hard to avoid negativity no matter what results you would get.

On the other hand, there are a lot of people who sincerely symphatize with the crypto movement and it’s core ideas but let’s say that the status impact of crypto investments is, at least, controversial.

Fun

I think that fun is the biggest reason to invest in crypto. If you are addicted to adrenaline and drama, this is the best community to hang around! Crypto market is the wild west with all kinds of folks who have different agendas. There are a lot of honest people but there but even them have their egoes attached to any important aspect of crypto assets. There is also a legion of con men and plain criminals who thrive in this space so your job is to guess who is who and put your money where your mouth is. Fun is the only thing that you will get for sure if you decide to invest in the crypto assets.

Conclusion

Crypto assets might be a good investment option for almost any investor but it’s especially good for the fun loving investors with a huge risk tolerance. Crypto assets had the huge returns in the past although they are also far more volatile than most of the stocks or bonds. Due to their extreme volatility, I think that most of the investors shouldn’t have a big exposure to crypto assets. The exact number depends on many factors but I think that having 1% to 10% of your portfolio allocated to crypto assets might be a good idea in the long run.

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