Our favorite client recently asked us, “Aren’t both regular stocks, the stock market, and crypto, the crypto market, both essentially like Vegas… Gambling?”
We gave this simple answer/analogy. Think of the stock market as playing poker and crypto like rolling dice.
But this article isn’t about that. We will probably write about that subject at some point, but today we wanted to discuss the elephant in the room… Recent and major fluctuations in crypto. As of today's' writing, May 19, 2021, crypto is sinking hard and fast. Bitcoin at 31,090 and Ethereum at 2,014. Will they go up? Probably. Will they go down? Probably. Roll the dice.
So. What’s happening? Should you sell? Should you hold? Should you buy? And… Was it Musk? Was it China? Is it the Fed? Is it novice investors? Is it wealthy investors or big firms? Yes!
Let’s first address the biggest problems with investing in crypto. These are ignorance, fear, and greed. What caused the great Tulip Mania / Tulip bubble in 1637 and most bubbles? Ignorance, fear, and greed. That’s right, plenty of Hogs in the market and not enough Pigs. Then as now, there is plenty of ignorance, fear, and greed to go around. It was obvious, that legendary billionaire hedge fund investor Ray Dalio (who we have a lot of respect for), in a very recent interview, didn’t know difference between Bitcoin and Ethereum. If he did know, he certainly didn’t sound like he did. Bottom line, if he’s confused or un-knowledgeable, it’s no surprise that millions of new and inexperienced traders are confused as well.
So, before we can discuss trading or investing, we first need to understand what we are talking about.
“What is Ethereum?
Ethereum offers a way to use the power of the internet without trusting apps like Facebook, Google, or your online bank with your personal information.
Apps like Facebook and Google collect and store the information of their millions of users in servers. This means that user data is kept at a very small number of locations (this is called centralization). If one of these locations is hacked into, we’re all in big trouble!
Ethereum is a blockchain that allows the user to build smart contracts and dApps.
You may think of Bitcoin and Ethereum, as a lot of us do, as the Apple and Microsoft of crypto. However, unlike Apple and Microsoft, they are completely different from one another. Both have very different objectives in mind.
Ethereum vs. Bitcoin
While both the Bitcoin and Ethereum networks are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, transactions on the Ethereum network may contain executable code, while data affixed to Bitcoin network transactions are generally only for keeping notes.
Other differences include block time (an ether transaction is confirmed in seconds compared to minutes for bitcoin) and the algorithms that they run on (Ethereum uses ethash while Bitcoin uses SHA-256).
While bitcoin was created as an alternative to national currencies and thus aspires to be a medium of exchange, and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts, and applications via its own currency.
BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system, but rather to facilitate and monetize the operation of the Ethereum smart contract and decentralized application (dapp) platform.
Ethereum is another use-case for a blockchain that supports the Bitcoin network, and theoretically should not really compete with Bitcoin. However, the popularity of ether has pushed it into competition with all cryptocurrencies, especially from the perspective of traders. For most of its history since the mid-2015 launch, ether has been close behind bitcoin on rankings of the top cryptocurrencies by market cap.”
- Investopedia, June 16, 202, Nathan Reiff
Did you get that? So big differences. Why the confusion?
Ignorance, fear, and greed. And I’ll add one, Laziness. What am I saying? Many people can’t even take the time to do a small bit of preliminary research. The information that we included above came from a simple and quick search on Investopedia, and there are hundreds of other sources available with just a rudimentary Google search.
What the heck is happening?
Musk started a fire storm with his latest tweet about Bitcoin, “not being environmentally friendly and that he would no longer be taking payment for Teslas’ in the form of Bitcoin”. This is nothing new. Musk is a master of market manipulation (Like his latest tweet, the market impact will not last. They never do). He’s acutely aware of the fact that Bitcoin has moved to 75% renewable energy for mining, (China did however, announce that a new coal plant was coming on board just for the sole purpose of Bitcoin mining). He also knew that Bitcoin mining used a lot of energy when he made $500,000,000 from his own Bitcoin investment not so long ago. That said, Teslas also run on both coal and other fossil fuels. Please give Musk the memo. So, does this have anything to do with being green? Really? No. So. How does he get away with it? Easy. He needs the governments and the governments’’ need him. It’s a symbiotic relationship, where both benefit. Not surprisingly, China also comes out with a statement bashing Bitcoin. So first, and an aside, the idea of buying a car with what is essentially a reserve currency (stored value), doesn’t really make a lot of sense, especially with these huge value fluctuations. You buy a car on Tuesday for 60,000 Bitcoin, but on Friday your car is only worth 40,000 because of a major swing in price, (all of the knowledgeable investors have known this)?
Secondly and more important. Ray Dalio, did say something both important and profound during the same interview. He basically stated that the governments’ of the world would never allow crypto and that they would do everything they could to outlaw it. Hmm. This guy is VERY well connected, and he also knows a lot about economics. Question: Do you think that China, (where Musk is setting up new factories and power-plants), and other countries including the US, would rather you buy a car with regulated government backed currency/dollars or with non-regulated crypto? Exactly. China wants their citizens to buy cars with “real” money and so do we. At this point, "real" money makes the world go around.
Two. Millions of citizens in the US received Covid checks, and many more unemployed citizens received unemployment money. What did they do with this money? MANY of them invested in the market and in large part crypto, because of its’ incredible draw, (Fast and seemingly easy money).
When the bottom drops out of crypto, what do many investors do? They jump ship. That’s what is happening now? Many people have lost their money and millions of others now need to put their money someplace else. Where? Will the majority save it? No. Will they invest in something else? Not likely, as once bitten, twice shy. Most of them, especially younger investors have only ever seen a Bull market. Will they buy stuff? YES. The Fed loves it when you buy stuff. They love it when you buy real stuff from Amazon, Walmart, etc. This helps stimulate the economy here, but mostly in China. China loves it when you buy stuff, because they make the stuff that you buy and get real money for it. (For another article).
The US Fed outlawed gold in 1933. That was incredibly short sighted, just like trying to outlaw or fight the crypto movement is today. They should instead, be working more with the private sector to create either their own form of crypto and/or working with and embracing the inevitable. The government is presently working with researchers at MIT in MA on a form of US backed and regulated crypto currency, and China is well ahead with this research, but the key word in both cases is "regulated".
Ultimately, deregulated crypto is here to stay. In what form and which coin or company is anyone’s guess.
As per Ethereum, we believe that it makes sense. It makes as much sense as it can considering it lacks so many of the essential fundamentals, which are calculable in “real” stocks,(companies) but, enough to at least analyze in a systematic and somewhat logical way. Make sense?
As we conclude this article, Bitcoin is at now at 40,000 and ETH is at 2,904.
Vegas Baby! Roll the dice!
Pigs get Rich. Hogs get slaughtered. Be a Pig!