Why Most Crypto-pushing Articles and Videos are Useless

Some people retired early because of bold bets on bitcoin or whatever coin was the new trend, but those stories should not and must not urge you to invest in cryptocurrency unless you know what you are doing. Bear in mind that those cases get media presence but the millions who lost a few thousand dollars do not, nor do the few thousand cases who lost almost all their savings. 

By knowing what you are doing, I hope the only reason you invest in Bitcoin and Co. is speculative and you are more than aware of the possibility you could lose up 70 or 80% of your money. For perspective, Bitcoin already lost 46% from its peak on 8th November 2021, which was barely two and a half months ago (as of 23rd January 2022). Even if you fell prey to FOMO thinking in the low $50k or $60k in October 2021, you would currently be sitting at 30-40% unrealized losses. 

In Medias Res

Some might argue that this means nothing on the grand scale of long-term investing, but to those, I'd like to counter that even if we now knew for sure that in say 5 years, bitcoin price will stand at $150k, I doubt anyone of us would love sitting on unrealized losses over many years. That draws down your mental ability to think straight over this long period. Believe me, I have had my share of sitting on unrealized losses and waiting for them to recover. This was a very traumatic experience for me and it slowly damaged me mentally for one and a half years. It gets especially tough, once the market keeps running against you, even in the moments when you are convinced it cannot go even further.

By knowing what you are doing I also mean that you are more than aware of how the value of those "currencies" only exists because there is a pool of people willing to try their luck to be among the 1% of the big gainers. Sure, you could argue, the value of our fiat currencies, like the euro, the dollar and the yen is based solely on the readiness of other people to accept them as payment. But these currencies are backed by powerful countries that have a history of at least more than 70 years of not defaulting and backing their currencies. Countries have a history of crushing down on emerging rival currencies which spring up and get used in parallel to their own. 

Gold for example is used as an investment partly because investors anticipate a certain macroeconomic environment that will entice others to buy gold as a hedge or safe-haven investment. So, people also buy gold by reasoning gold prices will go up because other people will also invest in it. Every other investment has this hope and belief inherent in itself: if you consider investing, you start to wonder if it this the right time, will other investors eventually flock to this investment, too, otherwise, the price of it will stay at depressed levels. Yes, but other investments either keep paying dividends in the meantime or in the case of gold, it gets used in the real economy as a commodity. So, there is fundamental value inherent in it. Yet, I still consider gold inferior to shares of companies, even in a higher inflation environment, because it does not provide dividends.

In 2021, Bitcoin and Ethereum have reached their status of legitimacy on Wall Street. Which is a huge step for any financial asset. Once mining was banned by the Chinese government, it was clear that the two have become too significant. Otherwise, the Chinese government would have ignored them.

Hold your horses! That still does not mean that it will go up from here and that it is a wise investment decision to hold it for a long period. The year 2021 was special and unique in many regards, thus the interplay of a few circumstances propelled Bitcoin from its previous high of around $20 thousand in 2017 to over $60 thousand last year. Algorithmic trading bots, a general bull market in equities, low-interest rates, the stay-at-home environment, all played a major role alongside the notorious FOMO bias causing many white males in their 20s and 30s to put lots of their savings into so-called crypto assets.

There is one thing you can be sure of in markets where large sums of money get shifted from side to side and that is, once structural changes happen, the genius trade of last year hardly ever works again this year. The structural change happening this year will be the large and persistent inflation numbers causing the Federal Reserve to hike interest rates, starting probably in March 2022. 

I keep seeing all sorts of buy-crypto articles. There are also plenty of videos of so-called analysts pumping Cardano or Ethereum and the likes, but I failed to find two useful ones that would back up their claims properly about how investing in those cryptos was a smart and wise decision. Instead, the argumentation usually goes in the direction of how there is huge potential with that specific coin or how in the next months the value of some coins will recover and reach new highs. Here are some of the most useless quasi-arguments:

• Cherry-picking the coin and the timeframe to say how if you invested in coin X on August 21st and held until now/sold 28 days later, you'd have made a 200% profit.
• There is potential to make money - yes! but there is also potential to lose a lot of money, the latter is not considered in balance. Despite the risk of a downfall being larger than the potential upswing.
• Risk-reward looks favourable for fill-in-the-blank 
• Coin Y will go parabolic in the next few days (or similar: crypto is in a supercycle)
• This coin Z is the next dogecoin/Shiba-Inu. 
• The technology can cheaply offer banking services to poor people of the third world, lower the cost of remittances etc.

The last claim sounds to me rather like a try to greenwash all the waste in energy consumption or to pump someone's large need to become insanely rich from owning crypto-coins in a short period.

Not many articles talk about how such pumped up bubbles are recurrent in the history of mankind, they just take different shapes each time they appear. Some centuries ago it was tulip bulbs. Some 20 years ago it was stocks of newly-founded internet companies with no earnings nor revenue yet or most recently it was mortgage-backed securities of lots of subprime credit loans wrapped together and incorrectly labelled as the highest investment grade. As then, the same goes with this hype, you see lots of different industries and gold-diggers emerge and try to catch some stardust falling off of the shooting stars.

Let me go back to the first claim from above: for each claim of the first kind, you can cherry-pick another timeframe or another coin that was touted as the next big thing but failed miserably. how much could you have lost in that case? Even if you invested on a very favourable day in coin Y, what is the probability you would not have sold it after you made some decent profit after a few days? 

Go back to 2017 or 2018 when BTC dropped to $4 or 5k, was it smart to buy then without knowing the future? Crypto believers will argue, even if you bought at the peak in 2017 (at around $20 thousand) and held by now, you'd have a decent profit. Yes, but who has the patience to wait for four years and believe in it all the time when everyone stops talking about it. Or even worse who has the guts to see unrealized losses of 60 or 70% and look at them over a large period such as between 2018 and 2020? Another risk was, for example being in January 2021, you do not know that a few months later it will jump like crazy, maybe you lose your patience and sell for whatever you can get. 

I liked this statement from Stephen Diel's article:

For every winner there are guaranteed to be multiple losers. It's a game rigged by insiders by hacking human psychology.

Many Bitcoin Pumping Articles Rely on Technical Analysis

Here is the problem with technical analysis or charting: if you are a long-term investor in something, then the technical analysis should matter exactly zero. It might be suitable for day-trading and some shorter periods. Even then, there are many problems coming with technical analysis and you need years to master it and get some feeling for it, so if you joined the market recently, this is not a good option for you, despite the many articles or "expert" YouTube-tutorials telling you otherwise. In addition to mastering those plentiful rules and techniques, there come the problems of inherent biases we tend to make while investing our money. Daniel Kahneman got a Nobel prize in 2002 for conducting a thorough analysis on all the mistakes we do when subconsciously acting irrationally while being confident that we make a rational decision. He got the prize … (to cite the Nobel committee): 

...for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.

I strongly recommend you read about the findings of Kahneman and Tversky, concepts like loss aversion or recency bias can save you lots of money in the future.

Risk-Reward Analysis

What is the risk-reward analysis for bitcoin? What is the upside and what is the downside? How do you know that the upside is larger than the downside? Beware, do not think the upside of bitcoin is that it could go to $300k? OIn what do you base this conclusion? I hope not on some analyst's opinion who tries to give a sensational headline to get the most clicks or worse to pump his investment! 

The Odds of Picking a Unicorn

I also hope you do not consider buying some unknown coin in the hope it will be the next Shiba Inu! How could you tell what the next Shiba Inu or Dogecoin might be among 1000s of now unknown and worthless coins? Ok, you can take a guess and hope for the best, but how much do you invest then? Invest too little, even ifs value goes up tenfold, you end up with a small absolute profit. Invest too much, you might lose it all which is then a lot and maybe half of your savings or more. A problem venture capitalists face a lot. They usually invest in ten companies and hope that one of them will become the unicorn offsetting the losses of the other nine.

Invest in BTC now, how do you know it will not drop to $10k again in a short time frame like seven or eight months? What probability do you put on Bitcoin dropping to $10k and what probability do you put on it reaching, say $60k again this year? 

Let us even assume that BTC goes up to 300k and let's say, it does so in 2027, by that time everyone might have given up waiting. In the meantime, it can have dropped to even $5 thousand and you might have lost your "hodling" enthusiasm at, say $8 thousand and lost lots of money before it starts going up again. Let's even say from that $5k it goes only up and you are still hodling, I guarantee you, you will not wait to see it rise to $300k, but you will have realized your profits sometime before that which is to be fair the best-case scenario.

Media Attention Works Against You

Another problem of this hype: it is much easier to tell how some coin made a 30, 40, 50% move within a short time frame and feed the information cycle than putting it into context. Putting things into context every day is not very suitable for (financial) media companies who need to fill their programmes each day with content. Their only target is your attention and you spending time with them, how on the other side they could increase their revenues.

It is then the information that can be digested in 10 seconds which is preferred, instead of providing full explanations of underlying concepts, potential dangers of semi-truths, problems of this revolution-in-payment narrative. To dismantle all this takes lengthy arguments with detailed background and context, knowledge in money theory, economics, governments, central banks and regulators of the financial industry. All that does not easily fit into a tweet. 

Yet, then the clickbait news media comes out with "bullish" news for Bitcoin, like "Company Fill-in-the-blank accepts bitcoin as payment". This piece of "news" is so useless, because hardly any of these companies has ever sold/offered anything at a bitcoin fixed price. It is easy to say they accept, but they still price it in dollars and convert it to the bitcoin amount in the second of your purchase. This is light-years away from a company saying my product costs 0.14 BTC either you buy it tomorrow or next week or next month, it will still cost 0.14 BTC. Then the business bears the risk of bitcoin dropping by say 20% in dollar terms by next month. No legitimate business would ever do that given the price oscillations of Bitcoin because most of their cash flow is in a legitimate fiat currency.

Conclusion

I understand it is hard to take the longer path and live with steady returns in the range of six to ten per cent per year by being a conservative dividend investor in the stock market as opposed to investing aggressively in speculative assets and hoping for 30% in one or two months. But remember the power of compounding and remember that the best investors earned most of the money after 30 years of compounding. If you really cannot resist investing in something very volatile and speculative, do not shy away from cutting losses and admitting that you might have been wrong. Sit out two or three months and then start from scratch. That is more advisable than blindly believing the mantra how crypto and only crypto is the future.