Hey my financial builders! Not too long ago Crypto currency was all the buzz. If you found yourself on the sideline wondering if you should get in or not, this guest post from Andrei Polgar is a must read. When you’re done, be sure to check out his book “The Age of Anomaly” (on Amazon, iTunes, Kobo, or Barnes and Noble) and subscribe to his channel on Youtube (One Minute Economics) where he breaks down many economic and financial topics in easy to understand one minute videos.
Back in 2009 when bitcoin appeared, things seemed a lot more
straightforward than today when it comes to what crypto is supposed to
help you do. Simply put, bitcoin was designed to be a way for people to
protect themselves against all sorts of financial uncertainty,
especially uncertainty related to money and banks. In other words, those
who lost confidence in governments and central banks after the Great
Recession of 2007-2008 now had a brand new asset class at their
disposal. And indeed, as time passed, it became abundantly clear that
there is a clear correlation between the price of bitcoin and the level
of financial fear in society, especially banking-related fears, as was
the case back in 2013, when crypto performed remarkably well during the
Cyprus banking crisis.
All in all, a decent case can be made that crypto was designed as a
hedge against financial uncertainty and in a lot of cases, it actually
acted as such.
But as the price of bitcoin and other cryptocurrencies started going up,
a new type of crypto enthusiasm emerged. People started buying crypto
not because they wanted to protect themselves against monetary or
banking uncertainty but because they saw prices going up and wanted a
piece of the action.
As more and more alternatives to bitcoin (altcoins) appeared, this
casino mentality became even more obvious. While there are indeed
certain altcoins that put something meaningful in terms of technology on
the table, most of them, the overwhelming majority in fact, are nothing
more than glorified pump and dump schemes. In other words, coins which
have been simply launched without there being anything special about
them and with the sole intention of insiders initially generating buzz
around them and then selling to naïve investors who are left holding the
bag.
This state of affairs makes a lot of people confused.
What exactly does crypto represent at this point?
I believe the key to figuring this out is understanding that we can no
longer just say crypto in a way that encompasses absolutely everything.
In my opinion, there are two dimensions when it comes to the crypto
world right now:
- The “meaningful asset” dimension, and I’m referring to bitcoin and a
handful of altcoins that have genuine staying power and in which you can
indeed invest for meaningful reasons related to protecting your wealth - The casino dimension, which I feel perfectly describes everything
else. If rampant speculation and pretty much gambling is your thing then
sure, it’s your prerogative to invest in whatever it is you decide has
potential. Just understand the nature of the asset you’re investing in
So, should the average person invest in crypto?
When it comes to the casino dimension, I believe it would be wise for
most people to stay away. There is just too much manipulation and
misinformation out there for this approach to make sense for the average
individual. When it comes to the first dimension however, genuinely
meaningful cryptocurrencies such as bitcoin and a select few altcoins, I
truly do believe that there is a place for them in almost every
portfolio.
Now, of course, I wouldn’t necessarily recommend this asset class to
someone who is let’s say 65 years old and can barely use a computer. I
respect the fact that there are simply people for whom these assets are
not a good fit. However, the more tech savvy you are, the more I believe
it makes sense to allocate capital in this direction. If you’re a young
person and at least “kinda-sorta” know about the crypto phenomenon, you
owe it to yourself to at least learn a bit more about it and what
options you have at your disposal.
Finally, do keep in mind that even if you invest in the very best
cryptocurrencies, there will still be a lot of volatility involved. Just
like with any other asset class, pick a strategy which revolves around
you understanding the asset you are investing in. If a price drop of 5%
is enough to spook you, then this asset class is probably not for you.
If however you are open-minded and risk tolerant enough to give it a
shot, you might do very, very well.
This isn’t an asset class you should pour 50% of your net worth into, of
course not. At least not if you’re serious about preserving your sanity.
Instead, think of crypto as an asymmetrical investment opportunity. If
you make the right choices, then even if you do not allocate a very high
percentage of your net net worth in this direction, you can still
generate life-altering returns. Then again, the likelihood of losing
money is also higher than with other asset classes. When it comes to
crypto more so then when it comes to other assets, the adage of not
investing more than you can afford to lose is remarkably accurate.
All in all:
Is crypto a highly speculative asset class? Yes, even if you play it
safe and only invest in the best of the best in terms of crypto, we’re
still talking about ultra speculative and highly volatile assets.
So, should crypto investments be treated as an insurance policy or if
you will, as the hedge against uncertainty they were designed to
represent? Sure!
Should cryptocurrencies be treated as assets that have the potential of
making you very wealthy? Once again, sure.
My answers to the previous two questions may seem contradictory but…
well, they’re actually not. Simply put, crypto should be considered an
asset class that can represent a hedge against financial uncertainty *as
well as* something that can make you wealthy. A very attractive package
and an excellent fit for people who are curious/brave enough to see the
potential and the wise enough to take calculated risks in this
fascinating but dangerous field.
In The Age of Anomaly, my new book through which I teach people how to
protect themselves against financial calamities and become more
financially resilient in general, I explain in detail that exotic assets
like cryptocurrencies play an important part in the grand equation. The
same way however, old-school assets such as stocks or even precious
metals can complement them nicely.
For example, if you have to leave the country, cryptocurrencies are much
easier to “transport” than even gold or silver. All you have to do is
remember so few words and bam, you’re good to go. In an environment
without Internet access however, tangible wealth such as that
represented by precious metals would be a much better choice. Again, the
name of the game is putting together a balanced portfolio which consists
of assets that complement one another nicely.
As I keep telling people in my book and YouTube videos, protecting
yourself against what’s coming in no way revolves around rocket science.
Anyone can do it and everyone should do it. I hope you found this guest
post useful and as far as my new book is concerned, you can find it by
searching for “The Age of Anomaly” on Amazon, Barnes & Noble, iBooks and
Kobo. To give as many people as possible access to my work, I’ve lowered
the price all the way down to $0.99 until Sunday (8/12/18).