Investing in Cryptocurrency - The Sherpa’s Take

Crypto.

Some believe it is the future of money. Others think it’s a bubble, a scam, or the biggest Ponzi scheme in human history.

One thing is for sure, crypto is now too big to ignore:

• At the time of this article, the crypto market has reached a total market capitalisation (i.e. total value of the shares) of almost US$3 trillion.
  

• Every week since its launch in 2009, three million users have invested in Bitcoin, making it the third currency in the world in market cap after the Dollar and the Euro.
  

• According to the World Economic Forum, the crypto economy is creating an alternative financial system that is global, open source, and accessible to all, regardless of nationality, ethnicity, race, gender, and socioeconomic class.

These facts are impressive, for sure. Plus, you might know that governments, banks and high-profile entrepreneurs have invested in crypto. Perhaps someone you know has made good or extraordinary returns. Knowing this, it’s easy to feel you’re missing out.

But before you jump in, you should be aware this new system is rife with complexity, opacity, and uncertainty. Many people lost their money on crypto (especially on Bitcoin). 

In 2014, Mt. Gox, the largest Bitcoin exchange in the world at the time, saw over 744,000 bitcoins disappear, leaving them with US$174 million in liabilities. Subsequently, the company found 200,000 of the missing coins, but investors are still chasing 650,000 bitcoins, which may never be recovered. 

Then there’s other large breaches in Bitcoin’s history. So why have you heard that the Blockchain technology underpinning crypto is unhackable? 

The blockchain tracks ownership and transfer of Bitcoins. Saying it is unhackable is not correct, but it is very impractical to hack it. 

The millions of users on a blockchain make it difficult for anyone to corrupt the network. In order to do so, 51% of them would have to overwhelm, take over and eventually shut down the network. This would require an enormous investment and, if successful, it’ll completely erode the trust in the currency, lowering the value of the hacked coins down to zero.

But there are other layers of technology, sometimes in early stages of development, that come on top of blockchain. These could be open to breaches, such as the one experienced by the Mt. Gox exchange.

See how complex this is? On top of the technological aspects, there are also legal, fiscal and economical implications. 

But we certainly don’t want to create more confusion. We get it, you are trying to understand what to do. 

You don’t want to take huge risks, but you’re also nagged by that obsessive question: am I missing out on a big opportunity?

In this article, we’ll share our take on crypto and try to answer that question. Then we’ll go through its major benefits and risks, so we can finally help you make an informed decision.

But before we dive into it, you can familiarise yourself with the fundamental principles of the crypto paradigm here (if you are short on time) and here (if you want to get deeper into the topic).

Crypto’s Risks and Opportunities 

Satoshi Nakamoto (a presumed pseudonym used by a person or group of people not yet identified) first applied blockchain technology when he developed Bitcoin in 2008. He attempted to create a decentralised digital cash system similar to a Peer-to-Peer network for file sharing (think about what Napster did with music in the ‘90s).

In doing so, Nakamoto solved the double-spending problem with no need for a trusted authority or central server.

Crypto’s supporters believe this is revolutionary because it introduces several benefits, since it:

• Eliminates many of the risks that come with data being held centrally.

• Potentially reduces costs and processing timings, by removing bureaucratic layers required by the current middlemen - i.e. banks and other financial institutions, which in fact are researching how blockchain-based systems can replace some of their expensive and inefficient infrastructures.

• Offers greater efficiencies thanks to open-source technology, economic rewards, programmable smart contracts and decentralised governance.

• Introduces opportunities for inclusion for billions of under- and unbanked people, who could have access to simple to set-up and low-cost automated financial services.

• Can enable greater trust and transparency through decentralisation, cryptography, and the creation of new incentives. 

• Could solve some concerns around FIAT currencies - e.g. when governments increase public debt by printing more money as economic stimulus. 

• Could reshape supply chains - especially in combination with the Internet of Things and artificial intelligence.

• Could offer high gains to traders - but this comes with a big caveat, as we’ll discuss below.
  

However, its biggest advantage also presents the biggest risk. With no central authority and clear legislation to govern this market, investors have limited protection when things go wrong.

In fact, this novel system:

• Presents technical and systemic risks, which have resulted in significant technical failures and attacks on crypto services.

• Could open the door to fraud and illegal activity.

• Comes with governance complexities and offers little consumer protection.

• Is complex and hard to understand, which currently makes buying difficult for most people.

• Is affected by extreme volatility.

• Consumes a large amount of power, which has an environmental impact. This is especially true for the Bitcoin network.

Crypto from the Eyes of a Sherpa

It’s time to draw some conclusions.

To start with, it's important to distinguish between the potential of the new paradigm and crypto as an avenue for investment.

This technology has the potential to increase efficiency, solve several challenges of the current system, and create a more inclusive economy.

These could well be the early beginnings of a new open financial system, which requires some inevitable trade-offs and fine-tuning.

But if you’re thinking of investing in crypto, things get more complicated. You need a horse to bet on and, at present, it’s difficult to choose one. It’s like trying to invest in the web in the late ‘90s. In 1997, you may know that the internet is the future, but how do you invest in it? 

Almost all the major investment opportunities at the time subsequently collapsed. AOL was the biggest portal, Yahoo! the preferred search engine. Today, neither are winning horses.

Right now, crypto provides opportunities for trading, but how do you invest in it for the long term?

The cost of trust in the current technology is too high. With its high-energy usage, low-transaction speed and increasingly difficult proof of work, Bitcoin is unlikely to win the race - whatever the improvements to the infrastructure. Several other coins perform better at one or more of the required characteristics (scalability, decentralisation, and security).

Photo by lilartsy

Should You Invest in Crypto?

It’s a tough question to answer.  

For the focused and diligent trader, there are lots of opportunities which potentially deliver better returns than traditional forex trading. But can you match their skills and risk appetite?

If you’re less committed, you can try meme coins like Shiba Inu. But your chances might be the same you’d get with scratchies or lotto tickets.

Do you want our advice?

Just don’t bet the farm. An allocation of up to 5% might have a place in a growth portfolio if you have a high risk tolerance - especially if you’ve done extensive research and really understand a crypto project and believe in its potential.

But going all in with your self-managed super fund might not be a great idea.

History has not been kind to those who invest in fads, fashions, trends or bubbles. Some make a killing, but most end up losing. 

You might think these are unique circumstances and feel compelled to seize the day. But here is another point of view to consider.

Remember the four most dangerous words in investing: ‘This time it’s different’ — Sir John Templeton

In the end, you’re left with one question: do you feel lucky?