“How much money should an investor have in cryptocurrencies?” a friend asked me recently.
“None,” I said.
He looked shocked, so I added, “Of course, if you’re a speculator, that’s something else.”
“Oh,” he said, sounding relieved. “How much should a speculator have in cryptocurrencies?”
“About as much as he’d be willing to lose on a weekend in Las Vegas, since that’s how this is likely to end.”
Why? Let’s start with the first issue. Cryptocurrencies are impossible to value.
Anything is technically “worth” what someone else is willing to pay for it, of course.
But that can change quickly, as crypto investors learned last week when Bitcoin and other cryptos lost over a quarter of their value in a matter of hours.
Smart investing means making an independent calculation of what an investment is worth and then checking the market price to see whether it’s undervalued or not.
For example, stock investors can derive an independent valuation based on a company’s current and projected sales, earnings and dividends.
Corporate bond investors will assess value and risk by looking at the issuer’s assets, liabilities, cash flow and business prospects.
An investor in rental properties will look at prospective rents – and costs like repairs, property taxes and insurance – to determine what a house or apartment building is worth.
How do you make an independent calculation of what a cryptocurrency is worth?
Consider the ridiculous Dogecoin, a cryptocurrency created as a joke and useful for absolutely nothing. (Except, of course, betting on whether the price will go up or down.)
At its peak a few weeks ago, Dogecoin was worth more than $90 billion, or more than twice as much as Marriott International (Nasdaq: MAR), one of the world’s leading hoteliers with more than 7,500 properties in 133 countries.
How could that not be a bubble?
Dogecoin isn’t Bitcoin, of course. But – trust me – if the price of Bitcoin wasn’t absurd, the price of Dogecoin wouldn’t be either.
Let’s do a fundamental analysis…
Do cryptocurrencies have any tangible value? No. They are backed by nothing other than the faith of the people who own them.
Do they make transactions easier? No. It takes about 10 minutes for a Bitcoin transaction, and the average transaction fee is $20.
Do they provide a reliable store of value? Hell, no. Wild swings in their value make them unreliable as a means of payment.
Bulls will point out that, unlike fiat currencies, cryptocurrencies have strictly limited issuance.
But that supposed advantage is undermined by the fact that cryptocurrencies themselves are unlimited.
Bitcoin was the first. But there are now over 10,000 cryptocurrencies. (And many of the newer ones offer greater security, faster transaction processing and more sophisticated technical features.)
Cryptocurrencies offer anonymity, that’s true.
That’s a plus for those buying and selling things they wouldn’t want anyone to see. But it’s a short list in our increasingly libertarian era.
Yes, digital currencies and the blockchain – the decentralized record-keeping technology behind it – will be around for a long time.
But they are not the incredible innovations that advocates claim.
Incredible innovations solve problems.
What do cryptocurrencies facilitate?
If you are a terrorist network, heavy weapons dealer, drug cartel or human trafficker, Bitcoin is a godsend.
Coveware, a firm that assists ransomware victims, reports that 100% of ransoms are demanded in crypto. (As was the case with the Colonial Pipeline this month.)
And attacks by cybercriminals are up. Way up.
Chainalysis, a crypto security company, said ransomware payment quadrupled last year to $348 million.
This has hardly gone unnoticed by governments here and abroad. It’s just a matter of time before they step on this thing with new regulations and outright prohibitions.
That will make last week’s dramatic crypto sell-off – Bitcoin has lost nearly half its value from the mid-April high – look like a minor stumble.
It’s not possible to make a rational prediction about when irrational behavior will end, of course.
But it will end as it always does… in tears.
During the dot-com bubble, I warned investors to get out. During the housing bubble of the 2000s, I warned investors to get out. During the meme stock (GameStop) bubble a few months ago, I warned investors to get out.
Today I am warning cybercurrency investors – again – to resist “buying the dip” and get out now.
It’s okay to make mistakes as an investor. That’s inevitable.
But you never want to look back and say, “I was such an idiot.”
This is one of those times.