Hype and Risks in Crypto Currency Investment

Cryptocurrencies have made a significant global impact, and their presence in our daily lives is undeniable. In this blog post, we’ll explore the captivating ways in which the cryptocurrency craze has influenced our culture, revealing some intriguing patterns that seem to recur approximately every two centuries.

The Context

Beauty is no quality in things themselves: It exists merely in the mind which contemplates them, and each mind perceives a different beauty — David Hume

Cryptocurrencies appear to have had a significant influence on contemporary society.

News outlets, social media influencers, supporters, and members of this strange asset frequently publish inspiring stories about young people who are allegedly preparing for retirement with the aid of secretive, decentralized digital money.

As an alternate and quicker way to achieve financial freedom, this trend is luring many new and experienced investors to explore this asset class.

We have been asked several times over the years to offer our opinions on cryptocurrency investments, therefore this article is in answer to such requests.

Since about 2010, we have been keeping tabs on all the relevant activity and conflicting perspectives surrounding this mysterious asset. At the time, several futuristic forums and websites had only begun to request that users “gift us a coffee in the form of bitcoins.”

Be aware that investing in any asset class is a personal choice, and that our research on the issue is based on personal viewpoints. Those who are on the verge of nirvana through this arcane asset class shouldn’t view the rulings as a deterrent, curse, or mood dampener.

Cryptos & The Art

As we write this article, one bitcoin is currently trading at a record high of $60,835 (or about ₹45 lakhs in Indian currency), up from its initial trading range of about $0.0008 to $0.08 per coin (about ₹6.00) in July 2010.

Bitcoin is the mother of all cryptocurrencies, and the world will be fascinated by this phenomenon, all thanks to Satoshi Nakamoto’s ingenuity.

As of October 2021, there are more than 6,500 cryptocurrencies in use.

Since the value investing ethos is only based on strong fundamentals and an asset’s intrinsic value, we may broadly classify cryptos, non-fungible tokens (NFTs), and other specialized digital assets as ART.

High-net-worth and some affluent people are drawn to art because it frequently signals the conclusion of a fruitful financial journey. Happiness is ultimately what matters if you can afford it.

Let’s use the example of the well-known painting “The Starry Night.” an 1889-produced original work of art by Vincent Van Gogh.

The value of this picture is put at more than $100 million. This picture, however, is a masterpiece by Van Gogh, and it might be claimed that there is no way to value it because it is priceless.

Such assets can be worth millions to the wealthy, but they might be completely useless to the poor and the same goes for cryptocurrencies and NFTs.

Because digital assets cannot grow or extend in predictable size similar to a conventional firm that exhibits a human-like growth lifecycle, the only factors that drive associated assets are participant approval, supply, and demand.

The only changes we’ve seen in the previous ten years in the cryptocurrency market are growing investor adoption, trading speculations, and uncountable imitations, some of which even began as Korean TV series (Squid Games) or internet memes.

Referencing Shiba Inu, a Japanese dog breed, is featured in Dogecoin, which purposefully misspells the word “dog” as “doge.”

Furthermore, it is important to keep in mind that, similar to stocks, big players and governments always have the upper hand when manipulating assets that investors are unfamiliar with.

The Crypto Craze (2000’s)

For those with elephant-like memories, we want you to think back to August 2017 when Jamie Dimon, the mighty CEO of JP Morgan Chase, referred to Bitcoin as “a hoax.”

As it turns out, a few days later, JP Morgan became one of the most active purchasers of Bitcoin XBT, a tracker fund for digital currency.

Bitcoin XBT is an exchange-traded note that is listed on Nasdaq Nordic in Stockholm. It effectively enables users to hold bitcoin without worrying about how to store it safely.

Between the day Jamie Dimon thrashed it and the day of the XBT deals, the price of Bitcoin had already dropped by as much as 24 percent. This issue came to light when a complaint was lodged by Florian Schweitzer, the managing partner of a London firm called Blockswater, a bitcoin market-maker who was trading about $25 million a month back then.

In defense, it was claimed that JP Morgan wasn’t engaging in any form of manipulation and was simply operating on behalf of the client. Even today, Dimon still views Bitcoin as “fools’ gold.”

The European markets are already accustomed to this sensation with roughly 20 Crypto ETFs worth more than 1 billion euros!

Since the Winklevoss twins submitted the first Bitcoin ETP petition in 2013, the SEC has regularly rejected similar requests. However, on October 5, 2021, in a desperate attempt to capitalize on the hype, the US SEC approved an ETF that tracks companies with large exposure to Bitcoin.

Earlier methods of doing this included contracts and cash-settled, front-month Bitcoin futures (#BITO).

Volt Crypto Industry Revolution and Tech ETF, a new actively managed ETF, will be offered on exchanges.

The “Volt Crypto Industry Revolution and Tech ETF” will hold the majority of its net assets in bitcoin or receive the majority of its profit or revenue from businesses engaged in related activities such as mining, lending, or the production of mining equipment.

Please pay special attention to the phrase “related activities” as many investors currently understand this as direct Bitcoin investments that appear to be further driving Bitcoin prices and demand. Although it isn’t officially a Bitcoin ETF, this cryptocurrency fund has the SEC’s blessings.

According to reports, the Volt ETF won’t invest in bitcoin directly, preferring to invest at least 80% of its net assets in what it refers to as “bitcoin revolution companies“, options, and ETFs with indirect exposure to those companies – a skeptical play. In other words, instead of investing in prospective gold, they would do so in companies that sell shovels.

To balance the risk of the portfolio, the remainder of their exposure is anticipated to include broad equities or good old stock market assets. This is an odd instance of using a terminally hazardous asset to reduce potential threats from a critically risky asset, similar to some hybrid mutual funds.

The crypto craze phenomenon is categorically not new and unique, even though it would be an exciting chance for stock investors like us to watch how this develops!

The Gold Rush (1800s)

Turn the clock back 200 years to January 24, 1848. John Sutter, a merchant from North America, was having a sawmill built close to Dahlonega, Georgia, when by sheer luck, James W. Marshall, one of his carpenters, discovered gold.

Despite Sutter and Marshall’s best efforts to keep their discovery a secret, thousands more fortune seekers soon encircled them and camped out in conditions that only the prospect of gold could make them bear. Sutter and Marshall then decided to form a partnership.

Around 80 thousand “forty-niners” (as the 1849 fortune seekers were referred to at the time) had arrived at the California goldfields by the following year, and by 1853, 250 thousand people had poured there.

The gold rush eventually slowed down when the most productive resources were exhausted and organized capital and machinery (like commercial bitcoin mining farms) took over the efforts of lone miner-adventurers with more effective and professional operations, following a normal pattern.

A permanent community with an established government and law enforcement replaced the anarchic and violent mining camps. As soon as the gold was gone, those towns that had no other sustainable economic pursuits quickly turned into ghost towns.

In the ensuing years, this repeatedly transpired as a herd occurrence in Australia, Canada, and South Africa.

Although some fortune seekers did find gold, which led to a widespread frenzy in the towns, the people who profited from the gold rush were those who sold shovels and other mining equipment.

We now bring up another psychological phenomenon, which is used metaphorically to refer to any significant economic bubble when asset values diverge from their fundamental value, in the hopes that crypto is not history that is repeating itself.

It’s commonly known as herd mentality.

The Tulip Mania (1600s)

Rewind 200 years — Tulipmania was a time during the Dutch golden age when contract prices for some bulbs of the newly popularized and newly introduced tulips rose to extremely higher heights before tumbling sharply in February 1637.

In the history of investing, it is largely acknowledged to have been the first speculative bubble or asset bubble ever documented. At the height of the tulip craze, in February 1637, some individual tulip bulbs fetched more than ten times the annual salary of an accomplished craftsperson. The Scottish journalist Charles Mackay’s book, “Extraordinary Popular Delusions and the Madness of Crowds,” which detailed this incident, was published in 1841.

In it, Mackay said that at one point, 5 hectares (12 acres) of the property had been offered in exchange for a Semper Augustus tulip bulb. According to Mackay, the price decline caused many investors to lose everything, and Dutch commerce was severely shaken.

Tulip Fever, a highly regarded book by Deborah Moggach, is about the obsession with tulips that has captivated the public’s attention for generations and has been the topic of several other novels as well.

Conclusion

Although ART (our analogy for digital assets) is a fantastic tool for high-net-worth individuals to stash away extra cash, technically they are not intended for retail investors due to the underlying hazards.

The problem with art or psychedelic artwork like NFT is that the appeal and worth of such possessions always depend on the individual’s perception and point of view. While the US Gold Rush lasted for roughly eight years, the Tulip Craze only lasted for about six years due to its shorter lifespan.

The cryptocurrency’s first significant price increase came in 2010, and the current rally seems to be outperforming all expectations. That’s eleven years in a row of unimaginably erratic growth with astronomical gains (crypto traders please excuse us).

Our findings suggest that the financial markets experience a similar unusual disruptive trend every 200 years or so.

We are bound by our essential ideals and thus we would exercise good judgment to refrain from boarding a mystical moving train that has already picked up a dangerous speed. In order to find and sweep undervalued stocks, our limited understanding and deep value investing principles only work with assets that can be examined on their intrinsic value (underlying worth).

These prospects for value investing often have shown lifespans of more than 5, 10, or 15 years and require little painful maintenance. The thrill of investing in crypto, however, entirely rests on one’s capacity for taking risks.

Since stock investing has been tried, tested, difficult, but immensely effective for the previous four centuries, we choose to stick with it ❤️.

Frequently Asked Questions (FAQs)

1. How has cryptocurrency impacted contemporary society?

Cryptocurrency has had a significant influence on contemporary society, attracting attention from news outlets, social media influencers, and investors alike. It has become an alternate and faster route to financial freedom for many, sparking interest and investment from both new and experienced investors.

2. What are some parallels between cryptocurrency trends and historical events?

Cryptocurrency trends often mirror historical patterns, with similarities to phenomena such as the Gold Rush of the 1800s and the Tulip Mania of the 1600s. Just as these historical events led to frenzied investment and speculative bubbles, cryptocurrency markets experience similar cycles of boom and bust.

3. How does cryptocurrency compare to traditional assets like art and gold?

Cryptocurrency, like art and gold, holds appeal for high-net-worth individuals seeking to diversify their portfolios. However, its value is subjective and can be influenced by factors such as public perception and demand, similar to the valuation of art and collectibles.

4. What cautionary advice should investors consider when exploring cryptocurrency?

Investors should exercise caution when investing in cryptocurrency due to its inherent risks and speculative nature. While it has the potential for astronomical gains, it also carries the risk of significant losses. It’s essential to thoroughly research and understand the market before investing and to consider diversifying one’s portfolio to mitigate risk.

5. How does cryptocurrency investing differ from traditional value investing?

Cryptocurrency investing differs from traditional value investing in that it relies more on speculation and market sentiment rather than intrinsic value. While traditional value investing focuses on analyzing fundamentals and long-term prospects, cryptocurrency investing often involves short-term trading and navigating volatile market conditions.

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