The cryptocurrency space is a minefield of scams. That’s not to say there aren’t any good projects, it’s just that we are currently in the early stages of development. It’s only natural that scammers and hucksters would try to cash in while the space remains unregulated.
Most cryptocurrencies are scams. Chances are that your favorite project is a scam. From my research alone, I would reckon that 99% of cryptocurrencies today are scams, while the other 1% are a combination of well-meaning, but doomed projects, and successful projects that have some staying power.
Since the crypto space is largely unregulated, it’s basically the Wild West in cyberspace. Companies that file for IPOs in the regulated stock market are subjected to rigorous procedures by regulators to ensure that the risk is on the CEO of the company and not the investors. In this case, the CEO of a newly publicly traded company cannot pump and dump their shares on the open market.
The crypto space, in comparison, doesn’t have the luxury of having competent regulators. Bitcoin and crypto maximalists would argue that this is a feature and not a bug. I would argue that this is part of the reason why most serious investors choose to stay away from crypto.
Since companies that are looking to offer an ICO (Initial Coin Offering) don’t have to abide by regulations, the risk is completely assumed by the individual investor and not the CEO – in fact, the CEO has almost no risk at all. This has incentivized scams and get rich quick schemes on an industrial level. In most cases, scammers have started crypto projects not for the purpose of revolutionizing finance or changing the world, but to scam retail investors so that they can get rich quick. The sad thing is it works.
What these scammers do is they invest heavily into fancy marketing, getting influencer endorsements, and publishing theoretical whitepapers that sound good in theory, but don’t hold up to scrutiny. With no real development team behind the project, these CEOs file for an ICO, while owning hundreds of thousands, if not millions, of shares. Once retail investors crowd into the space and pump up the price of the shares, these CEOs and various insiders immediately dump their shares in a coordinated effort to sell while prices are at their peak, only to leave their investors holding worthless shares and losing all their money in the process. These CEOs get rich and make out like bandits, while their investors lose all their money and are forced to hold the proverbial bag.
This brings me to my second point: navigating a crypto minefield of scams as an investor.
I received some interesting responses to my previous article, in which I classified Bitcoin as a reliable storage of value and not a currency. I stand by that claim because Bitcoin lacks the practical and technological qualities to make it a legitimate currency in a country that already has a stable currency.
Bitcoin could be a good store of value, like gold, or a rare Rolex. In fact, I own some Bitcoin myself for this reason.
The problem is that we don’t know Bitcoin’s true value. That’s because the Bitcoin market has been flooded with speculators, who have, for the most part, crowded out the investors.
Speculators are gamblers. They are looking to get rich quick. For speculators, the goal is to turn a couple thousand into a few million – and to do it quickly. Their investing approach is to go to Vegas and put everything on black.
Very rarely does this work – and for every overnight Dogecoin millionaire that you see glorified in a newspaper, there are hundreds of thousands of losers who’ve lost everything chasing a speculative investment. Only you never hear about them.
Bitcoin’s price has been heavily inflated over the years because a significant number of unsophisticated investors (speculators) looking to get rich quick have entered the space. A CNBC study found that a lot of these speculators are heavily over-levered and have invested most, if not all, of their life savings into Bitcoin.
Something tells me that these ‘investors’ have never studied Benjamin Graham, followed Warren Buffett, or heard of Charlie Munger. The Bitcoin crash from ~ $81,000 CAD to ~ $41,000 CAD was inevitable. I chose not to invest any of my own money when Bitcoin was at ~ $81,000 because I wasn’t sure it was worth that kind of money. My investment strategy was to sit back, let the unsophisticated investors get wiped out, and then enter once the market corrected itself.
Timing the market is almost never a good idea, but in this case it was. There’s just no way Bitcoin was going to sustain itself at ~ $81,000 with all this over-levered money in the market. I’m not saying that Bitcoin will never hit ~ $81,000 again – in fact, it could surpass that down the line 5-10 years from now – but what I am saying is that this correction was not only inevitable, but welcoming, considering this gives newer, more sophisticated long-term investors the opportunity to enter the market.
That’s how investors think. They are looking to hold an asset for at least 10 years with the understanding that they are purchasing a business, and not a stock. All successful people play long-term games with long-term people, while unsuccessful people play short-term games with short-term people. Likewise, the investors that did well in Bitcoin invested with a long-time horizon, while those who lost their money, bought when it was at an all-time high, and sold when it crashed.
I believe Bitcoin is a decent asset to hold as a store of value for the next 10 years. I don’t know what it will do next year or the year after, but I do believe it will increase in price as supply dwindles and demand skyrockets.
Invest in the crypto space like an investor, and chances are you will do well over the long-term. Invest like a speculator, and you will almost certainly get wiped out.