[ad_1]
Text size
Hollie Adams / Getty Images
In mid-April I picked up my 15 year old daughter and her friend from school and took them to Barnes & Noble. The friend found out that I was doing stocks for a living and immediately asked me about crypto. What cryptocurrency should I buy, she asked.
I’ll tell you about the advice I gave him in a moment. But soon after, I received three calls in one day from my wife’s side of my sister-in-law’s family (a pharmacist) and my cousins (both are barbers). They were all asking me about crypto. You don’t ask my opinion on which number to put your chips when playing roulette in Las Vegas, I told them. Cryptocurrencies fall into the same category.
Whichever asset class you’re talking about, it’s a little cheesy when people far removed from investing start asking you for advice on this, all at once.
I feel like a cranky old man writing this. I know I don’t understand. Crypto enthusiasts look at me like I’m defending silent movies and treating talkies like unwelcome, short-term impostors. Curmudgeon I am.
When we are discussing crypto, we have to separate blockchain technology from the so-called currencies. While I haven’t seen a mainstream blockchain application yet, I have a feeling they’re coming. Having said that, just because a technology is useful, has a lot of applications, and is widely accepted doesn’t automatically mean you can use it to create real money.
Here is an example. Venmo, which is owned by PayPal, is a very useful technology that many Americans use on a weekly or even daily basis. However, the benefits of widespread use of Venmo accrue to PayPal shareholders and do not lead to an appreciation of the US dollar or any other currency in which it trades.
When we talk about cryptocurrencies, we need to clarify which one. Many see Bitcoin as their lord and savior. However, there are thousands of these currencies out there, and many more are on the way.
Until recently, Bitcoin looked like a clear winner. Even Elon Musk was bragging about it, and Tesla bought it for $ 1.5 billion. Then Musk also shared with us his love of the literal Dogecoina joke of a coin and its price exploded. Weeks later, Musk realized that Bitcoin is a Beanie Baby that runs on coal, as Bill Maher put it. Due to the decentralized nature of Bitcoins, solving unnecessary math problems to mine more coins uses more electricity than Argentina. Musk announced that until Bitcoin starts consuming less energy, Tesla will not accept it as a payment method for cars. If you’re an ESG-oriented pension and don’t want to own Exxon (the evil Big Oil), I want to see how you justify owning Bitcoin. If you adjust CO2 production for societal utility, Bitcoin is arguably worse for the environment than internal combustion engine cars (at least cars get you seats). For the energy cost of processing a Bitcoin, Visa can process 810,000 transactions, about 370 times faster.
One of the US government’s biggest assets in its arsenal is the dollar, which is the world’s reserve currency. Controlling our currency gives politicians the ability to make and break promises, constantly running budget deficits and printing and borrowing money to pay off those promises. We are able to run multibillion dollar deficits because the US government has a dollar printing press. Washington will not give up without a fight. We started wars for less.
Cryptocurrencies are a clear and present danger to the US dollar. There is a high probability that the US government will ban the use of cryptos as currencies. Does that sound far-fetched? The US government did it with gold in 1933. India is threatening to ban Bitcoin. South Korea is pushing.
I sympathize with some cryptocurrency investors, especially after seeing what we do with our fiat currency. But for many people, these are just speculative vehicles. My wife’s relatives pay little attention to the balance sheets of the US government or the Fed. They are only interested in bitcoin for one reason: it is increasing. Cryptos offer people these unique opportunities to pour their bit and byte savings onto distant servers in the hope that they will magically turn their lives into beach paradise.
When you go to the casino, you don’t cash in your savings and borrow from your mother-in-law, unless you are a compulsive gambler. The casino is not trying to impersonate a place where you invest. If you have a shred of common sense, you know you are in a casino, a place where people gamble. The air is pumped, you hear the incessant ringing of the slot machines, and you can’t easily find an exit. A reasonable person will only take to Vegas as much money as they can afford to lose.
Cryptocurrencies are a different beast. You buy them on platforms that look like your brokerage account, where (hopefully) you invest. You are not playing with casino chips, you are buying currency. As a result, crypto is not competing with your Vegas purse but with your 401 (k). This domain confusion is dangerous. My advice on crypto is consistent: play with as much money as you can afford to lose. But remember, even when you win, especially when you win, you are not investing, you are playing. Approach it like a trip to Las Vegas, not a visit to your 401 (k).
Now let’s move on to the advice I gave to my daughter’s young friend. You are too young to play, I told him. If you want to invest, you have to accept that it is not a get rich quick business but a get rich slow business. Once she heard slowly, I think she lost interest in the advice I had to offer. Luckily, we got to Barnes & Noble, so she didn’t have to keep listening to this cranky. You neither.
Vitaliy Katsenelson is the CEO of Investment Management Associates.
[ad_2]
picture credit