David Veksler

How to Avoid Buying Trash Crypto That Wastes Your Money

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Original posted at The Bitcoin Consultancy

Buy And Hold Your Entire Crypto Portfolio In Bitcoin

The only guaranteed way to avoid falling for a crypto scam is to keep 100% of your crypto portfolio in Bitcoin. Investors fall for crypto scams when they try to beat the returns of Bitcoin through a variety of other coins and schemes.

Let’s analyze objections to a 100% Bitcoin portfolio and how it gets investors in trouble:

Objection #1: Bitcoin’s returns are not good enough

Over the last ten years, Bitcoin has consistently earned almost a 200% return. In other words, if you just kept your money in Bitcoin, you would have tripled your investment every year.  

No other cryptocurrency can match Bitcoin’s track record. Consider Ethereum, which has beaten Bitcoin over the last 4 years. But this assumes you had the foresight to participate in Ethereum’s ICO. Ethereum is up 2.7x since its 2017 high, whereas Bitcoin is up 3.3x. The point is that you’re not missing out by not buying the latest hot altcoin. By the time you hear about it, any potential for astronomical returns is long gone. If you had bet on Ripple when it was #2 In 2017, you would only have 1/3rd of your portfolio left.

The only way to become a successful long-term investor is to study the fundamentals of an asset, not its price. Bitcoin is the future of money. No other altcoin comes close to Bitcoin as money. Bitcoin’s top competitors are smart contract platforms of various kinds. Their usefulness for real-world business models is currently unproven.  

Objection #2: You heard some altcoin is better than Bitcoin

Novice Bitcoin traders want to be above-average investors. Of course, we can’t all be above average. But many nonetheless try to add some extra alpha to their portfolio by buying a hot new coin or timing the market. 

Those familiar with the efficient market hypothesis understand the difficulty of consistently beating the market. The prices of assets reflect all current information known by participants. Unless you can consistently evaluate the fundamental value of assets more accurately than others, you won’t beat the average. When you try to time the market, your emotions work against you, urging you to buy after an asset goes up, and sell when the asset is low.

Of course, if you invest in Bitcoin, you’re already disagreeing with the vast majority of investors who have little or no exposure to it. Why not disagree a little more and buy some altcoins? Here is the difference:

Bitcoin has a simple business model (“Hard Money You Can’t F*ck With”) and a 12-year track record. Altcoins are all either a technical variation on Bitcoin (fba vs proof of work, or dag vs blockchain) or an entirely different business model (smart contracts). It’s much more difficult to understand the technical merit and value proposition of these assets. None have Bitcoin’s track record.

As a managing partner of a cryptocurrency hedge fund, it is my full-time job to research and write about cryptocurrencies. Yet the vast majority of my crypto portfolio is in Bitcoin because I do not feel qualified to judge the technical merits of various projects. I have a background of 17 years in software development and architecture. I personally designed a Bitcoin exchange. Do you think you can do better based on YouTube and Twitter personalities?

For example, even if Dash is technically better than Bitcoin, is it going to beat Bitcoin’s network effects? What’s to stop Bitcoin from adding whatever killer feature Dash offers? Are you qualified to make these judgments, or are you buying based on the rumor mill?

If you are personally involved in a crypto project, I understand your decision to invest. But don’t expect to beat Bitcoin based on scrolling crypto news sites.

Objection #3: You want to be a crypto trader

It’s an awesome experience to sit down in front of an exchange trading screen full time. For many of us, crypto exchanges were our first introduction to the power interfaces of marketplaces, with their continuous order books, market depth & candlestick charts, and advanced orders. 

Once you master the advanced trading screen, you feel like you have the key to mastering the markets. By taking a few online courses, you can develop a unique system that consistently earns you profits. During a bull run, when everything is going up, it’s easy to conclude that you are in fact a pro.

It is possible to earn a consistent edge in crypto – just not by you. Crypto markets are manipulated by whales (big traders) with powerful marketing machines. There is no way to predict their actions, but they will use your emotions against you. They also pay lower trading fees than you, while your profits are eaten up by fees.

Objection #4: You want to diversify your crypto portfolio

One of the main reasons people hold a basket of crypto assets is that they don’t know which will be successful in the long run. This is a reasonable concern. In practice, however, choosing which assets should go into your portfolio is very difficult.

The principle behind diversification is that by holding uncorrelated assets, you can reduce the volatility of your portfolio while maintaining the rate of return. Diversification works great for the stock market because the profit margin tends to be the same across different sectors. Also, the stock market has 120+ years of precedent to predict future trends.

The same isn’t true of the cryptocurrency market. The price of crypto is based almost entirely on anticipation of future demand, not current demand. Bitcoin’s price depends much more on speculation than current demand as money. Furthermore, money is a natural monopoly, so it’s likely that only a single coin will emerge dominant. (Likewise for smart contract platforms.)

If we assume that a single asset will emerge dominant, which one do we choose? One option is to look at the total market capitalization of each coin (hence CoinMarketCap.com being the #1 crypto site). But this is misleading. If I create a token called “Veksler Coin” with a supply of 1 billion and sell a single coin to my friend for $1, I instantly have a $1 billion dollar market cap with a $1 inflow. MarketCap rankings are key for adoption, so there is extremely strong pressure to manipulate them. Even though Bitcoin has less than a 50% market cap, the vast majority of fiat inflows go to Bitcoin. In short, there is no reliable metric for market capitalization.

Some organizations advocate automatically rebalancing your portfolio in response to market cap changes. My fund does that to an extent, though we only trade coins that our research has vetted. However, if you are managing your own portfolio, are you prepared to continually rebalance your portfolio — and pay the capital gains tax on any profits?

Objection #5: You want to earn passive income from staking/yield-farming/crypto lending

Many Bitcoin investors believe that it isn’t enough to hold Bitcoin. You don’t just sit on your cash, right? You invest it in a productive enterprise to earn a return. Just holding an asset is speculation, and that’s bad, right?

There are two problems with this reasoning:

First, Bitcoin is fundamentally different from fiat money. The problem with fiat money is that it’s an inflationary asset. You have to put your money to work just to preserve your wealth. By contrast, when the quantity of money is fixed (as with hard money like gold or Bitcoin), a growing economy means that the share of wealth represented by each unit keeps increasing. Furthermore, the adoption and therefore demand for Bitcoin is rapidly increasing. Bitcoin is not just a static asset like cash or gold. It is also a money transmission network that provides ongoing value to people. Simply holding Bitcoin is an investment into the future of money.

Is a few extra percent return on top of Bitcoin’s 200% average worth risking your principal?

The second issue with many “crypto-investments” is their inflationary design. Consider staking. Cardano staking returns a 5.x% APY reward rate. Cardano also has a 5.7% inflation rate. You must stake to preserve your wealth. This is Cardano’s way of motivating users to delegate their ada to trustworthy stake pools. Staking may be a legitimate way to secure a crypto asset, but it isn’t a legitimate income stream.

More egregiously, consider coins like CAKE, which has a 73% APR (previously 450%+) in the Auto CAKE Syrup Pool. How is PancakeSwap able to offer those returns? There is a handy chart here. Clear as mud? The supply of CAKE is completely arbitrary and the reward rate is a combination of investor subsidies, high growth rate, and high inflation that changes day by day completely at the whim of the CAKE governance process. It’s fun to gamble with, but should you trust your life savings with this scheme?

Objection #7: You want to trust an expert (or algorithm) to trade your crypto

Never expect other people to be smarter with your money than you.

Many people will give you advice on how to invest your money. But just because someone made a lot of money managing other people’s money, doesn’t mean they did their customers a favor. Extensive research shows that index funds perform better than actively managed funds. Crypto isn’t any different.

Keep in mind that the volume numbers of many exchanges on CoinMarketCap are fake. It is much easier to manipulate the prices of crypto assets than you would think. Twitter, Telegram, and YouTube are filled with pump and dump schemes. If an investor finds a consistent advantage in the market, he will not give it up by publicly sharing it. Only those who can’t make a living by trading run YouTube channels about it.

The only reputable actively traded crypto funds are crypto hedge funds. They are open to accredited investors and have minimums of $50K and up. Be very clear on the value they are providing over you just holding Bitcoin before you decide to invest in one.

Conclusion: to avoid buying trash crypto that wastes your money, stick with Bitcoin

The crypto space moves fast. Dozens of new coins go live daily. The top 10 coins today look very different than five years ago. I can’t promise you who the leaders in this space will be in the future. What I do believe in is that fundamental value is what drives long-term trends. The asset that has the most universal business model, can scale to meet consumer demand, has the biggest real-world network, and the most robust community is Bitcoin. If that changes, I’ll be the first to let you know.

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