Thoughts on Crypto Currency Mania

It's the end of 2017 and right now there's a huge amount of interest in buying [insert any crypto currency coin here]. Everyone wants to buy everything, and as a result we're very much in a bull market at the moment. It seems almost too easy to make money, and that's because it is.

However, too many people are buying digital assets in the same manner they might choose a number on a roulette wheel. In other words, a lot people right now are gambling, under the disguise of "investing".

If you're buying an asset because you think it'll increase in value in the future, without any understanding of the problem space, the technology, the team behind the project – ultimately without a clear position on why you believe the particular project is positioned to succeed at solving a real problem (which is the only way it can survive long-term) – then you're gambling.

It's OK to gamble, but it's helpful to be clear on what your motivations in the market are. When you bet on a horse, you're pretty clear: the horse must cross the line first. If it does, you know what you'll return. If not, you know what you'll lose.

But how will your new crypto currency asset return? At what point will you realise its profit or loss by liquidating it? What profit do you believe it can return? How is it even going up in price?

If you don't know the answer to these questions, there's a strong chance you'll lose your money, and the reason is because this game is zero-sum.

You gain money because others come in later and increase the price. If you liquidate (sell) that asset, you stop the price going up, or in some cases cause it to fall. As a result, the money you take out is the money that others put in after you. Perhaps they will be lucky enough to have the same fortune. Or perhaps not, and what if 'they' are 'you'?

The crypto currency space has been growing rapidly for a long time. Since 2010, early adopters have bought/mined Bitcoin, and subsequent currencies. Money invested into Bitcoin in 2010 would buy you ~200,000 the number of units than the same amount would buy you right now. Let that sink in for a moment.

What that means is that there are people, who may still be in the market, who can leave it at any time. If they do, they'll exert ~200,000 times the pressure on price than you have with your own investment. It doesn't take many of those kinds of events to both crash the price, and produce yet more sell pressure as others begin to panic.

This could happen tomorrow, or it may happen next year, or in 10 years. There's no reliable way to know for sure, but that doesn't remove the facts and the risks.

So:

– Consider whether you're actually gambling instead of investing. Do you understand the technology, the landscape, the problem, and the proposed solution? Do you have a fundamental view on whether the project will add value to the world, with the help of your capital? Are there ways you can invest your time and skills, aside from your money?

– If you are gambling, and are happy to take a punt, have some idea of where you want to enter and exit the trade. It's all down to you in this wild west game of high stakes Bitcoin. There's no horse, and no finish line.

– Please don't risk money you cannot afford to lose. Whether you think you're investing or gambling, if you can't afford to lose it, you're potentially putting yourself into a very bad situation if luck decides it needs to wash its hair tonight.

– If you are lucky/smart, and end up making a bit of money, try to avoid being the "omg, crypto currency is a money tree!" person. Others may be more impressionable and less savvy, and encouraging them to take risks they may not fully understand isn't acting responsibly. Use your experience to educate people into understanding the risk and making their own informed decisions instead.