omnirand
Junior Member
- Dec 22, 2011
- 190
- 88
Intro
Ok, it's officially a crypto year. I'm going to finally say something, since I don't normally have an area of expertise per say. So what is this whole thing about? Well I'm going to explain what's going on with cryptocurrencies right now and give a bit of a history lesson to catch one up on what's likely to happen. History is not a guarantee that things are going to repeat, but it is important to recognize the fact that history tends to repeat itself defying our rationality. Also, if you know the history, you can at least be better prepared to make better decisions. If you are coming in here wondering what specific coin you should buy, sorry but this is not for you. This is just historical experience that you can use to supplement your own research.
So first of all, have you heard of this thing called Bitcoin? I'm joking, but seriously you might've heard about it awhile ago, but as anyone in technology will tell you things change quickly. If you heard of Bitcoin during the last cycle (about a couple of years ago) or any time before it, you would remember that Bitcoin "was" trying to be digital money. I say "was" because that idea is gone. Bitcoin is now marketed as digital gold. I'm serious. This means that Bitcoin is now a "store of value" and it doesn't need to become a currency since it didn't have the TPS to really do that. Sure it has the lightning network and all that, but who cares. Bitcoin is now focusing on what people have been using for the past few cycles now... an investment.
Business
You may have heard of Tesla buying Bitcoin, but it is certainly not the first company to buy bitcoin and it is definitely not going to be the last. Recently a "Bitcoin Conference for Corporations" conference was ran by Michael Saylor the CEO of MicroStrategy regarding the strategy of simply buying lots of Bitcoin. This talk was given to CEOs of many businesses and is basically making a case for 100k Bitcoin, which many crypto investors believe is inevitable. So this cycle will be more about business jumping in on Bitcoin since it is now big enough to accommodate 1.5 billion dollar buys without "significant" price movement. His timeline is that businesses take about 3-6 months to buy Bitcoin, so one would expect more businesses to start adding Bitcoin to their balance sheet in the summer or fall. MicroStrategy has used this "strategy" to spend about $1.125 billion on Bitcoin in 2020. This includes the time that MicroStrategy in December basically took a $650 million loan from investors to buy more, which was totally a responsible move and not all the same as those who took out home equity loans to invest in bitcoin. For those who like the actual stats, they were able to buy 70,470 Bitcoins at the average cost of $15,964. This means that MicroStrategy currently has about 200% in paper profits. If they were to sell they would actually make more than their 2019 annual revenue, which was about $500 million.
There is another business that focuses on bitcoin. Grayscale, which offers a Bitcoin Trust that you can put in your retirement account as well as other cryptocurrencies, stated that for Q4, 93% of capital inflows, $3 billion, was from institutions. Grayscale Trust has been aggressively accumulating assets starting 2020 with about $2 billion in assets and ending 2020 with $20 billion in assets. For some periods, Grayscale was accruing more Bitcoin than what was being mined. These are just a few examples as to why scarcity is going to go up, pushing up the price. So for 2021, these are the main market forces in play for Bitcoin.
Past Market Forces
Now let's jump back a couple of cycles (a cycle is defined loosely as around 4 years) to see a bit of pattern of how we got here. In early 2013, Bitcoin rocketed up to around $200 on this small exchange called the Magic the Gathering Online Exchange (MtGOX). It fell quite a bit, but soon would reach up to $1000 in late 2013 and dropping around 75% after. These days were fueled by early adopters and whether or not China banned Bitcoin. In these days there were altcoins, but many of them were just forks of Bitcoin with some added extras (Litecoin and Peercoin) and some were even forks of forks (Feathercoin and Dash, both forks of Litecoin). Meme coins were created too (Dogecoin is a fork of Lukycoin which is a fork of Junkcoin (I'm not kidding) which is a fork of Litecoin). Each had their place, but many would be lost to time. RIP BBQCoin.
Jumping forward a cycle, it is now 2017. There is a new craze regarding initial coin offerings (ICOs). Basically you were able to invest in a startup similar to an IPO. There were a lot of scams (Hey hey hey). But there was a new cryptocurrency that was at the center of this madness, Ethereum. ETH is considered programmable money. You are able to code on it using smart contracts which can basically do a number of things like creating virtual Beanie babies that you can sell for a ludicrous amount of cash due to limited editions and what not. But most importantly, all the ICOs were on it, meaning that if you wanted to be a part of one you needed to buy ETH to be able to participate. Also in this cycle, Bitcoin forks did not stop, but these were hard forks with people disagreeing about what Bitcoin should be (BCH and BSV). And some forks were just about the money (Bitcoin Gold and Bitcoin Diamond). Also lots of competitors to ETH and BTC were created with many traders placing bets on which would succeed (ADA, Vechain, Raiblocks/Nano). Frankly, lots of stuff was going on, but basically imagine a crypto-money version of Avengers Civil War leading to Ethereum almost overthrowing Bitcoin from the top spot. Ultimately, Bitcoin had a few bumps here or there along the way, but around late 2017, it reached a local ATH of around 20k and then eventually dropped to about 80% a year later.
Current Market Forces
Ok, now back to this cycle. The new craze this cycle is decentralized finance (DeFi). What does that even mean? Well you know how your bank gives you some infinitesimal amount of money in your savings account. Well with DeFi is about automating that so you get a much better APR than less than a percent of a percent. Ultimately the idea is anything that is financially based can be decentralized removing the middlemen. Want to trade stock and crypto? You can use decentralized exchanges built on smart contracts (Uniswap) and tokenize the assets (like WBTC and WETH). These exchanges can take the fees that would normally go to corporations and instead go directly to the shareholders/tokenholders. You can do the same for decentralized banking regarding lending and being able to borrow money without a middleman. Code is the contract and the wealth is shared with all stakers who put their money in to be borrowed. Also decentralized exchanges are big, so people are buying token shares in decentralized exchanges and making dividends off of the fees. So now there are a lot of new ways to park your money and make more money for it, which causes price to go up when a decentralized exchange becomes popular. By the way, Ethereum is still at the center of since everything needs to be done via smart contracts, but alternatives are still ramping up to take advantage of the high fees required. Also, while this is happening ETH is undergoing a revamp to 2.0, which would also let you stake your money to receive dividends. So overall, this cycle is about business buying Bitcoin for reserves to combat dollar inflation, while some people are buying tokens to hold for better APR than what you can get at a bank or selling as the token grow rapidly in value.
Actual Advice
Just so you know, I am significantly simplifying years of cryptocurrency events to get the main points across without having to explain tons of background. There is definitely a lot more going on, but I'll leave that as an exercise for the reader. Now what does history say about 2021? Well if history is any guide then it would be saying that around late 2021 we should be having another run up and then most likely a huge drop off next year. Now is that going to happen? I do not know. It would make me mentally satisfied to see the pattern occur again, but things can always be different. Maybe the pattern is longer and lasts till early 2022 or maybe things are cut short with some sort of Black Swan event.
So what can you do?
Well, legally, this is not financial advice (aka don't sue me) since I'm just a random individual on the internet, but if you are American, then it's most likely too late to be able to position yourself for long term capital gains (requires 1 year) if you want to sell at the local top this year. Taxes will be very important for Americans, especially since one of the first things that you fill out for taxes asks you if you acquired cryptocurrency during that year, so be prepared to part with profits or at least declare some losses. Side note: Every trade is a taxable event. Yes, even crypto to crypto.
Next, you should not day trade (aka trading based off emotions). No matter what charts you are looking at crypto-trading on a day to day basis is practically gambling due to the volatility of cryptocurrencies being controlled mostly by news and who hears it first. When the market goes up, you will be tempted to jump in to the latest trend due to the fear of missing out (FOMO, see Gamestop stock). I like to go by the rule of: "If you heard about it on the news, you are way too late. If you heard it from someone else, then you are too late. If you came up with it yourself, you are probably already late, but at least, you are the one responsible for your actions." Research your options and make your choices because they make sense to you and not because you saw it go up 100% today.
Make sure to understand how much risk you are taking and are willing to take. For the average person who lives paycheck to paycheck, putting money in Bitcoin is too risky. Sure, that risk may entail a possible 20x over a year, but there is also the possibility of it going to zero. When you start picking other coins, like Ethereum which has 40x potential but a higher probability of going to zero, your risk is exponentially growing as you go down the list of the Top 100 coins. You should not use money that you need in the next year or so on cryptocurrencies. The risk is simply too high and "diversifying" into many different cryptocurrencies is not really managing your risks, but instead increasing the risk of losing more. Sure a few people might make 100x profit, but many, many more lost a lot for those few to profit. And why did they lose? They were either impatient and wanted to make money quick, which is never a good sign; or they made one big mistake that cost them. You can make 100x profit on paper and still lose it all later, because you got over confident and thought that you were infallible. Experts say that you should have no more than 5 percent of your investments in cryptocurrencies. I obviously do not follow this advice, since I believe that if you are young, you should try more risk.
In the end cryptocurrency is about trying to escape something, if you can escape the rat race with help from it then why not?
Healthy cryptocurrency investing is buying over a long period of time using money you do not necessarily need to survive, and selling how you see fit. You can either sell at a certain price point or sell over time, but whatever you do, have a plan and stick to it. Greed has led many to despair, and sometimes, you have to know when to cut your losses, which should also be a part of your plans.
Good luck, you are going to need it. Cheers.
Ok, it's officially a crypto year. I'm going to finally say something, since I don't normally have an area of expertise per say. So what is this whole thing about? Well I'm going to explain what's going on with cryptocurrencies right now and give a bit of a history lesson to catch one up on what's likely to happen. History is not a guarantee that things are going to repeat, but it is important to recognize the fact that history tends to repeat itself defying our rationality. Also, if you know the history, you can at least be better prepared to make better decisions. If you are coming in here wondering what specific coin you should buy, sorry but this is not for you. This is just historical experience that you can use to supplement your own research.
So first of all, have you heard of this thing called Bitcoin? I'm joking, but seriously you might've heard about it awhile ago, but as anyone in technology will tell you things change quickly. If you heard of Bitcoin during the last cycle (about a couple of years ago) or any time before it, you would remember that Bitcoin "was" trying to be digital money. I say "was" because that idea is gone. Bitcoin is now marketed as digital gold. I'm serious. This means that Bitcoin is now a "store of value" and it doesn't need to become a currency since it didn't have the TPS to really do that. Sure it has the lightning network and all that, but who cares. Bitcoin is now focusing on what people have been using for the past few cycles now... an investment.
Business
You may have heard of Tesla buying Bitcoin, but it is certainly not the first company to buy bitcoin and it is definitely not going to be the last. Recently a "Bitcoin Conference for Corporations" conference was ran by Michael Saylor the CEO of MicroStrategy regarding the strategy of simply buying lots of Bitcoin. This talk was given to CEOs of many businesses and is basically making a case for 100k Bitcoin, which many crypto investors believe is inevitable. So this cycle will be more about business jumping in on Bitcoin since it is now big enough to accommodate 1.5 billion dollar buys without "significant" price movement. His timeline is that businesses take about 3-6 months to buy Bitcoin, so one would expect more businesses to start adding Bitcoin to their balance sheet in the summer or fall. MicroStrategy has used this "strategy" to spend about $1.125 billion on Bitcoin in 2020. This includes the time that MicroStrategy in December basically took a $650 million loan from investors to buy more, which was totally a responsible move and not all the same as those who took out home equity loans to invest in bitcoin. For those who like the actual stats, they were able to buy 70,470 Bitcoins at the average cost of $15,964. This means that MicroStrategy currently has about 200% in paper profits. If they were to sell they would actually make more than their 2019 annual revenue, which was about $500 million.
There is another business that focuses on bitcoin. Grayscale, which offers a Bitcoin Trust that you can put in your retirement account as well as other cryptocurrencies, stated that for Q4, 93% of capital inflows, $3 billion, was from institutions. Grayscale Trust has been aggressively accumulating assets starting 2020 with about $2 billion in assets and ending 2020 with $20 billion in assets. For some periods, Grayscale was accruing more Bitcoin than what was being mined. These are just a few examples as to why scarcity is going to go up, pushing up the price. So for 2021, these are the main market forces in play for Bitcoin.
Past Market Forces
Now let's jump back a couple of cycles (a cycle is defined loosely as around 4 years) to see a bit of pattern of how we got here. In early 2013, Bitcoin rocketed up to around $200 on this small exchange called the Magic the Gathering Online Exchange (MtGOX). It fell quite a bit, but soon would reach up to $1000 in late 2013 and dropping around 75% after. These days were fueled by early adopters and whether or not China banned Bitcoin. In these days there were altcoins, but many of them were just forks of Bitcoin with some added extras (Litecoin and Peercoin) and some were even forks of forks (Feathercoin and Dash, both forks of Litecoin). Meme coins were created too (Dogecoin is a fork of Lukycoin which is a fork of Junkcoin (I'm not kidding) which is a fork of Litecoin). Each had their place, but many would be lost to time. RIP BBQCoin.
Jumping forward a cycle, it is now 2017. There is a new craze regarding initial coin offerings (ICOs). Basically you were able to invest in a startup similar to an IPO. There were a lot of scams (Hey hey hey). But there was a new cryptocurrency that was at the center of this madness, Ethereum. ETH is considered programmable money. You are able to code on it using smart contracts which can basically do a number of things like creating virtual Beanie babies that you can sell for a ludicrous amount of cash due to limited editions and what not. But most importantly, all the ICOs were on it, meaning that if you wanted to be a part of one you needed to buy ETH to be able to participate. Also in this cycle, Bitcoin forks did not stop, but these were hard forks with people disagreeing about what Bitcoin should be (BCH and BSV). And some forks were just about the money (Bitcoin Gold and Bitcoin Diamond). Also lots of competitors to ETH and BTC were created with many traders placing bets on which would succeed (ADA, Vechain, Raiblocks/Nano). Frankly, lots of stuff was going on, but basically imagine a crypto-money version of Avengers Civil War leading to Ethereum almost overthrowing Bitcoin from the top spot. Ultimately, Bitcoin had a few bumps here or there along the way, but around late 2017, it reached a local ATH of around 20k and then eventually dropped to about 80% a year later.
Current Market Forces
Ok, now back to this cycle. The new craze this cycle is decentralized finance (DeFi). What does that even mean? Well you know how your bank gives you some infinitesimal amount of money in your savings account. Well with DeFi is about automating that so you get a much better APR than less than a percent of a percent. Ultimately the idea is anything that is financially based can be decentralized removing the middlemen. Want to trade stock and crypto? You can use decentralized exchanges built on smart contracts (Uniswap) and tokenize the assets (like WBTC and WETH). These exchanges can take the fees that would normally go to corporations and instead go directly to the shareholders/tokenholders. You can do the same for decentralized banking regarding lending and being able to borrow money without a middleman. Code is the contract and the wealth is shared with all stakers who put their money in to be borrowed. Also decentralized exchanges are big, so people are buying token shares in decentralized exchanges and making dividends off of the fees. So now there are a lot of new ways to park your money and make more money for it, which causes price to go up when a decentralized exchange becomes popular. By the way, Ethereum is still at the center of since everything needs to be done via smart contracts, but alternatives are still ramping up to take advantage of the high fees required. Also, while this is happening ETH is undergoing a revamp to 2.0, which would also let you stake your money to receive dividends. So overall, this cycle is about business buying Bitcoin for reserves to combat dollar inflation, while some people are buying tokens to hold for better APR than what you can get at a bank or selling as the token grow rapidly in value.
Actual Advice
Just so you know, I am significantly simplifying years of cryptocurrency events to get the main points across without having to explain tons of background. There is definitely a lot more going on, but I'll leave that as an exercise for the reader. Now what does history say about 2021? Well if history is any guide then it would be saying that around late 2021 we should be having another run up and then most likely a huge drop off next year. Now is that going to happen? I do not know. It would make me mentally satisfied to see the pattern occur again, but things can always be different. Maybe the pattern is longer and lasts till early 2022 or maybe things are cut short with some sort of Black Swan event.
So what can you do?
Well, legally, this is not financial advice (aka don't sue me) since I'm just a random individual on the internet, but if you are American, then it's most likely too late to be able to position yourself for long term capital gains (requires 1 year) if you want to sell at the local top this year. Taxes will be very important for Americans, especially since one of the first things that you fill out for taxes asks you if you acquired cryptocurrency during that year, so be prepared to part with profits or at least declare some losses. Side note: Every trade is a taxable event. Yes, even crypto to crypto.
Next, you should not day trade (aka trading based off emotions). No matter what charts you are looking at crypto-trading on a day to day basis is practically gambling due to the volatility of cryptocurrencies being controlled mostly by news and who hears it first. When the market goes up, you will be tempted to jump in to the latest trend due to the fear of missing out (FOMO, see Gamestop stock). I like to go by the rule of: "If you heard about it on the news, you are way too late. If you heard it from someone else, then you are too late. If you came up with it yourself, you are probably already late, but at least, you are the one responsible for your actions." Research your options and make your choices because they make sense to you and not because you saw it go up 100% today.
Make sure to understand how much risk you are taking and are willing to take. For the average person who lives paycheck to paycheck, putting money in Bitcoin is too risky. Sure, that risk may entail a possible 20x over a year, but there is also the possibility of it going to zero. When you start picking other coins, like Ethereum which has 40x potential but a higher probability of going to zero, your risk is exponentially growing as you go down the list of the Top 100 coins. You should not use money that you need in the next year or so on cryptocurrencies. The risk is simply too high and "diversifying" into many different cryptocurrencies is not really managing your risks, but instead increasing the risk of losing more. Sure a few people might make 100x profit, but many, many more lost a lot for those few to profit. And why did they lose? They were either impatient and wanted to make money quick, which is never a good sign; or they made one big mistake that cost them. You can make 100x profit on paper and still lose it all later, because you got over confident and thought that you were infallible. Experts say that you should have no more than 5 percent of your investments in cryptocurrencies. I obviously do not follow this advice, since I believe that if you are young, you should try more risk.
In the end cryptocurrency is about trying to escape something, if you can escape the rat race with help from it then why not?
Healthy cryptocurrency investing is buying over a long period of time using money you do not necessarily need to survive, and selling how you see fit. You can either sell at a certain price point or sell over time, but whatever you do, have a plan and stick to it. Greed has led many to despair, and sometimes, you have to know when to cut your losses, which should also be a part of your plans.
Good luck, you are going to need it. Cheers.