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Bitcoin has had an interesting impact on the younger generation as it is often their first experience with investing. A recent study found that over 30% of millennials would prefer having $1,000 worth of Bitcoin rather than stocks or bonds, although it seems the survey may not have been fair. However, the point still stands: A significant portion of the younger generation is more entranced with Bitcoin than traditional financial investments. Is this net positive or should we be concerned about the effects this might have on their longer-term future?
Why Bitcoin Investing is Unhealthy
On the downside, many young investors in Bitcoin have unrealistic expectations when it comes to returns. Many see 10% in a month to be an “unexciting” sum of money, partially because their gross investment amount tends to be small and partially because Bitcoin has had numerous times where it has increased over 50% in a month. As a result, first-time investors in Bitcoin often have idealistic and outright outrageous expectations on their returns. This is even worse for those who invest in riskier altcoins (cryptocurrencies other than Bitcoin), some of which are akin to penny stocks (as if Bitcoin wasn’t risky enough).
Extended bull-run for Bitcoin. Source: Coindesk.
Furthermore, many first-time investors who begin with cryptocurrencies have limited perception of risk. Given the market has been in an extended bull trend for over a year, and given that over 50% of existing market participants haven’t been around for longer than a year (based on Coinbase user growth), most haven’t had to experience any substantial losses until just recently. Many of them have profits that outweigh their initial investments in a ratio of 10-to-1, meaning that even if the market saw a decline of over 80%, they still would have outperformed the stock market (which has been booming, for the record).
Source: coinbase.com/about and various news outlets aggregating data.
It is easy to “stomach” risk when you are playing with profits – this is a common gambler’s fallacy and one I find even myself susceptible to (a dollar of profit is no different from an initial investment dollar, yet mentally we perceive them as different). The only group of people who have seen their initial investment dwindle (which didn’t arise from overtrading) is those who bought since December, where Bitcoin spiked to $20,000.
Bitcoin price since December. Source: Coindesk.
However, even among that demographic, there is an even smaller group who is experiencing major losses as altcoins have boomed during this decline for Bitcoin. This means any individual who bought Bitcoin at its peak ($20,000), but still had money in altcoins is likely still in the black.
Altcoins boomed while Bitcoin dropped off. Source: coinmarketcap.com
In fact, we have even seen a shift in what I would call “market narrative,” where an increasing number of individuals are proclaiming Bitcoin dead as its “technologically superior” altcoin brethren take over. This suggests that many investors have substantial altcoin positions, meaning the demographic with major losses is really quite small.
The fact that so few have losses in this market is the key argument for why cryptocurrency investing is a net negative for first-time investors. Their expectations for returns aren’t realistic and their perception of risk is warped by gambler’s fallacies. It isn’t a far cry to say that cryptocurrencies are in a bubble, as we see cryptocurrencies like Tron with an obtuse (arguably plagiarized, unless translation error) white paper, no product and unoriginal code receive valuations in excess of $10 billion due to marketing hype. This speculative behavior isn’t investing, detractors will say, and it will only lead to eventual pain and suffering. Just look at the recent price action!
Why It Isn’t So Black & White
While I agree with this last, grim statement, there are more positive elements to cryptocurrency investing that we should be focusing on. First and foremost, most financial advisors can attest to the fact that the biggest reason that people aren’t able to comfortably retire is because they don’t save any money. Dave Ramsey is likely the biggest testament to that idea, hounding it over and over as a straw man argument against anyone who tells him that his annual 12% mutual fund figure is nonsense (which it is).
However, the statement on retiring is remarkably true: A surprising amount of Americans just don’t save any damn money, and that story doesn’t change as you go to a global perspective. Those of us in the financial world are far too focused on investment optimization: Maximize returns, minimize risks, achieve diversification benefits, allocate to the right asset classes, hedge against interest rate fluctuations, etc.
But the reality is that as long as you are saving and paying down debt, you’re a step above the rest. The “mission statement” of many financial advisors is to just pass this simple idea on to more people, even if it means they get paid less! This is where Bitcoin and other cryptocurrencies come to “save the day”…
The more experienced among us like to point out that the illusion of high returns and ‘low’ risk is ultimately going to result in a catastrophic and life damaging event for many young investors (perhaps this crash, for example). However, it is the very illusion of high returns and “acceptable” risk that is encouraging them to become investors in the first place!
… Hold on just a darn second, you say in writhing objection. That’s just stupid – of course that’s why they’re “investing!” But when (not if) the bubble pops, they’ll become so disillusioned with investing that they’ll never want to participate again! Just look at all the people who invested in Bitconnect (cryptocurrency Ponzi scheme that recently collapsed): We must protect them from this inevitable situation. They will blame everyone and everything but themselves: Whales manipulated the market, the governments don’t want to see it succeed, the banks tanked the prices, the exchanges conspired against us, yada yada yada. No one ever takes responsibility for anything they didn’t exercise discipline to achieve!
You’re right. When the bubble eventually pops, fingers will be pointed everywhere. Many investors won’t accept that they themselves were responsible for the gross mispricing of nearly all cryptocurrencies, especially given many are fueled by political ideologies. Just as they bandwagon’d into cryptocurrencies, they will bandwagon against whatever the masses determine as the primary cause for the bubble popping. They will scream “FUD” and blame the “weak hands” for being so easily manipulated.
Why Bitcoin Investing is Net Positive
But don’t let this likely reality deter you from an even greater and more valuable truth: Many people are deferring spending and are investing instead because of cryptocurrencies. If you’ve been involved with Bitcoin for longer than a week, you’ve likely heard about the story of the $100+ million pizzas. It’s a rather stupid story, given Bitcoin would never have the value it has today without people using it back when it was fractions of a cent, but the impression it leaves on people is the relevant part here: Why spend money on anything when you can save it in Bitcoin and have more in the future?
Now funny enough, this concept is true of all investing. You could replace Bitcoin in that sentence with any investment: Stocks, bonds, real estate, personal businesses, etc. But as they say, “everybody has their price.” In this case, price is returns and stocks just aren’t interesting enough to people that only have $1,000 (often less) to invest. How many teenagers have you heard say: OH BOY! $100 in a year if I’m lucky? Guess I should hold off from buying that (insert anything relevant here)!
Bitcoin on the other hand? The absurd returns are enough to make anyone, even teenagers, take a step back and seriously consider whenever they are about to make a new purchase. People are starting to take a small portion of their paychecks and devote it to cryptocurrencies. How much do you want to bet that portion of their paycheck likely would have been spent instead if there were no cryptocurrencies?
There-in lies the important revelation for those of us who know these returns won’t last forever: Even after the bubble pops, many people (even those who bought at the peak) will be wealthier than they otherwise would have been. Obviously it will be a mixed bag – some people are investing in cryptocurrencies entirely in lieu of stocks or paying down debt. Some are even going the extra mile and are taking ON debt to invest more. Those individuals will likely come out less wealthy than they otherwise would have been (some bankrupt), but the net effect should be positive.
I also suspect that a number of individuals who are exceptionally successful in cryptocurrency investing will likely move over to more traditional investments as they see their portfolio worth increase from 5 figures into 6 or 7 figures. There comes a point where even a teenager will see 7 – 10% in a year (I guess arguably lower given current stock market return projections) as attractive with a large enough sum of money. Funny enough, it’s not like the stock market is exactly cheap right now either.
Furthermore, those who have a first time investing experience in Bitcoin and cryptocurrencies should have a strong tolerance for volatility. Losses in excess of 30% are common, which in stocks would be considered catastrophic. Many folk who have invested for cryptocurrencies for longer than a few months aren’t even phased by movements like we’ve seen the past few days and are less prone to make emotional decisions (although admittedly, I ponder how these individuals will act when Bitcoin DOESN’T recover in the course of a month). This should prepare them for future recessions and bear markets, whenever they might occur.
All in all, while investing solely in cryptocurrencies is certainly NOT a prudent financial decision (at least in a fundamental sense), it is welcoming a whole new class of investors to the world. When the bubble pops, it will leave a poor taste in most of their mouths. However, many will likely be wealthier even after the bubble pops and EVEN IF they bought at the peak. Why? Because many of these people investing solely in cryptocurrencies were never allured by traditional investing in the first place and would have spent the money instead, which is often negative 100% ROI given the resale value of most items (and more importantly, the laziness of most people to sell anything they no longer need).
For those who get a taste of what investing can do for them, they might consider jumping into the traditional world of investments, especially given the number of “influencers” in this space that encourage such a choice. As with all matters, cryptocurrency investing isn’t as black and white as most would paint it. In many cases, it will behave as a crucial stepping stone into the world of accumulating wealth and achieving financial independence. Some lucky people will achieve it before the bubble pops and secure it (congratulations if so), but even factoring those individuals out, I still suspect cryptocurrency investing is net positive for our younger generation.
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