Sending out a crypto warning

The cryptocurrency space has matured significantly since the last wild west of a bull market of 2017, however in some respects there are still certain areas that act like an adolescent teenager. Just recently there was much sniggering amongst the crypto faithful at the blatant 'rug pull' of Squid Game coin, a meme cryptocurrency token that was effectively launched purely to profit off of the back of the popular Netflix show of the same name. This is one trend in the cryptocurrency space that new investors should be aware of, so in this article I want to send out a crypto warning as falling foul of these shenanigan's is shortsighted and will ultimately get you wrecked.

Squid Game coin launched on the decentralised exchange Pancake Swap and within a few days it went from $0.01 to momentarily touch $2,861.80 (a modest 28,609,900%) and then plummeted to back down to zero on the morning of 1 November after the promoters behind the 'project' initiated what is known as a rug pull effectively selling out for a more liquid cryptocurrency and then probably into real-world fiat money. Regardless of what exit route these scam artists took this does nothing to forward the efforts of many hard working and honest people in the space and equally disillusions many investors who are new to the space.

Shortsighted naivety?

One would think however that this would be the death knell for the meme coin, however like the embattled main character in the series, it is truly remarkable (or is it just blind stupidity?) to see that the token is down but as of yet not out. Astonishingly since the rug pull event took place it has clawed its way back and rocketed more than 800 per cent in 24 hours to touch $0.80. So unbelievably some people are still willing to risk putting their hard earned money into something that was so blatantly abused by the promoters.

The rebound is obviously not much consolation for those who bought at the top, however I guess they can all but dream. But the story of Squid Game coin – not least the dogged determination to ‘buy the dip’ mentality – seems to highlight so much more about some of the willing participants in the cryptocurrency space: in essence one could argue that we're looking at a religious as much as an economic phenomenon.

The 3rd Law

The famous sci-fi author Arthur C. Clarke wrote 3 famous adages that have become known as Clarke's 3 laws and the 3rd law states:

“any sufficiently advanced technology is indistinguishable from magic.”

This could very well apply here in the crypto realm. What is a reaction when someone sees magic? Is it not worshipped to some degree?

Too few cryptocurrency investors bother to spend any time at all trying to understand or learn the basics, so is it no wonder that the mathematical and computational basis around which blockchain technology is created remains forever a complete mystery to many? In fact one might argue that it becomes an incomprehensible form of magic that literally sucks in the unwitting and poorly equipped.

But the principle behind the technology – a distributed, immutable ledger of transactions that is fully transparent in nature that no individual or central authority can mess with – is something that is at one with any number of uses and virtues. Yet as is often the case with poorly understood technologies that are completely new, the best use-cases aren’t always the ones that are arrived at first or in themselves become those that are craved. The fascination at its amazing maths driven existence in fact produces different degrees of infatuation and magical thinking.

Hence: the growth in attention for cryptocurrency.

Since its inception there have been all manner of arguments made against Bitcoin and its myriad of digital cousins. It has been stated that crypto can’t decide whether it’s a currency or a speculative investment. But this is an extremely naïve and ill-informed point of view; one that is borne out of a lack of knowledge and understanding. Yes, the early attention surrounding Bitcoin was about the first thing. It concerned the ways it would disrupt fiat currencies, liberate international markets from the dead hand of central banks and all those bloodsucking intermediaries. But the world has moved on since then and that narrative doesn't necessarily ring true today.

I don't think anyone with that opinion would have considered the notion that the U.S. Federal Reserve would go on such a rampant money printing escapade, nor would one believe that governments would willingly choose to abandon core principles of democracy and freedom in such an underhand and irresponsible manner as they are currently doing.

A shift in perception

As I see it a shift has taken place in the way in which people are starting to look at Bitcoin and to some extent the crypto space as a whole. What’s happening now is that Bitcoin is being used in two primary ways, but the end goal is basically the same - to accumulate more Bitcoin, or more of a particular coin or token.

Although it is possible, people aren’t really using their Bitcoin or crypto assets to buy goods and services. Although earlier in the year you could buy a Tesla with Bitcoin, this was by in large a publicity stunt precisely because it was an outlier. Nobody’s buying the weekly grocery shop or paying the cleaner with Bitcoin. Instead, they’re either trading speculatively, typically with leverage, which is immensely risky and definitely a loss leading pursuit, in order to try and make more Bitcoin. Secondly, people are patiently accumulating more of this scarce, store of value asset at every opportunity they get.

There has definitely been an awakening in 2021 and this isn't people being put under any form of black magic spell. Instead people are starting to take a much broader look at the world; they are opening their eyes to a legacy system that is starting to crumble and as such many are beginning to turn their backs on a centrally controlled fiat currency mechanism that is effectively printing value losing pieces of paper to infinity.

By understanding the core fundamentals and having a deep seated belief in the asset, not only are people seeing their investments increase in value but it is proving time and time again that the crypto space is literally destroying the returns made on boring real-world things like blue-chip shares.

Don't be the pizza guy!

The divergence of the belief that it is a currency versus a speculative asset seems to be most neatly illustrated in the infamous story of the guy who bought a couple of pizzas using 10,000 Bitcoin back in the early 2010s. He did then what everybody else at the time did with Bitcoin. He didn’t ‘hodl’ it in the hopes of it going ‘to the moon’. He thought that it would be cool to use it to buy a couple of pizzas instead. I am certain that this person ruefully reflects, had he held onto his Bitcoin he would by now have been able to not only buy the pizza restaurant but have plenty of change left over to buy the city block that it sits on. It was, retrospectively, the most expensive pizzas anyone ever bought. In this scenario he mistook a speculative investment for a currency.

Volatility can be a good thing

There isn’t an absolute distinction between the two things I’ve set out: as is shown in the forex markets, currency is often traded speculatively and this is often done with high leverage. But as it stands they are a slightly different beast. You typically don’t want the price of currencies to fluctuate wildly in value: this obviously has a detrimental effect on anyone running a business, as you don’t want to discover that by the afternoon the widgets that you're selling are a quarter of the price the constituent components cost you that morning. You want to know that the fiat currency in your pocket is worth roughly the same at dinner as it was at breakfast. In the traditional financial world this can cause bad things to happen when it isn’t.

What tends to keep fiat currency relatively stable, if as a non-economist I understand this correctly, is that millions and millions of people are using central bank printed fiat currency every day to buy real-world goods and services. But as I have previously pointed out in my article on legalised theft it is the willingness of the participants in this 'robbery' who ultimately suffer. At the end of the day the value of fiat money is dependent on how a country’s economy is performing, how the country is governing itself, and the effects of these factors on interest rates. A country experiencing political instability is likely to have a weakened currency and inflated commodity prices, making it hard for people to buy products as they may need. So speculation in currency effectively piggybacks on that, but the bottom line is that paper money’s ‘value’ is evidenced and tested and constantly corrected by a mass of transactions taking place in real-world economies.

Research and education is key

Conversely anyone who makes an investment, wants it to move in price. That’s effectively the point of them. Those among us who have a steadfast belief in what has been invested in because time has been spent to do research and the investment thesis is defined in years and not months should actually welcome volatility as that is what sets the stage for the potential of outsized levels of yield. In fact the more abstract the investments are, and one can definitely put cryptocurrency in that bucket, the more volatile they will be. But what many traditional investors fail to comprehend is that unlike most investments in the traditional sense that tend to be pegged to some sort of real-world value, or expectation of it, cryptocurrency is an asymmetrical bet on the future; you bet a small amount that you can afford to lose, with an upside potential that is actually infinitesimal. This is something that isn't achievable in any other traditional asset class that is accessible to the average person.

In the absence of it being widely used as a currency in the traditional sense, though, just like any other investable asset, the key factor that supports the value of a cryptocurrency is the expectation that there will be someone else who is willing to pay to take it off your hands.

Be a smarter investor

You’re effectively betting on being the last person holding a bomb before it goes off. This is a reality that many people fail to understand in the crypto space with regards to the performance of the smaller alt and meme coins. Whilst seemingly attractive because of the thought of massive quick gains, they are in fact like a perfectly primed explosive but with very short fuses. Sadly people fail to do any research; they avoid educating themselves; and avoid having a firm and well thought out plan in place. They think that it is easy to hitch a ride on the latest hype train after listening to random people on social media and YouTube and believe that they can make easy money.

With Squid Game coins if people actually took the time to pay attention they could probably see the wires sticking out and smell the cordite (let’s not even talk about the similarly ill-fated cryptocurrency Monkey Jizz).

Bitcoin, like other established and battle tested coins may be heavy, shiny and attractive, but coins like this are able to present a proven track record and genuine real world use cases. By holding onto some of the other hyped coins with no real world application or viable working product right up to your ear, deep inside, I think you will likely hear something ticking.

I am saying this not because I want to deter you from investing in the crypto space, far from it, I genuinely want the space to thrive and for everyone to be able to make life changing wealth. But this is only going to happen if people stop blindly falling for the magic.

Financial markets can be difficult places to navigate for even the most accomplished investors, but with the right knowledge, understanding and guidance anyone can achieve great things. But just like anything that is worthwhile in life, it requires some effort.

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I'm Paul

I am on a mission to help people start a journey to financial freedom. The key to long term success is education and understanding the incredible opportunity that exists right now.

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