Stay away from crypto

December 13, 2024

At least in the Dutch Tulip Mania, when it all came crashing down, you had a pretty flower. Granted, the bulb was no longer worth the price of a fashionable Amsterdam mansion (including carriage house and garden), but your spring would have been a little more beautiful.

The same cannot be said of the crypto bubble.

As this odd financial behavior plays out, let's review some keys points.

Keep in mind that one of the underlying premises, or fears, driving this bubble is well-founded. The United States government is trying to deal with an increasingly high debt load, and the way it has and likely will try to mitigate that liability is by inflating at least some of it away by debasing the dollar. But there are better ways to protect yourself as an investor (mainly by owning businesses) than resorting to coin-land.

One of the beautiful things about investing is that you do not need to swing at every pitch. This is not baseball. You can let pitches sail right through the strike zone, and there is no harm done. People make money all kinds of ways. In 2024, Bitcoin is up a lot. That's fine, and that's wonderful for Bitcoin holders, assuming their coin wasn't lost or stolen.¹ But it does not mean you have to get on board.

So let's step through a few reasons why, when your nephew pontificates on the wonders of crypto at your holiday get-together, you are going to just let it roll.

1. Notice the currency used when everyone quotes coin prices. Do they quote it in Bitcoin? No. Do they quote it in Ethereum? No. They quote it in U.S. dollars, because U.S. dollars are the universal standard that everyone, well most people, trusts. Universality and trust are key elements of a currency. There is so much irony in the fact that they use dollars to quote their coins.

2. Don't be fooled by the tech nature of this bubble. What is happening here is the crypto promoters are acting as if the technology is some useful thing that sheds value onto the coin as an investment. Venture capitalists are actually decreasing their investments in blockchain and crypto, as after 15 years, use cases are just not showing up.² The VCs had a period of time years ago where they couldn't find the next tech wave, and they blew oxygen onto the crypto fire, but now that they have found useful artificial intelligence, they are moving on. (To be fair, crypto does have some "use" in facilitating illicit transactions.)

3. So if you don't need the fancy veneer of software to market the underlying coin-which-has-almost-no-function, why are we using roughly 2% of the nation's energy to mine these things? If we are going to trade something around that is of fixed quantity (not all cryptocurrency is of fixed quantity), why not just, say, put 10,000 unique glass spheres in a box, start the trade at X value, and say "have at it folks, convince other people to pay you more for your unique glass sphere. The dollar might depreciate but we are not going to inflate away the 10,000 spheres."

I suspect over time a few of these coins will stay around, roughly serving a function similar to gold. The majority likely will fade away to zero. I could be wrong. I don't really care if I'm right or wrong though, because I believe there are better, more understandable opportunities in indexing.

Dan Cunningham

p.s. Get those financial New Year's resolutions ready! Unloading expensive financial products and managers is a great way for you to fight inflation.

1. NBC News 9/10/24: Crypto scams stole $5.6 billion from Americans last year.
2. Galaxy Research 10/15/24: Crypto & Blockchain Venture Capital Q3 2024