Someone asked me what I think of cryptocurrency. I think cryptocurrency is not a proper investment. It’s better thought of as a symptom of a societal disease. I don’t think that disease is capitalism, that’s too simplistic of an assessment. Rather, I think too many young men see no realistic viable future for themselves that they can be enthusiastic about. If you have a society with a lot of young men with access to the Internet, who are unable to be happy with an average standard of living (something that rapidly happens when they’re brainwashed by social media where twenty year old mumble rappers show off their mansions) and who see no way for themselves to deliver a meaningful contribution to society, you’re going to end up with a lot of cryptocurrencies. You’re also going to end up with a lot of people losing money in the stock market by the way.
In a Ponzi scheme, you pay out early investors with the money of later investors, promising massive returns without actually using the money to produce anything that could lead to such massive returns. When too many people try to cash out simultaneously (which eventually happens), it becomes apparent that the money they believe themselves to possess doesn’t actually exist.
In the old days, a Ponzi scheme needed an operator. Some person needs to operate the scheme and that person tends to flee with everyone’s money when too many people start withdrawing simultaneously. In the internet era, you can create decentralized Ponzi schemes, where no single individual can be legally held responsible. So, inevitably, that’s what a lot of people spend their days doing. If you’re involved in a Ponzi scheme, your mind is going to look for reasons why it’s not a Ponzi scheme.
Everyone wants to know how to get rich fast, so if you read some strange Dutch dude’s obscure blog on the Internet and he tells you “buy cryptocurrency X” and cryptocurrency X ends up traded at 10 dollar the next week instead of 1 dollar, you’ll tell yourself: “That guy is really smart and knows what he’s doing.” The reality is that the guy probably got lucky, reading obscure forums with the highest density of desperate NEETs.
That’s the main thing to understand about all of these internet schemes: They always mainly appeal to young men with far too much free time, who don’t have their shit together in life. You’re 23 and in your fourth year of studying medicine? You’re probably not spending your days on Reddit, trying to figure out which stock /r/wallstreetbets is going to be pumping next. You have actual meaningful stuff going on in your life that demands your attention, you’re well on your way towards delivering an actual meaningful contribution to society.
The guys who can’t contribute to society? They spend their days trading digital tokens back and forth. I should know, because I was one of them. A lot of these guys would have been better off learning how to become plumbers, electricians and construction workers (one reason we have a shortage of houses is because we don’t have enough people to build them), but girls who are spending 20,000 dollar a year of their parents money on college tuition tend to be reluctant to introduce their mothers to boyfriends who fix your clogged sink for a living. If you add in the lockdowns, we now have an epidemic of young men who can’t contribute to society, so what we get is this:
This is bad for humanity.
I could taint my soul a little bit further and I could post here “buy cryptocurrency X” because I saw it spammed on 4chan and the next week Reddit would start hyping it and then it would jump 1000% and you would be thankful for reading about it. But what happens? It’s a zero sum game, so society as a whole doesn’t genuinely end up better off. Some dysfunctional NEET who bought the coin first might earn 1000 USD and he would post about it everywhere and you will think “man, I need to start trading cryptocurrency”! The reality is however, that if one dysfunctional NEET earned 1000 USD, ten other dysfunctional NEETs lost 100 USD buying the first NEET’s coins. They then tend to keep quiet, so you’re exposed to biased information that makes it appear as if cryptocurrency is a good way to earn money.
I myself bought Bitcoin back in 2013, because I was a dysfunctional NEET. It earned me some money when I eventually sold the coins. That doesn’t really change the fact that Bitcoin is a net negative for society however, unless your value orientation leads you to place a lot of value on the ability for ransomware operators to receive anonymous payments and for people to trade fentanyl online.
Bitcoin doesn’t produce anything, but it does consume something: Huge amounts of electricity. The investors pay for that by watching their share be diluted, society pays for it in the form of electricity shortages and exacerbated climate change. The nicest thing I can say about Bitcoin is that it seems to make it easier for Chinese people to move capital out of China, I’m struggling to think of something else.
Bitcoin functions like a decentralized kind of Ponzi scheme, plain and simple. It doesn’t make sense to treat it as an investment, just as any competent investor like Warren Buffet will tell you that it doesn’t make sense to treat gold as an investment. Gold at least has the property of being genuinely valuable and scarce, but Bitcoin is neither.
You can sell your bitcoins today and receive actual money for them, but every dollar you cash out requires someone else to pay a dollar to step in. That dollar someone spends on bitcoins can be divided into the scheme’s two main expenses: The money spent on producing more bitcoins and the money old speculators cash out. As a negative sum game, the system continually bleeds money. It seems humanity is currently wasting about 4 billion dollar worth of electricity every year, to mine Bitcoins.
If that is the case and actually competent investors have been saying it for years, then how come it’s still going up? The first thing that everyone tends to miss is that you have to correct for coins that are lost. It’s thought that people lose 1500 bitcoins on a daily basis, compared to 900 new bitcoins that are produced every day. This happens in a lot of ways. You have 30 dollar left in a wallet that you used to buy drugs and forget about it. Perhaps you die and your wife can’t figure out what to do with these passwords she found in your wallet or simply doesn’t care about your digital NEETbux. Perhaps your harddisk ended up in a landfill. If the influx of money remains the same, but the number of coins that bagholders can sell declines, we would expect the price to go up. The other issue to consider is that the price of Bitcoin appears to be inflated by the fact that fake dollars are being used to prop up the price. A lot has been written about Tether already, so I won’t expand on this point.
So how do you earn money? Contribute to society. If you want to earn a lot of money, think of something relatively unique you can contribute to society. However, if you’re thinking of making money with cryptocurrency, that means that some humility is probably appropriate. When you see a chess competition where the highest ranking 10% of participants go home with all the entrance fees, you need to ask ourselves whether you might belong in that group, before signing up. Insulting your readers is a bold move, so let me reformulate it: Ask yourself what you’re really good at, ask yourself which of those things you like doing, ask yourself which of those things people will pay you money for and then focus on figuring out how to work with that.
There are surprisingly many ways to contribute to society. Trading can be a perfectly valid way to earn money. Imagine you see a rare old time car sold online for 30,000 dollar. You realize it’s worth 50,000 dollar, but it’s being sold at a discount because the guy wants to get rid of it fast. You buy it for 30,000 dollar, then sell it rapidly for 40,000 dollar, to an enthusiast who is happy to jump on the opportunity to get the car he always wanted. You delivered a service to society: Without you stepping in, the guy selling for 30,000 dollar would have dropped his price to 25,000 dollar, to sell it to someone looking for really desperate people in need of quick money.
If history is a guide, simply buying a random basket of stocks should earn you about 8% per year on an annualized basis. Consulting a monkey throwing darts would have earned you 8% per year in the past. It would have been possible to earn more than 8%, by focusing on buying stocks at a discount to their intrinsic value. We call that value investing. You don’t have to be very smart to do that, you just need to be patient. In the words of Warren Buffet: “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Warren Buffet’s 50% per year for the first decade is an outlier, but it’s not as big of an outlier as you might think. I’m convinced even the average dude with less than one million dollar to invest can reliably earn 20% per year through value investing, if he can control his temperament and stick to his area of competence.
But there’s the problem we’re dealing with: Twenty year old guys aren’t looking to earn 20% per year off their 1000 dollar Robin Hood portfolio. They’re looking to double their money in a week, so in practice they tend to lose everything to some anonymous guy who organizes pump and dump schemes through /r/wallstreetbets. My advice has to be to those guys to put investing out of your mind altogether. If you have less than 100,000 dollar, just buy an ETF, my personal suggestion would be a small cap Japanese value ETF. There’s no point in spending every day gazing over stocks to earn 20,000 dollar a year, if you could earn 10,000 dollar by buying an ETF and focusing on something else in your life. If you have less than 10,000 dollar, don’t even think about investing altogether, 10,000 dollar is a perfectly good emergency savings fund.
All that time spent browsing dumb subreddits where NEETs try to peddle their pump and dump schemes to each other would be better spent asking yourself how you can contribute to society and what you need to change about yourself to get to that point. Maybe you have difficulty focusing on your homework because you have a nutrient deficiency. I’m not saying that’s the case, I’m saying that’s a more useful question to contemplate than: “Which cryptocurrency is going to be pumped next?”
For those of you with enough money to make investing a meaningful endeavor, I would like to make a new post about value investing soon, where I will share some of my ideas. People asked for an update, so here’s the current state of my portfolio at DeGiro:
Obviously, anyone who began investing in 2020 feels like a genius right now. I started in March 2020, right when the markets crashed. However, I would argue that it’s not coincidence I stepped in back then, as it was simply a time when everything looked cheap to me, when I looked at the balance sheets of the companies I bought. Obviously, this high return of over 50% annualized is unusual, I doubt I could repeat it this year. I’m a value investor, so I look at what price stocks are traded at, compared to their intrinsic value. This sometimes means that you find yourself with cash on the sidelines, waiting for someone to sell something to you at a discount to intrinsic value.
In March 2020, I suddenly saw discounts everywhere. Imagine a company that has 50 million dollar in cash on its balance sheet with no debt, that is being traded for a market capitalization of 40 million dollar. It doesn’t take a genius to figure out this company is probably undervalued. It’s not a guarantee that the company is undervalued, bad management that’s impossible to fire may make it impossible to actualize the value, but if you buy a basket of ten companies trading at negative enterprise value, you’ll typically witness high annual returns.
There are four basic principles to investing that I can recommend, all of which are being broken by the NEETs on Reddit right now. None of these principles are my invention, they’re principles every competent value investor could explain to you. These principles are as following:
-Buy assets that deliver goods or services. You bought gold? Cool, but gold doesn’t produce something, it just sits in your basement. Real estate delivers you value every year, either in the form of rent, or in the form of your ability to live and work in your property. Companies are supposed to deliver dividend, or spend their earnings on capacity to increase their earnings in the future. Bitcoins? Dogecoins? They deliver you nothing, you’re hoping to sell them to a greater fool.
-Buy your assets at a discount to their future earnings capacity. Let’s say a company has a market cap of 500 million dollar, it earned 100 million dollar this year and you’re quite convinced it can reliably earn 100 million dollar for the next five years. That’s going to be a good investment. I can’t tell you exactly when the market will agree with you, but it will eventually figure out you were right.
-Stick to your area of competence. Diversification is nice in theory (though not how it’s generally practiced), but what’s nicer is owning things you understand. You’re better off owning three companies that you understand very well, than five companies you understand quite well.
-Ask yourself what stage of the cycle the market you’re investing in is right now. Different parts of the world are in different stages of the cycle, a phenomenon that will probably disappear in the coming decades, as the global market becomes increasingly synchronized. It’s nice if you see a company that looks cheap compared to every other company, but when a market as a whole is expensive, you’re probably just dealing with something that will drop ~20% in a year rather than dropping ~80% in a year *cough* Tesla*cough* Shopify*cough* Nvidia*cough*Zoom*cough*. There are some markets that look very expensive right now, the United States is a prime example. Other markets however, are definitely not in a bubble right now.