Why crypto could be the ultimate value play
Investing’s not about knowing what will happen.
It’s about playing the percentages.
I mean, if I offered you odds of 100-to-one on something you judge actually has a one-in-five chance, you’d snap my hand off, right?
It’s in that spirit that I urge you to check out our new Secret £20 Crypto Blueprint
Quite a few of my colleagues have already started building their positions.
Nothing major. Not money they’ll necessarily miss.
That’s because one of the drawbacks of cryptocurrencies – that they’re hugely volatile – is also kind of a strength.
You don’t need to have as much invested to make a meaningful profit if we do see another leg higher.
To see what I mean, take a look at these returns from some of the lesser-known cryptos:
SwapToken: Up 2,413%
GAYcoin: Up 721%
Dimecoin: Up 441%
Solaris: Up 318%
NewYorkCoin: Up 256%
Devcoin: Up 249%
These returns were made in a single day earlier this year. My colleague John, our cryptocurrencies expert, dug them out to illustrate crypto’s potential (as well as its Wild West nature).
Crypto is like the ultimate asymmetric bet.
You could lose everything you put into it. You could also make that money back many, many times over.
Sports betting experts talk about something called a “value bet”. Those are bets like the one I mentioned above, where the pay-off is way in excess of what it “should” be given the actual probabilities.
Of course, what the “true” probabilities are is a judgement call. You may think the probability of crypto being worth more than it is now in the future is zero.
Or else so low as to make any investment folly.
But when you see the returns some coins have made already, it’s hard to argue there’s potential.
Potential to lose everything you put in, sure, but also potential to win big.
Big enough that it justifies a position even if you think the likelihood of it paying off is quite low.
By the way, this value betting concept applies to finance too. Both Jim Rickards and Tom Tragett used it last year to help readers make money on the Brexit result.
They saw a mispricing in the market that offered a good risk-reward trade off, and they took action.
Not because they knew or thought they knew what would definitely happen…
Just because they judged the probability to be mispriced.
So I’ve decided to join my colleagues in putting a small amount of money into crypto.
To be honest, I’m just dipping my little toe in at the moment. Getting my head around the nuts and bolts (because it is a bit more involved than just opening a trading account).
What drives me forward isn’t so much the promise of riches – though obviously it’s a factor, as you’ll see from reading this.
I just don’t want to be this close to something with so much potential, turn up my nose at it AND THEN WATCH PEOPLE I WORK WITH MAKING A FORTUNE!
Because that would be annoying. Deeply annoying. Lock-myself-in-the-toilet-until-everyone’s-gone-home annoying.
By holding a small crypto position, I have a kind of hedge.
I can continue to tut and say “This looks weird and unstable” whenever crypto comes up in conversation.
But by putting in a bit of dosh I’m happy never to see again, I won’t want have the urge to bludgeon those I work alongside if this thing really does take off.
They’ll tell me I was wrong, a stick-in-the-mud, and we can laugh about it together as we all go to buy our sports cars.
So that’s my plan.
For today’s DR I want to put a bit of flesh on the bones so you have a bit more info to help you decide if this is right for you.
First of all, you may already know that bitcoin, the biggest of the cryptocurrencies, trades at more than $2,000.
So does that mean you need at least that much to invest?
Well, no. It doesn’t. You can buy fractions of coin – that’s what I did yesterday morning.
Second – and again, this is probably something you’re already aware of – the crypto space goes waaaaay beyond bitcoin.
That gives you plenty of scope to find something that may be right for you. So whether you’re a buy-and-hold investor building your wealth for ten years hence…
Or a short-term trader who only holds positions for a few weeks…
You should find that one of the altcoins, as the lesser-known cryptos are known, fits the bill.
A word of warning, though. This broad range is a double-edged sword.
“With more than 800 crypto coins available it’s easy to jump on a bandwagon and end up holding something worthless,” says Agora Financial UK’s cryptocurrency expert John Duncan.
“As I write there is a maximum of 37 different cryptos from that list of more than 800 I’d be seriously interested in owning. The rest? Fail one or more of my testing process.”
John has identified five coins in particular that he reckons offer excellent potential right now.
These are what he calls “penny cryptos” (think penny shares, but for crypto. Higher risk, along with much higher potential reward).
Following on from that, I want to make a third and rather obvious point.
Cryptocurrencies are volatile.
Anything that can produce a chart like this is something where you need to keep your wits about you:
That’s a chart of bitcoin as it hit its recent peak.
The idea behind “penny cryptos” is that they’re just starting out. It’s a chance for you to get in while they’re still valued at levels bitcoin was a few years back.
But – again – be smart.
“Any money you put into cryptos for the very first time should be money that you’d be prepared to put on a horse in the Grand National,” says John.
“Don’t even think about starting if you can’t face taking a hit. Hitting something at the wrong time is inevitable, making losses on some is inevitable and cryptocurrency trading is a tough business for those with the wrong attitude.”
You have your rules of engagement!
A fourth and final issue to address – what gives cryptocurrencies their value?
Now, I’m hardly going to put a dent in such a deep topic today.
But we can make a start.
A lot of people say cryptos follow the “greater fool theory”. You buy one in the hope that someone else – a “greater fool” – will be willing to pay you a higher price for it later on.
To be honest, I have a lot of sympathy with that point of view. It’s a phenomenon that affects markets from time to time, whether it’s stocks, property, gold or tulip bulbs in seventeenth century Amsterdam.
The real question is whether that’s all there is to see here.
Are these modern-day tulip bulbs? Or is there something of real value?
Is it like a house, where you may pay a temporarily elevated price but in the long run benefit from an upward trend?
I’m in no way saying this is “safe as houses” – that would be ridiculous (remember John’s comments about the Grand National?)
But one of the appeals of bitcoin since its inception has been its unlimited supply.
If that appeal persists, and attracts more and more people to store more and more wealth there, you could well see a long-lasting uptrend. A bit like we saw for gold in the decade or so up to 2011.
And when you consider the wider applications of cryptocurrencies’ underlying technology – the blockchain – then you start to think in terms of buying into genuine social value.
In other words, getting in on the ground floor of a massive social change.
“A purchase of bitcoin, however small is nothing other
than a short sale of the currencies of the world,” Grant’s Interest rate Observer quoted hedge fund boss Murray Stahl last year.
“This is ultimately what the great bitcoin mania is about,” adds a computer scientists friend of mine.
“A huge pent-up unease at having human civilisation revolve around a thousand or so ageing computers.”
This is what led to crypto being created. And it is this drive to build an alternative to the current centralised systems that underpins cryptocurrencies’ values.
“Now the focus is very much on blockchain technology and what it can do for the future,” says our crypto expert John Duncan.
“There seems no end to the inventive ways that developers think they can put that to use.”
Not all will work out. In fact, I suspect most will be nice ideas that just weren’t practical.
A few, however, could genuinely change the world. And the crypto coins associated with them could end up looking like the bitcoin chart I just showed you.
Until next time,