A List of Pros and Cons to Consider for those Getting into Cryptocurrency in 2018
Cryptocurrency is full of risks and rewards. Thus, it stands to reason it carries with it a number of pros and cons. Here are some pros and cons of crypto to consider.
NOTE: I help run a cryptocurrency site and own cryptocurrency. Part of my life rides on crypto doing well, and thus I have a bit of a bias toward crypto. Despite that, I’ve tried to be honest here about not just the pros and cons of cryptocurrency in general, but the pros and cons of investing from the perspective of April 2nd, 2018. The end of the bull market was in mid-January, and things have been volatile and often bearish since. However, there are still reasons to have a positive outlook.
In summary: The technology behind crypto has a lot going for it, and the gains can be epic on a good day. However, the risks of investing and trading are high, and the tax implications are brutal. Now consider, only one thing on that list I just mentioned is inevitable – taxes. Do the math. Given the risks and taxes, people are well advised to take off the rose-colored glasses and approach cryptocurrency with respect and caution as they would if entering a casino or buying a penny stock. There is lots of room to have fun. You can create a conservative position that acts as an investment, and if you have the chops, you can even make a profit trading. However, those who enter unprepared and trade based on impulse and emotion rather than strategy are likely to learn some lessons the hard way. So, let’s skip those costly lessons and jump right into being safe, smart, strategic, and having fun by considering both the pros and the cons. 😀
Pro: Collecting digital assets and their paraphilia (like white-papers) is incredibly fun. It is like collecting baseball cards and reading their stats. Humans have an innate desire to collect things and make money. Crypto can scratch both those itches and give you plenty to think about. Plus there is a whole community and culture to immerse yourself in.
Con: In theory the comics you collected from the 1990s have value. However, it is always harder to get the price you imagine they are worth in practice. It is easy to get commitment bias and convince yourself that X-men #1 1991 has got to be worth a fortune these days. However, if you check the market price, the reality is that you will be lucky to get the sticker price, assuming it is in mint condition and you don’t pay the shipping costs or sell to a re-seller. It doesn’t help that you joined the 1990s comic book chat room and had a bunch of people sending out memes about how valuable those comics are. I would be mad to sit here and tell you that the problem had to do with comics or the comic you picked. Instead the problem has to do with factors like supply, demand, the price you paid, when you bought it, and your expectations. You can probably just HODL that comic, but you might have already HODL’d past the peak. That is the reality you need to brace yourself for. On the other hand, a few of those comics from the 90s are worth a nice chunk of money. Many things cost significantly more to buy than you can make when you sell them, depending on your timing of the crypto markets, cryptocurrency may be no different.
Pro: You don’t have to treat crypto as an investment. There are a thousand sides to crypto. You can learn about programming smart contracts or something like that and never look back. You can find a way to apply blockchain to an industry. You can use Ethereum-DAaps, only going into Ether when you need it for the app and otherwise sitting in dollars. You can start a cryptocurrency, create a wallet, Etc. In other words, you can use crypto, or work with it in some way, and never treat it as an investment or trade it. Heck, you can even mine a coin and always sell at market price and potentially do alright. Crypto offers a lot more than day trading or putting your life savings in internet money.
Con: If we are honest, we have to admit that most people come into crypto seeking moons and lambos. This is why Bitconnect was so popular for example; they promised the moon. Who wouldn’t want to buy a Bitcoin for a penny and watch it go to $20k? That is insanely inciting. People often come for the riskiest part of a venture, and sadly they often come to the party late. You could end up like the kid in the 90s buying an X-men comic after we all thought that comics would be worth a lot some day because some people who bought and held onto comics in the past did so well! Logically, we probably all understand that we won’t win a million dollars at the slot machine, yet so many of us will leave our logic behind once at the casino for bright lights and adrenaline. We pass up the opportunity to take gains; we play down to our last dollar; then we feel sad on the ride home. This is how the house keeps the lights on; they offer hope and entertainment. If you manage risk, it is fun, but the reality is not everyone gets to win and many don’t manage risk well. Humans are emotional creatures, and our emotion overrides our logic. It takes discipline and experience to override this, and even then we can fail.
Pro: The lower the price goes, the lower the risk is that you are coming in high.
Con: There is no limit to how low prices can get. We could enter a long-term or permanent bear market. The problem with the quick rise of crypto in 2017 is that it filled the market with so many wildly different prices that it has become difficult to tell which one of them is reasonable. Was the slog to $7k reasonable, but the rest an advent of an overeager market and some pump and dumps? Or, was the whole push from $1k to $7k an unjustified bubble? It is not a pleasant question to ponder, but if you consider it honestly, possible answers for a fair price start to include any price from $1k (or lower) – $7k, which is a big spread. I like to think the higher end is “the right market price” given factors like mining costs, but knowing crypto, we are likely to see half or double that like a week after I hit publish. Of course, this is part of the overarching problem and what makes people flock to crypto in the first place.
Pro: If you don’t know about investing and trading, crypto is an easy to access market that will force you to level up quick.
Con: By level up, I mean to fall on your face so hard and so often that you’ll eventually learn to stick your hands out when you fall. This is especially true if you enter in a bear cycle or enter in a bull cycle and don’t have a tolerance for volatility.
Pro: Anyone around the world can access crypto, and anyone can trade it. There are no barriers to entry (aside from a few state-imposed ones). If your country has a volatile currency, or if you need to send money across the world, this can be great. The same thing goes for developers; anyone can develop. It is quick to transfer money across the world with cryptocurrency; this is a really big perk!
Con: In practice, a small fraction of people own the majority of all cryptocurrencies. Also, prices can be heavily manipulated by those few owners, which is not unrelated. If crypto is more volatile than your nation’s currency, then I’m very sorry you are dealing with that. Any problem with currency or other assets is present in crypto (and sometimes it is worse). This includes the problem of someone who owns a large portion of an asset dumping it at market price to tank the asset’s price either quickly or slowly. It also includes the problem of fluctuating value. On the developer side, people can develop scam coins and platforms. This does a lot to discourage people from entering the cryptocurrency market, which is unfortunate.
Pro: Demand at different market prices shows people value cryptocurrency and accept it has value.
Con: It is hard to justify a specific fundamental value everyone agrees on. As a result, there are no specific prices any crypto can be expected to trade at. Prices are found through speculation. Speculation can get messy.
Pro: The decentralized, democratic, and trustless aspects of cryptocurrency allow for peer-to-peer contracts based on code and not trust. That is one of the most valuable parts of cryptocurrency, and it is a fundamental value of some cryptocurrencies.
Con: Without a central mediating force, there is no way to exclude the worst of humanity from most aspects of crypto. If the worst people on earth are the best at accumulation, then power will be funneled to them. Further, there is very little in the way of consumer protections. If your crypto is stolen or lost, it is gone.
Pro: For those who do invest or trade (AKA the majority of people who get into crypto), any gains come quickly. Most cryptos will lose value or stagnate for most of their trading life. Every once in a while, they will make rapid and absurd gains rarely seen by any other asset class. In isolation, the gains are very attractive if you can lock them in.
Con: There are many ramifications to the fact that both gains and losses happen quickly in a volatile market. The biggest ramification is that any given cryptocurrency tends to spend most of its time paying for those gains. Look at the charts of coins over time (especially in BTC prices). Look at those giant green candles (or steep upward lines); now look at the long downward wave-like slopes after those candles. That is what I’m talking about. Most of the gains come in these quick “pumps,” and tend to be given back slowly over time via a slow wave-like bleed with a few mini-pumps in between (in bear markets at least). The negative here said plainly, is “the entire market, from BTC to shh-coin-x is subject to being pumped and dumped due to the low volume and remarkably rich people in the space (whales).” The problem is this: with great pumps, comes great dump-ability. the dump phase is slower because this is how pump and dumps work (when done right). The slow bleed allows the pumper who previously accumulated coins to unload their coins slowly while warding off panic selling by making it look as though values could go back up. It isn’t always a specific entity doing this; it is collective human behavior. The collective of whales, pros, and average Joes and Janes reflected in the market creates a pattern where buying gets hot and heavy, then it cools off. Actors and the reasons for their action aside, the effect is the same. The average person is not prepared to deal with this psychological game and is likely to buy during the dump phase and HODL or sell later for a loss. Not everyone can sell at inflated prices because the demand isn’t there. The fundamental valuation does not justify the prices; the pumpers and nimble traders have no plans to buy back too many shares high and HODL. This is why the price drops, sell pressure builds, and then the big players take their buy orders off the book and catch the price at the next support level. A few people pump, then nimble traders enter quickly accentuating the incline. This drives most people to FOMO into the dump phase while the first two groups sell, which is why most people lose money trying to trade or invest in crypto. This process filters money to the top, as it does in any other asset.
Pro/Con: The top coins by volume and market cap over time are less susceptible to pumps, sometimes have organic growth (like Bitcoin for most of 2015 – mid-2017 felt somewhat organic, for example. However, even Bitcoin has historically seen many steep and quick rises and then 80% losses on its way to $20k and back down to $6k. Top coins will never see those quick 50,000% gains some other coins do, but they are safer and more suited for investing. Meanwhile, the lesser cryptos can go up way further and faster than BTC, but sometimes they are one pump wonders. Over the years, many one pump wonders have gone to the graveyard. The point being, the higher up the list (by market cap and volume over time), the better the odds are that a mistimed buy in the last cycle won’t result in permeant losses if you HODL. Meanwhile, the lower cost and low volume coins can offer absurd gains, but those gains tend to come and go quickly, and sometimes you only get one shot at locking in the gains.
Pro: Cryptocurrencies are legal, and regulation thus far has been focused on embracing their technology, not banning them. In the early years, the fear of a ban was real. That doesn’t seem to be as likely anymore.
Con: Crypto is treated as investment property in the U.S. at least. Unfortunately, doing your taxes on crypto use or trading is a nightmare if you use or trade crypto frequently. Specifically, crypto profits and losses are next to impossible to report correctly if you did a lot of trading. Meanwhile, the penalty for botching it up includes owing $250,000 to the IRS and federal prison. So, not only were many suffering loses in 2014 and 2018 by tax time, but they also had to do nearly impossible reporting from their 2013 and 2017 trades and pay capital gains on that or face some pretty gnarly penalties. This is a very significant negative if you trade or use crypto. If you HODL, your tax life is simple, your problems lie elsewhere.
Pro: The technology behind cryptocurrency is exciting and likely here to stay. This is probably the most widely accepted pro on the list. It is what drew me into crypto, and it is what keeps me around. This part is likely to continue to be a force long term, and consequently, the top cryptos are likely to retain some semblance of value and grow in value over time.
Con: Speaking a bit to an above point, the technology behind cryptocurrency isn’t directly tied to the price of a token; there is a lack of fundamental value. This doesn’t mean prices don’t react to the technology. It means that there is a disconnect between the price and tech. If you buy Apple stock, you can look a their earnings and work out a fair value of the stock (like earnings, plus projected earnings over 10 years based on their current tech and future plans, and then you get a dollar amount value of the stock which the stock will trade at, under, or over). I can write an essay on how to value cryptocurrency based on some interesting metrics, but ultimately the price action on the exchanges overrides any theory I can put forth and generally does it before I get a chance to finish writing my essay.
Pro: The market is open 24/7 and is a global market.
Con: Humans need to sleep, and unless you have a bot that can change strategies when the market changes, you can’t safely sleep and manage your trades and investments. Instead, you have to end every day in cash or specific cryptos.
Pro: Cryptocurrency is flexible. It works as a currency for investing in other cryptocurrencies (or at least Bitcoin and Ether do, and you can swap into those at any time with most cryptos). You can also spend cryptocurrency like cash anywhere that accepts it or use it for peer-to-peer payments. Trading crypto to crypto is fun, using it for peer-to-peer and online payments is both useful and easy.
Con: Trading and using crypto are taxable events plus the price is so unstable that most cryptos make no sense being used as a base currency or traditional currency. Who wants their dollar going up or down 25% in a day or week? We all want it to go up that much, but don’t want to take crypto at market price, because the price could go down. Just as many don’t want to spend it at market price because the price could go up.
Pro: Cryptocurrency can make you a small fortune if you are a good trader.
Con: Most people are not good traders.
Pro: Cryptocurrency can be a solid investment if you can time your buys correctly.
Con: Most people tend to FOMO into cryptocurrency while it is high and then HODL it into the ground. Historically those who wait it out long enough are then rewarded, but there is a long period of sadness there, and some cryptos have never fully recovered historically.
Pro: If you properly secure your crypto it is very safe.
Con: People who don’t take the proper steps, and even a few who do, risk things like their hardware breaking, accounts being hacked, and exchanges being hacked. Crypto can’t yet offer the same types of protections as banks against fraud and theft.
Pro: Crypto is new and exciting.
Con: There is a real risk that new and exciting technology that burns a ton of people doesn’t end up being sustainable. Not everyone is well suited or interested in professional poker. And one should heed this warning. Please have a look at the search volume of “poker” in Google trends from 2004 to today. As the pros took more and more money from the plebs, the plebs lost interest. The end – for now. The poker fad might come back, people still play poker, but search volume has been stagnant since 2014 and declining since 2009. That is the reality. Dan Bilzerian has a lambo; you probably won’t be getting one. However, if you are smart and steady, you have the potential to do well too. It isn’t “easy money;” there is no easy money on earth.
Pro: You can create an average position and HODL and mimic the act of investing in a less volatile and more conservative investment.
Con: Anyone who bought after November had all their gains and probably part of their initial investment wiped out by HODLing. With many coins (but not all) only those who traded or sold did well at this point. That could change, but for HODLers to do well, they likely need to not HODL during the next run-up. However, if everyone sells, then how does the price run-up? Does crypto depend on fresh blood for each fractal-like wave? That isn’t sustainable. Essentially, and to the above points, the pump and dump nature of crypto presents opportunities for some to get rich quickly, but also opens up a large can of worms for the asset class in general. The ramifications can be seen after each cycle in which cryptos get pumped upon each new wave of adoption.
The Bottom line
The bottom line is the first sentence and is repeated throughout the pros and cons section.
It is this: Crypto is full of risks and rewards. The rewards are nice, but many come in unprepared for the risks. That makes sense. Unless you watched 2013 – 2017 unfold, you didn’t have a good sense of the risk associated with the latter half of 2017. If every wave of adoption were immediately followed by a long string of disappointment, there would be a risk of burning out in every new wave. At some point, logically, that means we will reach mass capacity and then burn out. The nature of crypto will likely have to evolve for it to sustain itself as a valid asset class. This is totally possible and one shouldn’t rule out despite the history thus far.
Speaking as a person who holds some amount of cryptocurrency, believes in the space, and makes part of my living running a cryptocurrency site, I’d put it like this:
I equate investing in or trading cryptocurrency to playing poker (AKA skill-based gambling, of which the popularity with the general public is likely to ebb and flow).
If you asked me “should I play poker?” I would go on and on about what an exciting game poker is, how it is valid and fun, how you could make money, how it can be a positive thing for your brain (but also very emotional if you take positions you can’t afford to lose), etc. That, if you approach it with strategy and don’t over-extend yourself, it can be a fun and worthwhile social venture. I would even recommend it generally speaking.
If however, you asked me, “should I go all in a tournament against professional poker players?” I would try to explain that “while those nice folks have lambos, that in this sense the lambos are real, the chances of you getting one is near zero because you aren’t a pro. For you to get a lambo, you need to play like a pro or get lucky, because you need to take the pot from the pros to get the lambo money.”
If you can play a pickup game versus LeBron, then that is awesome. We can safely say that basketball is a great game and you’ll probably learn a thing or two. There is something in basketball for everyone to enjoy.
However, if you are going to bet your house on that pickup game vs. LeBron, you are gambling and potentially taking a bad bet although it depends on who you are, right?
Crypto is like that, there are many positive points, and the further you get away from the markets (and especially bear markets) the more positive points you’ll find. However, it is a space so full of traps and dominated by markets that the average person will have trouble avoiding the pitfalls.
I’d suggest dabbling in cryptocurrency to anybody. Own a small amount, try using it, research the technology, etc. Dip a toe in with a small portion of your investable income, then decide your next step.
However, I suggest approaching the market with extreme caution when you do approach.
I don’t think I’ve ever met a person truly willing to lose 80% of their investment (even just on paper), but the majority of people I have encountered in crypto have managed to do just that while a small minority of cleaned up. This is similar to the way it works in high-stakes poker).
Play the tape out, the house wins over time, and thus most people don’t spend a ton of time at the casino after a few trips when they first get into it. Mostly because the average person only has so much money to lose. It is, cold, unemotional, logic and it is a logic that will grind on cryptocurrency until its nature changes.
For now though, crypto has room for another wave of adoption and Bitcoin has room to grow as a brand name. However, if things keep going like this, the next big wave is likely to turn into a global tsunami. I’m not sure how much I love that idea, everything I love about crypto aside.
NOTE: In 2015, I cautioned people to approach crypto carefully, in retrospect we can laugh. You could have sold all your assets for Bitcoin and you’d be able to cash out and be rich today. (“Be careful of those $1.50 Litecoins” I said; HA!) However, I also advised caution after the pump from $7k to $20k. There was not much to laugh at there; it was good advice (because, unless you sold high, you have, at best, broken even at this point). Today Bitcoin is $7k again. However, the general advice of being cautious does not change with the price. We all want to believe in million dollar Bitcoins if we own even a fraction of one, but consider that even though this future might occur, the road there is going to be bumpy enough to throw the average person off or keep them on the ride all the way back down. Probably only the pros and most nimble of traders will time their entrances and exits properly. And that is the problem, if the rewards go to speculators, and the pain goes to the average people fueling each new wave of adoption, at some point, we’ll run out of people to adopt the technology.
“How can a thing be at once so powerful, so virtuous and magnificent, yet so vicious and base?”
– Frankenstein’s Monster
Note on the reality of crypto as a high stakes speculative digital poker chip: If people truly cared about cryptocurrency as a currency, they would use Tether (a coin that holds the value of $1). Or, let me say this, they would be seeking a decentralized version of Tether. Sorry to be so blunt, but again, basic logic. The thing is, what draws many in is the story of penny Bitcoins turning into $20k Bitcoins. The problem is, of course, 99% of traders aren’t ever going to see anything like that. Rather, they will probably be lucky to not turn $20k Bitcoins into $6k Bitcoins selling in a panic, which is very much the opposite of what they were looking for. After the last epic pump, many people got burned. So you have lots of people seeking lambos, but many people will never get near a lambo. Thus, the rapid paced bubble and bust economy of crypto is likely to continue until either 1. someone can figure out how to bring stability to the market or 2. equilibrium is found due to necessity as it was in 2015 – 2016. Of course, the big players in crypto show no signs of wanting or seeking stability; this is obvious from the history of the market. We get a high stakes poker game that is winnable, but that will result in a lot of people losing their chips. So, do you abandon crypto and look for the next craze or play the stock market or maybe get into poker? All those sound like good ideas, assuming you understand the risks and plan accordingly (as those are all potentially fun, but risky ventures, just like crypto). If however, you are going to sell your house and put your 401k in crypto because of some news article or meme, you might want to re-think that. Crypto is a space worth being in, but you need to approach it with respect and caution because the games played here are often high level and high stake.