You want in on crypto?
Recently, as of writing this, the cryptocurrency market went through a "correction," which is know-it-all-speak for shit going down fast. Is it a crash? Hard to say. The prices of almost all cryptocurrencies are way down from where they were at the beginning of January, but still very much up from where they were at the end of November.
From this point forward, I have no idea of the markets are going to go up, down, sideways, or backwards. But what I do know is that people still keep asking me if they should "get into cryptocurrencies." I got into cryptos last year by working for a Bitcoin related company, and now it's a part of my life, and so it comes up when I have small talk about what's up lately.
Last week I had to see a physiotherapist for a small injury, and while he "flossed" my nerves, whatever the hell that means, he was asking me all sorts of questions about cryptocurrencies and how he should get them. Later the same day I bumped into a guy I kind of know who came to some comedy shows I performed at, and within five minutes of talking, he invited me out for a coffee so he could pick my brain about the cryptocurrency market. I don't claim to be an expert, there are definitely people who understand the technologies deeper than I do. But, I've been told by a number of people now that I can explain these things in a way that actually makes sense, so that's what I'll try to do. I've already written about how Bitcoin works, and most cryptocurrencies work the same way, so if you want to grasp the technology, maybe go read that. This is more about the market that everyone wants to get in on, and if that's a good idea.
First, the bad news
If you want to get into any cryptocurrency just to hold for a little while and then change back into hopefully more "real money" than what you put in, then I can't help you. No one can, actually. It's not because I think I'm so much holier than thou and I'm not motivated by greed. I do believe I am holier than thou, but that's a side issue. The reason I can't help you is pragmatic. The problem with with thinking of cryptocurrency as this thing that you just hold and it goes up in value, has to do with a fundamental paradox of value itself. If a thing's only value is having value, then it has no value.
Grab any item you have handy around you, the more mundane, the better. Like a coffee cup. Let's say a friend of yours offers to buy it off you for a dollar, and you have other cups, so you sell it. Then he sells it to another friend for two dollars. This is a very simplistic situation, so the next step is a bit of a stretch, but I think you can partly see where I'm going, so just come along for the ride. Let's say you catch a little herd mentality and feel there must be something to this cup that you didn't see before, so you buy it back for three dollars. To keep this nice and simple, let's contain this to just three people. Your first friend comes again and says they want the cup for five dollars. Round and round it goes, things get out of hand, and soon the cup is being bought and sold between the three of you for around million dollars at each transaction.
The cup comes around to you, and you've bought it for a little over a million bucks. You go to your friend expecting to sell for a little more, but she says no, she's content now with a million bucks, she doesn't need to see how much higher it'll go. You try the other friend. Same deal. Now they both have a million each, and you have a cup.
Crypto Ponzi Bubble Chairs
That's all cryptocurrencies are if they are nothing more than a thing people pass around for "real money." It's worse than a coffee cup, because at least the coffee cup can hold the coffee you're drinking while you reflect on how you lost a million dollars. Even company stocks, which I think are very close to being ethereal and meaningless, at least in a remote theoretical level give you partial ownership of an entity, the company, that you could maybe do something with if the stock crashed all around you and you were the last person holding shares. A cryptocurrency is absolutely nothing if it has no tradable value. If everyone around you decides they've reached the time when they're content to have the "real money" value, and you're the last one holding any coins, then you've lost everything.
Which makes it kind of a Ponzi scheme. Not technically, but, kind of. A real Ponzi scheme is more structured like a pyramid, where all the investment travels in one direction towards the the initial scammer and some scammers along the way get a cut. And actually, there are some cryptocurrencies which are straight up scams like that. But, keeping the discussion to cryptocurrencies that at least aspire to be legit and are just subject to market forces, they can still end up with everyone getting "rekt", as the kids say. Cryptocurrency prices can be like musical chairs, where the money goes round and round and if too many people start cashing out, there isn't enough space left for everyone to sit down.
From a purely cold, hard, economically rational sense, that doesn't mean you shouldn't buy it on those terms. It just means you have to get out before the music stops. There are plenty of reputable investors who do just that. They don't care why a thing goes up in value so long as it does, even if it's just the mania of uninformed investors. All the mercenary investors care about is getting out at the peak just before a "market correction" kicks in and everyone else is reduced to holding a coffee cup.
Now, here's you entering that game, and you are at a serious disadvantage. A lot of the investors who knowingly ride the surface of the expanding bubble have systems in place that will algorithmically make trades within fractions of a second under specific conditions, and you can't compete with that. You can barely compete with the casual day traders who put in office hours with their fingers over mouse buttons waiting to make the right exchange at the right moment. When the bubble pops, people like you and me are bound to be at our jobs or out with friends, living our lives doing whatever. Even if you have some kind of notification on your phone, odds are that by the time you know the bubble burst, within the time frame where you can do anything about it, the value is screaming downward so fast the only question is how much you'll lose.
What's the point of all this?
Cryptocurrency was not invented in the first place to be a vehicle for people to create crazy musical Ponzi chairs to scam people with dreams of getting rich. That's what a lot of them have become, but that doesn't change the fact that the original motivations were good and can still become something meaningful in the world.
The original intent, going back to the first cryptocurrency, Bitcoin, was to make a new form of currency. It says right there at the top of the original white paper proposal for making this new technology. A peer to peer electronic cash system, built to ensure the security of transactions between any two people. Basically, the idea was so that you and I could exchange money over the internet or even in person without having any bank or anyone in between us.
What's the point of recreating money? We already have money, and these days with debit cards and smart phones and the internet and everything, it's pretty smooth and convenient. Whenever I catch a train in Tokyo, I just touch my phone down on the ticket gate and it beeps to accept my payment, and it all happens so smoothly that I barely even break my stride. Seems money is working pretty good. Isn't cryptocurrency reinventing the wheel?
The point is to liberate money from middlemen the way the internet liberated communication. When I came to Japan twenty years ago, it cost a ridiculous amount of money for me to phone my mom in Vancouver. If you weren't careful about using the exact right service plan or whatever, it could literally cost hundreds of bucks for a twenty minute call. People used to have land lines that charged tiny amounts for all local calls, which could really add up depending on how much you were on the phone. Now, nobody thinks too much about how much it costs to make a call unless they're away from WiFi and are forced to suffer the service rates of their particular robber baron mobile phone operator. Texting didn't exist, and mail cost you the stamps you bought.
Now, talking, texting, emailing, blogging, video and whatever other ways you want to communicate can all be done for free or so close to free that you don't really think of it as something that costs money. Currency, the ability to exchange money for goods and services, should be the equally open and cheap to do, but it isn't.
If you've ever sent money overseas, you know that you get absolutely gouged by the banking system for fees and exchange rates. But you don't have to be an international jet setter to be constantly paying for the use of money. While cold hard cash is free to use... well, except if you take it out of an ATM, you might have to pay for that. Anyway, if you ever use a debit card or credit card, each transaction at some level or another has a service fee attached. It's usually invisible to the consumer, because the stores factor it into the price. But, as a restaurant owner recently told me, he has to pay about 3.5% to the credit card companies to be able to accept them. Similar fees for debit or bank cards. If you, like many people these days, pay electronically in some way or the other, that essentially a three percent tax on everything you buy. Over the course of a year, with all the transactions you do, it's a healthy chunk of money that's going to the banks. Your money.
If I could buy a lunch with a cryptocurrency, that transaction fee is all but gone. There is a small fee that goes to "miners," who are the people who run the computers that calculate all the transactions, but, it's literally around maybe one yen, or a fraction of a yen. Or of a penny, or whatever your smallest unit of value is. Transaction fees aren't correlated with price, and different cryptocurrencies have different methods of calculating them, but in general you don't need to worry about fees too much because they're so small that it's not worth thinking about. I use Bitcoin Cash, my preferred cryptocurrency, to actually buy stuff with, and of all the transactions I've made, I've yet to see any fee of more than one yen, regardless of the size of my purchase. Maybe there has been and I haven't noticed, but, even if it were, no matter how you cut it, it costs way, way, waaaaaaaaaaay less than what the banks and credit card companies are doing.
Just like the internet didn't completely eradicate the telephone industry, cryptocurrencies won't completely eradicate banks and credit cards. But, the essential concept of free voice calls and text messaging over the internet forced a lot of companies to change their business models from monopolistic practices, and the world is a better and cheaper place with more options and competing services. Cryptocurrency could do that for money, making everything you do a little bit cheaper, and create more different services that people could win with.
One aspect of the kind of new world we could live in with cryptocurrencies has to do with micropayments. Right now, because of bank fees, it's impractical to spend less than a dollar on anything online. Different services exist to try and get around that, but they generally involve you buying into a system for a larger sum of money, like say ten dollars, and then portioning that money out in small increments to people you support, who have to be on the same system. However, with something like Bitcoin Cash, there's no buy in, you can send increments as small as mere pennies, and everyone can access it with no one have to agree to any particular company's network or anything. That means that, say, a blogger like me could potentially get a five cent tip if someone liked something I wrote, and the aggregate could potentially be meaningful revenue for me. Micropayments by themselves could potentially revolutionize both online business, but also charities, and commerce in developing nations.
Some people take it a little further. What if banks had less hold over the world's economy? Might we see less problems like the financial crisis of 2008? What if money was not controlled by government, or at least, what if government did not have a monopoly on the use of money? Some people have both grandiose utopian visions if money were truly free and by and for the people. Other people think there's the potential for some real problems, and I think both sides tend to be overblown. The internet itself made communication more cheap and open, and that changed a lot of things, for both good and bad, but I think in the balance, I'm happier with the communication options I have now.
That's what cryptocurrency is really about. It's a technology that could drastically improve our lives by making it easier and cheaper for everyone to pay for goods and services with less middlemen and more liquidity. There's also the blockchain technology underneath it all which has it's own benefits to offer the world, and various cryptocurrencies, like Ethereum, have more to do with how blockchains can do interesting things than making a new form of money, but, without explaining everything about everything, hopefully you can see that cryptocurrency is a good thing.
Dreams of making the world better are nice, but I want money
Fortunately, everyone can win in this game, even the greedy. If we separate out all the scam cryptocurrencies that exist just to ride the hype wave and generate unjustified investment, the remaining good cryptocurrencies are perfectly reasonable investments. You're not going to put in ten dollars today and cash out and buy a million dollar home next month. But, overall, there is reason to believe your investment could go up, in two ways.
What makes a "good" cryptocurrency? One that actually does stuff. As in, it's value isn't just in being valuable, it's value is in trying to actually create some change in the world.
For example, my personal favourite cryptocurrency is Bitcoin Cash. It's a branch of Bitcoin that tries to preserve the original intent of Bitcoin by trying to be a currency. An actual currency that people can use for buying sandwiches or whatever. I've bought drinks, food, a bicycle, a soccer game, and some other stuff with it. If you go look into Bitcoin Cash communities, they are incredibly vibrant, with people talking about things like merchant adoption and commerce opportunities. Bitcoin Cash has the developers, the miners, the supporters, and the whole ecosystem necessary to make a legitimate bid to become a recognized currency alongside other everyday currencies. If that happens, even if it's value didn't go up, we could all be saving 3% on all our purchases by dealing less with banking institutions. Which, to me, is already a good thing.
However, the more Bitcoin Cash grows, the more utility it has, the more it will take up a portion of the global currency market, which is unimaginably huge. If that happens, even if it takes a very minor portion of that massive currency market, then it's potential value relative to other currencies could be quite massive. So it's a win-win in that it's an actually useful invention with real world potential, and the value it carries could go up. So, one of the two ways your investment could possibly pay off is that either it increases value such that if you trade it back for regular "fiat" currency, yen or dollars or whatever, there's a good chance it's more than you put in. Over a long time, of course. Right now nobody is making big bucks with cryptocurrency. But, the second possible payoff is that Bitcoin Cash becomes enough of a currency itself that you don't trade it for other government backed currencies, but instead buy stuff directly with it. If Bitcoin Cash reaches that point, it's purchasing power will be significantly higher than it is now, so you'll be in a really good position having got in early.
Or not. It could get totally Myspaced by some other currency that captures the whims of the people and finds its way into the mainstream. I personally think Bitcoin Cash has the best fundamentals for attaining adoption, but good fundamentals aren't a guarantee of success. The world is a random place.
Another example of a good, solid cryptocurrency is Ethereum. Ethereum is a little different in that it doesn't necessarily aspire to be an everyday currency. It has many currencies built on top of it, in ways that frankly confuse me a little. But anyway, Ethereum seems to be gunning for a market where it can be used for "smart contracts", which is basically using the security of blockchain technology to underpin agreements between people and businesses. Things get a little more technical when talking about Ethereum, so I won't go into it here. You can research it more if you want. But, when you talk about Ethereum, you can point to a particular purpose it serves, which is more than can be said about just about all other cryptocurrencies.
After those two... it gets real shady, real fast. What about the old Bitcoin, not Bitcoin Cash, but the one that had it's price close to 20,000 US$ at the end of 2017? Personally, I'm just not interested in it. The people developing it aspire for it to be a "store of value," which is something that banks and other services would use, and people like you and me would access it through second layer services. For fees, of course. To me it's going the wrong direction of creating more layers of complexity and creating business opportunities for banks and institutions. In the meantime, the transaction times and cost of using Bitcoin have made it practically unusable.
The next level of cryptocurrencies are ones like Stellar Lumens, or Cardano, which have good development teams, and I believe they have good intentions of creating innovative approaches to advancing blockchain technology and cryptocurrencies. But, I'm less clear on what their exact application is. I'm not saying they don't have them, I just don't know what they are.
There's Ripple and Litecoin which I don't touch and don't recommend for various reasons, but I don't want to get into a whole field guide for every cryptocurrency out there.
As you go beyond the top ten or twelve cryptocurrencies, you have a world of pipe dreams and outright scams. Some are even deliberate jokes, like Dogecoin, or PonziCoin. Yes, PonziCoin, which is actually a very clever self-described Ponzi scheme driven by very consistent algorithms.
If you tell me you want to "get into crypto," I will first tell you what everyone tells you, which is that you should only invest what you can afford to lose, because no one knows what will happen. No one. Not me, not anybody.
But if you insist, I'll happily say, get some Bitcoin Cash, but don't just do nothing with it, try spending it like a real currency. Even if you just exchange it between friends, play around with it. You can buy it in tiny amounts, so pretty much whatever your budget is, you can get in on it. Some people will say you shouldn't spend any because it's value goes up all the time, so it makes sense to just hold it. But, if you just hold it, then it falls into the having no value because it only has value problem. I personally recommend spending small amount that you could easily top up again. The more you use it, the more everyone uses it, the more value it will have for you and everyone else.
If you want to branch out, Ethereum is my second choice. After that, you're on your own. I'm not saying don't get involved with other cryptos, I'm just saying that I'm not recommending anything specific.
And, of course, if you do get into Bitcoin Cash and want to experience a world in which creative people get compensated through micropayments, feel free to explore that possibility by sending me some. You could send ten cents, maybe even less, like a sort of "upvote" on what you've read, to see just how micro a micropayment can be.