April 2021 Newsletter

Bitcoin, Cryptocurrencies & Blockchains

Dear Clients and Friends,

I am getting more and more questions about Bitcoin and other cryptocurrencies.

Bitcoin and cryptocurrencies remind me of scams that are on the internet. There is a scam for everyone on the internet, i.e. a scam configured that it confirms your opinions and seemingly gives you a solution to your needs, regardless of how trusting, suspicious, intelligent, streetsmart, gullible etc. we are.

If you have a need, however hidden, there is very likely a scam on the internet that will be very convincing. There are even scams for sophisticated, smart and aware people.

A scam has the downside that you will almost certainly lose your money except for the few cases where you can get in early enough that you make a profit and get out before it falls over.

Bitcoin and cryptocurrencies are not inherently a scam, they have a number of uses and some of them can be legitimate.

However, they don’t have an intrinsic value at all. At heart they are a string of numbers and a set of rules, nothing more. Their main use case is to make anonymous purchases or sales or to hide money from government agencies. The latter can be helpful in an oppressive regime but it can also be helpful in large scale money laundering.

Since Bitcoin had an amazing run from a few dollars per Bitcoin to more than $60,000 per Bitcoin a lot of people are wondering whether to invest into Bitcoin or any of the many other cryptocurrencies that are now available.

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Most of these cryptocurrencies are very volatile. If you get your timing right, you can make a fortune. If you get it wrong, you will lose a fortune.

These markets are largely unregulated. This means that it is a Wild West of investing with all sorts of strategies like pump and dump, collusion, large investors manipulating the market etc happening continuously. For example ‘pump and dump’ is a strategy where the instigator buys a large stake and then induces a lot of other people through Twitter or cold calls or mailing lists or advertising or strategically placed news articles or many other means to buy the same cryptocurrency which then soars in value. This can attract a lot more investors until there are no new investors, therefore no new demand and the cryptocurrency starts falling. With no underlying value the cryptocurrency can then easily go to zero or near zero. The instigator of the pump and dump in the meantime sold their stake and did very well. So did early investors who got out in time. The large majority loses.

To be very clear here – it is quite possible to make enormous profits through cryptocurrencies and one can improve one’s odds of doing well through research, but the overall odds are against investors who don’t have special knowledge or relationships.

One example is the runup of Bitcoin from $10,000 to $60,000 in recent times. A lot of people did really well if they realised their gains and they may make even more money. However, much of this runup seems to have been achieved through market manipulation. Here is an article that explains in quite technical detail that much of the runup in Bitcoin has been achieved through fraudulent misrepresentation of another cryptocurrency called Tether. I find it quite unbelievable that this article has not gone mainstream, its facts can easily be verified. The people who control Tether even had the New York regulator fine them but that still hasn’t been enough to touch this bubble, even though this fine was widely reported in the media. But to give a perspective here – Tether has probably earned its creators more than a billion dollars. In that context, the $18.5 million dollar fine is a speeding ticket.

There are now more and more cryptocurrencies, from the earnest to the wild, from the serious to the out and out but very successful joke.

If you choose to invest in cryptocurrencies and you choose to invest more than you can lose without worrying about the loss, the question may be why you would want to do that? You are buying something without an intrinsic value and whose price purely depends on what other people will pay. We can make similar arguments about gold (trading far above its intrinsic value as an industrial metal), or art, though these are much more established markets and have a long history.

Cryptocurrencies are based on what are called blockchains. That means, that transactions are authorised through a complicated process with no single authority in charge plus the possibility of being able to make anonymous transactions. Block chains were widely promoted as a great way to have worldwide payment systems or many other applications, but it has turned out that a so-called distributed database can do most of these functions much better and much more cheaply than using block chains. I find it interesting that, just when this understanding became more common among potential users of blockchains and therefore blockchains going a bit out of fashion, cryptocurrencies are taking off in a big way.

The bigger cryptocurrencies get, the more people there will be who can credibly say they have done well or very well (though many will not sell before a crash, if there is a crash in the future) and the stronger the impulse will be not to miss out. Personally I don’t invest in them as I consider them expensive, regardless of their price. It means I miss out on a lot of profits and losses but it also means I am not on a continuous roller coaster of emotions.

I trust this newsletter will shed some light on cryptocurrencies and as always feel free to contact me with any questions.
 
Warm Regards
Christoph

Christoph Schnelle
Financial Adviser and Life & Disability Insurance Specialist
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