Crypto Currency Investing Basics - Beware a rising tide

There is a famous saying in mainstream investment markets;

A rising tide lifts all boats

This term was originally coined to refer to the idea that improving economic conditions will generally benefit everyone. In an investment context this quotation refers to the fact that in a rising market, most stocks will rise, regardless of the quality of the underlying company. It is the actual uptrend in the market, not a rise in the value of the underlying company, that results in the increase in the share price. So when share markets boom, most companies will do well. A flow on effect from this is that many investors are lulled into a false sense of security by how well their investments perform. They see their investment portfolio continually rising in value and they fall into one of two thought traps:

• They believe that the market will always go up and that they cannot lose; or

• They attribute the success of their investments to their own skill, rather than to the fact they could have randomly selected any investments and done just as well.

While I don’t agree with the comparison that many Bitcoin critics make between the rise of bitcoin and the tulip mania of the 16th century, I do think that there are many parallels that can be drawn between the current rise in Bitcoin and some of the significant bull markets in the share market of the past. I think the most relevant analogy is that of the dot.com bubble of the late 1990’s.

The dot.com bubble was a significant bubble in the share market related to rapid rises in the share price of internet related companies. It coincided with the first wide scale adoption of the internet and the start of the information age. It was in essence, an investment boom spurred by the introduction of a revolutionary new technology (Does this sound familiar?). An enormous number of new companies were formed in an attempt to leverage this new technology, in hundreds of interesting and creative ways. Many of these new “e-businesses” listed on the stock exchange between 1995 and 2001 and recorded enormous share price increases. As most people know however, the boom ended in tears with the NASDAQ stock index peaking on March 10, 2000, and subsequently falling 78% over the following 30 months. The market took well over a decade to recover. A couple of observations can be made from this:

• Between 1995 - 2000 almost any company associated with the internet rose in value. There was very little skill needed to pick a winner, you simply had to invest and watch your money grow – until the market crashed and many people lost almost everything.

• By 2004, 52% of listed technology companies that had participated in the dot.com boom had gone out of business (Wikipedia)

So what relevance does the above story have to cryptocurrency investing? If you accept that the comparison is valid, as both the dot.com boom and the current bitcoin boom resulted from the introduction of revolutionary new technology and the enthusiasm that flowed from the community getting behind this exiting new thing, then some educated predictions can be made.

• A significant number, if not the majority, of currencies currently listed on crypto markets will not exist 5-10 years from now.

• The vast majority of people making money in crypto are making it based more on good luck than from any investing skill. They won’t admit it, and many wont even realise it, but it’s true all the same. The same applies to most crypto currency analysts!

• If you are a genuine believer in block chain and want to be a long-term investor, then careful selection of your individual investments is crucial. Privacy coins represent a good example of this. People will always value anonymity, so privacy coins will always have a place, but do we really need Monero, Zcash, Dash, Verge, PIVX and all the others. I doubt that we do, so in the longer term, one or two of these coins will survive and the rest will be relegated to history. You want to make sure that you own the winner.

Hopefully you’ve been able to draw a few conclusions from the above discussion. The first is that investor psychology is a bitch. Entire sections of economics departments at major universities are dedicated to studying it. If you are going to invest in crypto, make sure you stay grounded and are aware of how much of your success is attributable to your skill and how much is attributable to a gift from the market.

Another is related is related to another saying famous in investing circles

You only make a profit when you sell.

HODL is a great strategy if you’re a true believer in a particular coin, but to paraphrase Matthew McConaughey from the movie “The Wolf of Wall Street,” getting shit rich on paper is only good if at some point you turn those paper profits into real money.

Finally if you are going to HODL, then make sure you do your homework and understand what you are invested in. In the words of the worlds greatest investor and one of its richest men

A rising tide lifts all boats, but when the tide goes out you get to see who's been swimming naked.

Warren Buffett

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