‘Hi Ryan, long time no see! Hope you are well. How’s the wife and little one? Anyway, if you’ve got a minute, I just wanted to pick your brain on cryptocurrencies…’
I’ve been getting text messages like the one above almost every day over the past few months.
Long-lost friends contacting me out of the blue. A bit of a chat, and then a ‘just quickly…’ segue into some cryptocurrency advice.
I don’t mind it, though.
After the phenomenal rise in the bitcoin price, it’s no wonder people are getting very interested about investing in cryptocurrencies. At time of writing, bitcoin is sitting at a record high of US$4,200.
But the tables have certainly turned.
For a long time, it was I who was chewing the ears off my friends, talking about bitcoin at any social event. Beer and revolutionary currencies made for a good talking point.
But no one else was that interested two or three years ago. Glazed looks and stifled yawns were the most common responses.
So this role reversal is very interesting to me.
If this was a small-cap stock or general share market enthusiasm, I would have my suspicions we were near a market top.
It’s a sad fact of investing life that the general public become most interested and excited in an investment idea at its peak.
Joe Kennedy, father of former US president John F Kennedy, famously sold all his investments in 1929 when he overheard shoe shiners discussing the markets. That was just before the famous market crash that led to the Great Depression in the US.
But this time, with cryptocurrencies, I think it’s different.
That’s a very dangerous thing to say in the investing world. Probably the most dangerous phrase there is.
But I’ll explain why it might be true this time…
People are just kicking tyres
For all the hype out there, I know very few people who have actually bought any cryptocurrency.
Try the experiment yourself. See if you can find three people in your social circle who have bought any form of cryptocurrency. Two? One even?
People are interested, but not invested. That’s my experience, anyway.
Even the people I help better understand cryptocurrencies very rarely actually go on to buy any.
First, I tell them it’s an unregulated market where they could lose their entire stake. That can put a handbrake on their interest.
But then I explain it’s like a 50/50 bet that could potentially make 1,000% or even 10,000% returns in five to 10 years if it fulfils its promise. Or a 100% loss if it doesn’t.
Most people’s interest perks up again after this!
The real problem for people seems to be the ‘how-to’ when it comes to buying cryptocurrencies: understanding private keys, wallets, public addresses, navigating through types of storage and getting your head around a whole host of new terminology that comes with a cryptocurrency investment.
The second problem is that there are so many cryptocurrencies (over 900 at last count). How do you choose between the good and bad ones?
It all becomes too hard.
The moment passes, and the interest wanes…
But this could be a very costly mistake.
In fact, buyers today could be the ones to benefit from the very thing that is stopping wide-scale buying.
Because, when it does become easier to get around these two problems, we could be ready to enter the third stage of the cryptocurrency boom…
A ‘euphoria stage’ boom coming?
Economist Hyman Minsky identified five stages of a credit bubble that can be applied to any sort of asset boom.
The Displacement stage is when investors start to get interested in a new innovation. For cryptocurrencies, this stage would be the first big price rises in late 2013.
The Boom stage is where we are at now. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.
The third stage, the Euphoria stage, is where I think we’re going next. During this phase, caution is thrown to the wind and asset prices skyrocket. We might have reached this stage by now if not for the fact that most people find it hard to buy cryptocurrencies.
But that is set to change. There are numerous plans to make it easier for investors to buy into the crypto asset class without the technical hassles you currently have to endure. At last count, there were 20 funds and ETF products looking to launch later this year.
When the big banks start offering cryptocurrencies in their portfolios, you can be sure we are in the fourth or fifth stage.
Those are the final stages of a boom, resulting in Profit Taking and then Panic as the euphoria dies down and the boom turns to bust.
That’s how I see it playing out.
Bear in mind, though, crypto investing is a high-risk affair. You do not want to have a significant portion of your portfolio in cryptos. There is no guarantee we will reach the euphoria stage, or even that we’re not already in this stage!
But, if I am right about this, a little bit of effort now might pay off big time in the near future. The potential rewards on offer are unlike anything we’ve ever seen. You’ll find everything you need to know about getting started in the exciting world of cryptocurrencies here.
For Markets & Money