Why Shouldn’t I Buy Cryptocurrency? And, Anyway, What is it?

Decades ago, while serving as an infantry reconnaissance platoon leader, I learned a key lesson: it’s every bit as important to reconnoiter an enemy as fight him directly. If done well, no soldiers may die…on either side of the battle line.

However, when serving as a line infantry platoon leader, the mission was to mass our troops, concentrate our firepower, and bring devastating force down on the enemy. Much more brutal…many more casualties.

Many times, with our lives and livelihoods, we are “at war” with ourselves and others. It’s never fun. It’s brutal. It may result in permanent damage, emotionally, physically and economically, both for ourselves and others. We’ve all been there at some point in our lives, even as toddlers, teenagers, twenty somethings. The repercussions to ourselves and others increase as we age, and impact many more of those around us.

Battles can begin on all fronts in our lives. Money is a case in point.

We’ve been at war fighting a virus pandemic. Money has been both a major weapon for both attacking Covid-19 (conducting vaccine research and manufacturing PPE and ventilators) and a source of stress as many of us have had to struggle to retain jobs, lifestyles, relationships, and everything we’ve previously thought normal.

During times of war, battles often are won or lost quickly. Airlines, hotels, restaurants, and the energy industry can attest to such immediate losses right after the pandemic began. Early on in our battle against Covid-19, our “money” – as measured by the value of stocks – went down so swiftly, and recovered so quickly, that you would have missed the bear market if you’d skipped checking your investment account statement during that time period.

Our government distributed so much stimulus in so many areas that many people became flush with cash looking for a place to go. In a single month, the U.S. savings rate skyrocketed to over 25% of income from about 7% pre-pandemic. Consumer debt began to be paid down at an ever increasing pace. Sadly, of course, several sectors and many Americans still got hit very hard and are just now starting to recover.

By late last fall, with the announcement of the first Covid vaccine delivery, the world’s population exhaled a collective sigh of relief.

We saw the light at the end of the Covid tunnel.

Curiously, though, a shift began in the collective psyche of mainstream investors. They began to consider, due to the increase in their cash savings on the sideline, purchasing speculative-type investments.

In January this year, the GameStop/Robinhood attack on mainstream hedge fund investment managers looked eerily familiar – robbing from the “rich” and giving to the “poor.” Individual investors had stimulus-check cash that equipped them with “play money.” So, the little guy and gal slayed the money Goliath, massing in numbers during this brief stint of time trying to meme their own personal fortunes out of thin air.

In the past, such speculative outliers were relatively few in number, fighting their limited skirmishes with high-flyer, high-risk gambles that set up these winner-take-all scenarios.

The troubling part of this story is the marked increase of such speculative types of investments that seemingly have gone mainstream since the GameStop rescue-and-reward saga.

What started this more speculative trend in investing?

First, let’s take a look at one of the fundamental truths about Americans. We believe in freedom: the freedom to allow an entrepreneur access to capital markets to bring a new product or service to the marketplace. We instinctively look for leadership from our business leaders, not government, to find these new expanded capabilities that make our lives measurably better.

Steve Jobs held that “leadership” position, much like Henry Ford did a century earlier. Recall Jobs’ successes? His phenomenally profitable introduction of the iPhone and other “i” devices that were spawned from this breakthrough technology.

Sure, there are entrepreneurs such as Bill Gates, Jeff Bezos and Mark Zuckerberg, to name a few of the dozen or more corporate icons. But no one captured our attention as much as Steve Jobs.

His 1984 Super Bowl commercial referencing George Orwell’s 1984 novel and introducing the Apple Macintosh personal computer captured and compelled our attention. It catapulted Steve Jobs high above the mainstream, even if one didn’t fully understand what a computer or microchip could do in those early days of personal computing.

His resurgence at Apple in 1997 reminded us how much of a maverick he was and how in touch he was with what we wanted most from technology: smart devices.

Upon his death in 2011, we looked around for the next epic corporate leader. Enter Elon Musk.

While many of the same powerful and influential corporate leaders of Jobs’ era are still in place and active, Elon Musk has that certain mega something that captivates our attention.

Make no mistake about it. Musk, the late Jobs and many others may be inspired outliers in their technology realms as well as displaying flawed personal traits – their feats in one area sometimes overshadowed by their antics, idiosyncrasies, and eccentric lifestyles.

Elon Musk has started a new space race.

He started the electrification of transportation.

In February when, for Tesla, he bought $1.5 billion worth of bitcoin, the most well-known cryptocurrency, many took notice.

Most recently, SpaceX said it plans to launch a dogecoinfunded satellite to the Moon in 2022.

Naturally we pay close attention to these major shifts in our collective movement toward new technologies.

Besides, there’s the entertainment factor. The Tesla CEO now wants to be called the “Technoking of Tesla.” And as SpaceX CEO, given his recent high-profile support of the dogecoin cryptocurrency, he now refers to himself as the “Dogefather.” This April, when praising SpaceX’s reusable rockets, he proclaimed himself in his Twitter biography as “Emperor of Mars.”

Let’s get back to the earlier topic of peaceful reconnaissance versus brutal warfare

“Rational free spirits are the light brigade who go on ahead and reconnoiter the ground which the heavy brigade of the orthodox will eventually occupy.” — Georg Christoph Lichtenberg

When we reconnoiter a new investment, it is either friend or foe. We are looking to not get hurt—not lose money.

When we commit to battle – going in big to deploy the newest speculative investment, cryptocurrency – eventually someone may get hurt and lose money unnecessarily.

As the famous fifth century BC Chinese General Sun Tzu wrote in The Art of War, “Every battle is won or lost before it is ever fought.”

Certainly this is true when purchasing Real Estate, Private Equity and other selective illiquid-type investments. Money is made or lost the moment the purchase occurs.

We just don’t know the outcome until sometime in the future.

The die is cast. The stage is set. The damage is done.

Elon’s signals to his cryptocurrency followers are closely monitored. Some feel that “whatever Elon is doing I’m doing. I’m in 100%.”

There isn’t a week that goes by that we don’t hear or read another story of a newly minted millionaire who bought a cryptocurrency early on for a small investment, usually bitcoin.

Elon and others keep signaling it’s perfectly okay to exchange one’s real cash for a digital-transacted cryptocurrency and start playing in this unproven, highly volatile, poorly understood, virtual banking netherworld of blockchain technology.

Normally, corporate leaders and others do not have that much transactional impact on markets and money invested in the markets. The big difference this time is the across the-board $1,200 stimulus checks issued in April 2020, followed by an $800 check in January this year and an additional $1,400 in March. Also, it has been easier to

accumulate cash, with the pandemic limits placed on travel and entertainment.

This money is looking for a place to go.

If you happen to be in the category of a marginal saver (versus a marginal spender), then what to do with your newfound cash? Checking/savings accounts are close to 0% interest. Short-term bonds aren’t much better. Most people have turned to the equity markets…and suddenly everyone is abuzz about cryptocurrency!

“How do I get in on the action? Everyone but me seems to be making money on bitcoin!” Anxious people are experiencing FOMO (fear of missing out) anxiety!

Back to my days as a reconnaissance officer: “Recon. Wait. Recon. Step. Recon. Sit. Recon. Think.” Back to my business mentor Ed Coyle, who repeated to me many times early in my career: “Gary, slow down to speed up. Period.”

Jumping headlong into battle, investing a big wad of cash in cryptocurrency or any other speculative investment may work, but it may also end badly. Consistently outfoxing the foe, Big Money, seems a fast, furious and frequently fickle war to fight.

Viewing the broad field of money and money choices from numerous vantage points – with the intent of investing for a long-term profitable result – represents sound, deliberative business.

We’re seeing cryptocurrency now go mainstream much the same way as the dot com and no-money-down real estate deals of the late 1990s and early 2000s. There’s simply no way to predict with any certainty what will or will not happen with any cryptocurrency. That is something we’ll discover when reading future account statements.

This missive is not just about bitcoin or dogecoin. It’s about people’s freedom and desire to pursue the latest in a long line of potentially exciting investment ideas. And it’s a timely reminder that not all new ideas succeed. Here I’m channeling flying military tanks, radioactive health products, the Ford Edsel, spray-on hair, and the no-fat food additive Olestra that caused sudden and severe diarrhea. Oh yes, and 17th century Holland’s speculative “tulipmania bubble” that suddenly burst.

The 19th-century start-ups that bankrupted author Mark Twain included a typesetting machine, engraving process, magnetic telegraph, steam pulley, protein powder, watches and railroad stocks. By 1891 he had lost so much that he moved his family out of their Hartford home. His later maxim: “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

The observation to be made here concerns how we think about and ultimately invest in new ideas, new technologies, and new investment vehicles.

With new investments in leading-edge concepts, there is a sound general approach. Just like on the battlefield – where a military leader first sends out reconnaissance units to test, measure, analyze and collect information – so wise, prudent investing first requires careful, thoughtful analysis.

True, the information may initially be sketchy – much like the parable of the blind men who come upon an elephant and struggle to describe what they have just encountered.

But let’s fast forward to that moment, after vigilant and attentive vetting, when we decide to engage with our new investment. We take a piece. We watch it and the marketplace. We add more once there is more clarity about the new investment type. Yes, we all are keen to get in on the ground floor of an exciting new investment category such as blockchain technology.

Yet, do you remember when AOL, Yahoo and Netscape had the market early on in the 1990s for email, search and search engines, only to be unseated by Google and Amazon?

Leading-edge concepts can be a difficult dance to decide who will be the long-term viable contenders on the new technology dance floor or if there will be any survivors for that matter.

There’s a lot of cash chasing new ideas that are not necessarily sound ideas, although some of them may prove legitimate over the long term. SPAC (Special Purpose Acquisition Companies) anyone?

Slowing down by reconnoitering the field of players, then speeding up with a solid long-term strategy, generally is the optimal investment approach to creating long-term wealth.

Recall from our childhood the 800-year-old story about the Pied Piper of Hamelin who promised to lure the town’s rats into the river with his trusty magical flute? After supposedly doing so, the mayor cheated on his payment, so he lured the town’s 130 children into a forest cave. One story version has the villagers having to pay huge sums of money to retrieve their little munchkins.

Interestingly, in early May Elon Musk tweeted, “Cryptocurrency is a good idea on many levels, and we believe it has a promising future, but this cannot come at great cost of the environment.” This tweet resulted in bitcoin initially selling off around 12% of its value, and dogecoin shedding nearly 20%.

For prospective investors in shiny new objects and a bright future, it’s absolutely vital that everyone realizes the mercurial nature of today’s evolving technologies and the ever-changing interpretations, switched signals and swift surprises that will inevitably result:

A pessimist sees only the tunnel.

An optimist sees a light at the end of the tunnel.

A realist thinks the light is probably inside the tunnel.

The bullet train driver briefly sees three people standing in the middle of the track.

Gary

 


 

All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness.   This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client.  The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment.  Those seeking information regarding their particular investment needs should contact a financial professional.  Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  The opinions expressed were current as of the date of posting but are subject to change without notice due to market, political, or economic conditions. All investments involve risk, including loss of principal.  Past performance is not a guarantee of future results.

Copyright © 2021 Coyle Financial Counsel.  All rights reserved.

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