Should you invest in cryptocurrencies right now?

In a word. NO.

Before I continue, I’m going to assume that you are already aware of what cryptos (cryptocurrencies) are. As such, I’m going to try and focus on how I think about cryptos and look at them as an investment.

First, let’s figure out what helps to determine a good investment. A quick Google search yields very similar results across many different sites. Overall, the two most common listed factors are 1) Opportunity for Growth and, 2) Market/Industry Conditions:

Do Cryptos satisfy the “opportunity for growth” requirement for investment? 

They most certainly do. According to the 2018 World Payments Report, there is an estimated 671.7 billion worldwide non-cash transactions to occur in 2019. This number is expected to grow at a rate of 12% annually. There is an opportunity for cryptos to become a large(r) part of those transactions.

What does the market/industry of cryptos look like?

As of September 27, 2019, according to coinmarketcap.com, there exists 2395 unique cryptocurrencies with a total market cap of $217.28 billion. This sounds like a lot of money – and it is – but $217 billion is approximately the same market cap as Boeing or Wells Fargo. For reference, as of June 18, 2019, the S&P 500 had a market cap of 25.6 trillion. 

So, although $217 billion sounds like a lot of money, it is spread over the 2395 unique coins that make up the entire cryptocurrency universe.

As well, as of September 27, 2019, according to deadcoins.com, the cryptocurrency universe has 1779 coins that have ceased to exist. Of this include 994 coins that have died for a myriad of legitimate reasons, 28 coins that have been identified as wallet stealing malware, 664 coins that were created with the soul purpose of defrauding investors, and 93 dead parody cryptos made for the lols

Including these dead coins, there are a total of 4174 coins. 4174! 

So, how does one value crypto’s share of 671 billion transactions? Cryptos are still very nascent. Their use (and therefore their value) still haven’t been fully determined. Still, this hasn’t prevented folks from speculating (wildly, might I add) about the future value of cryptos. In fact, it was likely because of the last three years of speculation (read: noise) surrounding cryptos, and the stories of early adopters whose holdings “mooned” which allowed these folks to buy “lambos” with their gains that got you here asking, “should I invest in cryptos right now?”.

The worst part, nay, the most counter-intuitive part about making sense of the valuing of cryptos is that their value is also tied to their use. Yet, there remains a large group of people who hold cryptos (called hodlers) and refuse to use their cryptos with any regularity due to the fact that the value of cryptos is extremely volatile and the potential loss of capital in cryptos is significant. Instead, they prefer to sit on their coins like dragons in hopes for their value to appreciate… which they won’t unless used regularly. This situation is called the “cryptocurrency paradox”, and as an investor, it sounds like a tough position to find yourself in.

We also know that the crypto market is VERY concentrated (or saturated, depending on how you classify cryptos) market. Yes, we know that not all cryptos were created for the same purpose/created equally, and yes, I am lumping them together as though they are (#notallcryptos). Cryptos have been created for many different types of transactions, and for many different reasons, and it is not fair for me to equivalate them all, sure. But, quite frankly. I am not confident that I can guide someone – or even myself – to invest in the right crypto. 

Why do I say this? Well, at this time, I am not sure which crypto, or group of cryptos, will be universally adopted and become the most likely to survive, making it a “safe investment”. Sure, you could just tell me to “invest in the most popular ones right now”, but to me that is a lot less like investing, and a lot more like gambling: I did some quick math and to date, since inception, only 57% of cryptos have survived. 

By contrast, there are tens of thousands of public companies that one could also invest in. According to a published journal “The mortality of companies”, which followed more than 25,000 North American companies from 1950-2009, the approximate 10-year survival rate of public companies is 50%. That said, with the exception of Bitcoin (Bitcoin was created in 2009), nearly every crypto that has been created in the last five years, which makes the 5-year 57% survival rate of cryptos more pronounced. Over a similar 5-year period, the survival rate of public companies jumps to approximately 80%.

Am I telling you not to invest in cryptocurrencies based on survivability? God, no. I don’t think survivability should even factor into the top five reasons to invest. However, thinking about the survivability is interesting and important information that should be factored into investment decision making.

Some more quick math tells us that 17% of all cryptos created have been identified as full on scams. Personally, I am willing to bet that there are still a large number of coins, possibly hundreds, that still exist for the purpose of fraud. This is not to say that there are not companies that exist (or have existed) for the soul purpose of bilking investors. This happens to be sure. Otherwise we would not have people like Madoff or companies like Enron. 

According to a paper titled “How pervasive is corporate fraud”, between 1996 and 2004 only one in every three corporate frauds are detected. Which, according to the research, translates to 13% of public US companies engaging in fraud annually. 

So, am I telling you not to invest in cryptos because of the possibility of fraud? God, no. The fact that scams exist should not be surprising. And even though 17% is in fact greater that 13%, I don’t believe that in this case 17% is materially different from 13%.  But being aware that fraudsters exist is important information and should be factored into investment decision making.

Aside from the difficulties in valuing the growth of cryptos, or the problems within the crypto market, I would ultimately recommend that one DOES NOT invest in cryptos is because, like gold, cryptos are what is referred to as a “non-productive asset”. In the words of Warren Buffet, “non-productive assets will never produce anything but are purchased in the buyer’s hope that someone else will pay more for them in the future”. 

In practice, this statement holds true for cryptos: they provide no income to their owner other than the difference between the cost to buy it and the price someone else is willing to pay for it. Because they are more often than not used infrequently, they are prone to large market value swings, and it is this volatility that makes cryptos a terrible store of value as well.

In contrast, a simple company may sell a product and earn a profit. This money and can then be reinvested in the company itself, to grow in the future, and provide an actual real return to the investor. Therefore, the value of stocks is in part based on how that company is run/how profitable that company is and therefore can change based on that profitability or how productive that company is. In summary, the value of a commodity is based on perception (and speculation), and the value of equity in a company is based not only on perception (and speculation) of that company but also tied to the value of goods/services that company provides.

So, should you invest in cryptocurrencies right now? In a word, no.

There is undoubtedly a place for cryptos in our markets and the world at large. I absolutely believe in the blockchain as a future technology that will revolutionize how we conduct business. But if you find yourself asking whether you should invest in cryptos, you should first ask “why am I investing?”. Better yet “what do I hope to achieve by investing in cryptos?”.

If you are thinking of investing because you are caught up in the crypto fever that washed over the market and your FOMO is very real… sadly, you very probably missed your opportunity.

If your goal is to earn some income from your investments, you would be better off investing in T-Bills, the bond market, and/or the stock market. Investing in any one of these three areas, gives the opportunity to earn something from your investments, as well as serving as a much better store of value compared to cryptos. 

In my opinion there are many other more reliable and safer places to invest your money than in cryptos. Despite the stories that we’ve all heard about the “lambos” and the vast amount of money that has been made, I would urge you to remember the words of English poet Thomas Tusser: “a fool and his money are soon parted”.  

Don’t be fooled!