If you are a grizzled veteran of business, standing astride many important boardrooms littered with numerous ducks in a row and no indoor elephants in sight then you might not need a quick explanation of crypto asset investing.
Also, if you have spent a while meticulously studying the market so you can spot with assurance which factors will cause a spike and which will cause a drop, you probably know what you’re doing.
But if you want to know more and feel your current knowledge is hovering somewhere above the square root of zero then read on.
You’re here for a quick explanation of crypto asset investing. Let’s make it quick:
TL;DR
- Cryptocurrencies such as bitcoin make the news, but there’s a lot of different types of crypto assets not just cryptocurrencies
- Crypto assets are often not tied to a real asset, making them volatile, harder to predict and offering less protection when it goes wrong
- Crypto valuations are often shaped by sentiment and herd mentality so they’re less predictable, so the wins and losses can be big
Life in the fast lane, everything all the time
Many people tell me that I live my life on the edge. Often I will have not one but two pints of Generic European Mood Enhancer in the pub. Sometimes twice a week! I also I wager a £3 accumulator on three football matches every weekend.
I back my detailed and ultimately pointless knowledge of the beautiful game but the returns on my accumulator are pretty low, normally about £25 if it comes in. Vegas remains untroubled. I invest a maximum of £3 because, as much as I’m proud of my misspent hours watching twenty-two men chase a redundant spherical object, the bet doesn’t always come in. When this happens I’ll lose a maximum of £3 each week. As you can see, I live my life firmly in the fast lane.
The point is; events almost never happen exactly how you expect them to. I only need something unexpected/mad to happen in one of the three matches for the bet to fail. Leeds United’s Patrick Bamford will miss a sitter or one of the internal battery packs that power Manchester City’s Erling Haaland will malfunction and my accumulator has collapsed.
Much like <insert politician we’re laughing at this week> I’m not in control and I’m at the mercy of randomness.
The same is true of crypto, which is a market that’s built on sentiment. If you have that magical ability to spot the predictable patterns in the unpredictable then jump in, else sit back and watch.
What is crypto?
Crypto comes from the Ancient Greek word kruptos to mean hidden, or secret, with cryptography the art of writing or solving codes. Yeah cheers thanks for the school lesson yeah. This means that you cannot replicate a crypto asset. The thing you’ve just bought only exists once as it is so complicated, unique and secure.
You might have heard of cryptocurrency. This is one type of digital asset, or crypto asset. But crypto assets aren’t only cryptocurrencies.
Crypto assets are a broad range of tradable ‘digital instruments’. The NFTs that dubious F-list celebrities are hawking on Twitter are crypto assets. Stablecoins and CBDCs are crypto assets. Types of tokenised securities (often sports club fan tokens) are crypto assets. DeFi tokens are crypto assets. A large number of assets traded using blockchain and DLT are crypto assets. The metaverse contains a huge amount of crypto assets. And yes, bitcoin and other cryptocurrencies are crypto assets.
Crypto bears less relevance to reality so is more volatile
Here’s the deal: Crypto assets are often literally – correct use of the word literally – only worth whatever someone else will pay for it. Crypto assets are rarely linked to real world assets.
For example: If you invest in a commodity like gold then you’ve got both the financial instrument you’ve just bought and you’ve effectively also got a lump of metal that’s been pulled from the ground. The same is true for buying shares, as along with that share you’ll own a percentage of that company. Yet if you buy crypto that’s it, you’ve just got your crypto thing, nothing else, until someone else buys it from you.
Why is that important?
Thank you for asking! Let me give you two reasons.
Reason one is that this makes crypto more volatile and shaped by herd mentality. The real world asset of a related financial instrument will shape it’s price, as a share it will increase in value after the company it’s linked to makes more money.
The price of crypto is often only decided by whatever the next person will pay so the price of a crypto asset often doesn’t follow a real world asset. The movements of national currencies and commodities are easier to predict as you can study the asset they’re linked to, whereas crypto is based purely on the buyer’s sentiment. There’s less predictability to less chance to play the market.
Reason two is that no one is going to bail you out. When a national currency crashes the government will likely step in to try and salvage the economy. Again, when a company’s share price starts underperforming its management will try and turn things around. But when a crypto asset dives no one is saving it. The value of the crypto asset you’re holding could quickly go through the floor.
It’s a competition
Imagine someone sat in a dark room lit only by the blue light coming from their computer monitor. They’re chain eating tangy cheese Doritos, leaning back and lolling to themselves as they whip up a fury on Reddit.
Imagine a room full of baseball cap wearing men (it’s always men) leaning across desk to high five their fellow tech bros.
You’re competing against them. It is a competition – for someone to make money, someone has to lose money. Crypto doesn’t create additional money.
A quick explanation of crypto asset investing
The winners in crypto are those who completely and fundamentally understand their market. They have spent so long watching the market, knowing how long assets increase in price for, knowing what causes falls.
The crypto market is less shaped by the news.
For instance, steel commodity prices will rise because a car factory has opened. Similarly, share prices will rise or fall when a company announces a profits update. In contrast to this, crypto is more open to the emotion of those owning the assets and whether they want to sell or not.
As the market relies more on sentiment you need to know the factors that shape the market, monitor them intensely and position themselves to be the first to react when they change.