Understanding Investing in Crypto

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Speaker 2
00:29
Welcome everybody. On this week’s episode I’m joined by Devin and we’re recording this mid November 2024 and we are going to talk about cryptocurrency and bitcoin. It’s been all over the headlines after the election and going to take a deep dive into what it is and do we recommend it is a good investment. But Devin, why. Let’s just start. Why is this relevant right now?
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Speaker 3
00:51
Yeah, great question. Obviously crypto, bitcoin, ethereum, et cetera are all over the news right now due to the Trump win. He’s been seen for quite a while now as pro crypto, I would say primarily because he’s been backed by the crypto lobby, which might be a good or bad thing, but either way, pro crypto folks, crypto investors have seen this as a, has a tailwind to both the price of crypto but also potentially allowing crypto to become what I think it was meant to be. So that’s the long and the short of it. I think as of today the price of one bitcoin is above 90k right now.
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Speaker 2
01:39
Dropped today, yesterday it was 91. Now it’s down to 88. So it dropped a little bit today. It was an all time high yesterday.
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Speaker 3
01:44
So it’s in that 90k range right now, which is absolutely an all time high. And I believe it’s up about 150% over the past 12 months, something like that. Right. So prices have been, have been going crazy. And again I think the primary reason is because of the Trump election.
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Speaker 2
02:01
So Trump winning the election, Trump very pro in the campaign and like you said, took money from people, donated money to the campaign in crypto seen as very pro crypto and that kind of led this spark. But I think so before we dive into any thoughts, recommendations, I think it’s really important to get a really good understanding of what this is because I think it’s very misunderstood and people read bitcoin is an investment, Bitcoin’s going up. But there’s so much behind that in the technology and everything that is like bitcoin is just such a small piece of the pie. So let’s start with like, what is blockchain? Blockchain is actually the technology that this all runs on. Blockchain is a type of digital ledger that securely records transactions across a network of computers. The whole purpose is that it’s decentralized and it’s transparent.
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Speaker 2
02:52
So it’s peer to peer transactions. So the bottom line is it cuts out any need for an institution like a bank. It’s just person to person. And so a couple key benefits. One, decentralized, unlike traditional banking system that is controlled by a bank, it operates peer to peer, so there’s no single party that controls it. Deregulated completely. It’s a way to transact records, it’s transparent. And basically a lot of companies have started to adopt this technology, which we’ll get into. It was created after 2008 financial crisis for a few reasons. But in the last, I guess 15 years, a lot of companies have started to adopt this in the way of supply chain management. It’s a way to track goods from origin to customer in a transparent way.
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Speaker 2
03:39
Healthcare is using it to store medical records and real estate to have simplified transactions and smart contracts. And the different industries are using smart contracts. But that’s like. I like to use the analogy of blockchain is like the Internet in the 90s. Like the Internet was the technology and the platform. And then from the Internet you got all of these tech companies, you got Apple, Google, you know, all these things that transpired from the Internet technology. And that’s how I view blockchain. You have blockchain as the actual technology behind it. Now you have these cryptocurrencies, all these other use cases that were built on it. Anything to add on that?
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Speaker 3
04:20
No, no, I think you put it pretty clearly there. But again, just to kind of reiterate for listeners that sometimes we tend to get, and even you and I do this, tend to get blockchain. In cryptocurrency, we use those terms interchangeably. But to be clear, blockchain is the platform that is the technology that cryptocurrencies such as Bitcoin have been built on top of. So just to just.
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Speaker 2
04:39
So the next thing we’ll talk about is what is a cryptocurrency. So again, cryptocurrency is a form of. A form of money that uses cryptography for security, operates on the blockchain technology. So unlike traditional currencies that are issued by governments, these are what’s called fiat currency, these are fiat currencies. Cryptocurrencies are decentralized and are not controlled by any type of central authority. So it’s a way. It is a currency that was created from blockchain and with that you have things like Bitcoin, different types of currencies like Bitcoin, Ethereum, Ripple, stablecoins, dogecoin, all these things are types of coins. So just some key features. It’s digital, it’s only electronic. There’s no physical coins or paper. It’s decentralized. So most cryptocurrencies operate on a decentralized network powered by the blockchain. Like we said. This one’s kind of controversial, I guess. Secure transactions.
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Speaker 2
05:36
It’s supposed to be secure and anonymous. But there are some, because of that, they can. You can use it without. You can use it for like it was, I think when it started and if it still is, it was like the biggest currency for like, for drug purchases on the black. On the black on the dark web. And so. Yeah. Anything to add on that? I think that’s a good overview of just what. How cryptocurrency difference from blockchain.
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Speaker 3
06:01
Yeah. Maybe just to my thought, is that the biggest feature of it and maybe the biggest curse of it is that is the fact that it is decentralized.
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Speaker 2
06:08
Yeah.
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Speaker 3
06:08
So again, that’s the biggest. That’s the biggest feature. That’s why it’s popular in countries like Argentina and other third world economies. But again, that is the biggest reason why governments don’t like it right now. Governments like to control their own currencies. Governments generally cannot control bitcoin and other cryptocurrencies right now. So we’ll talk about more about this in a bit.
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Speaker 2
06:32
I’m glad you brought that up because two things. One of the big use cases in like a third world country where you can’t go to a bank if you have the Internet, which I guess some may or may not, but if you have the Internet, you can do online, you know, have an online currency transactions. Yeah. And yeah, the big thing too is the way I see it is like what government is going to want you to not use their currency. So if they push cryptocurrency and people went away from the US Dollar or any country’s currency, I just can’t see a world where government’s going to be totally okay with that.
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Speaker 3
07:12
Yeah. I mean, now we’re getting into fiscal and monetary policy issues. And back to what we started with. Trump has been pro crypto.
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Speaker 2
07:20
Yeah.
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Speaker 3
07:21
But the question is, will he be continued to be pro crypto?
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Speaker 2
07:24
Yeah. Which we’ll get into a second but. And then I think it’s important to know why this started. So blockchain again created after 2008 financial crisis was designed to eliminate the need for intermediaries by creating a system where trust is established through these online algorithms and decentralized. You don’t have to rely on a bank. Basically the 2,000 people. It’s long story short, people got mad at the banking system and the financial world after 2008 for good reason. People lost a lot of money. And somebody. Do you know how to say this? Satoshi no Komodo. He’s anonymous guy. Nobody knows supposedly nobody knows who it is who created this. It’s just a way to decentralize banking transactions and essentially, yeah, create transparency. Have a secure way to transfer money in transactions without using a bank.
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Speaker 2
08:16
So to reiterate just some of the benefits of blockchain cryptocurrency. So number one, transparency. All transactions are visible on the blockchain. You can see everything security, which again debatable. Transactions are encrypted and immutable. So it’s supposedly harder to hack. And for cybersecurity reasons, which also is one of the biggest risks with cryptocurrencies. Cybersecurity is a real thing. Efficiency eliminate the need for intermediaries like a bank reducing the costs being up transition transactions. And then it provides access to financial systems for unbanked populations like we mentioned. So a couple of the big risks, number one, volatility. So cryptocurrencies like Bitcoin, Ethereum, ripple any of these. They’re known for their huge price fluctuations which we’ll get into why in a second. Regulation is a big thing. So it’s been pretty unregulated.
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Speaker 2
09:08
I mean the first, like I don’t know, I would say 10 years, it was like the wild west. Like you could have anonymous accounts, nobody knew what was going on. It’s since gotten a little bit more regulated. Still not very regulated. But at any point somebody could step in and regulate this and you know, really hurt it and then security risks another one. So I think this is a Warren Buffett quote. He said cybersecurity is the biggest threat to or cyber. Cyber attacks I guess would the biggest threat to humanity right now. And so that’s a real thing is it could you know, at any point get hacked. It’s supposedly safer, but there are cases that it has gotten hacked.
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Speaker 2
09:48
And the other thing is when you buy, when you go on and buy something in a digital wallet, there’s A, I don’t know all the details, but you essentially get an encryption key that you have to like physically store somewhere. And if you lose that, there’s people that bought a Bitcoin 15 years ago and they lost that key and they literally can’t get their money. So it is safe in that sense, but at the same time, you could very easily lose your passcode and never be able to access it.
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Speaker 3
10:16
Yep.
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Speaker 2
10:18
Okay. So one of the big things which our view on this is the big debate is like, is this speculation? Is this an actual investment? The first thing, there’s a real lack of intrinsic value. So with a stock or a bond, real estate even, they’re tied to underlying assets. You know, a stock company has, there’s, you can do fundamental analysis on PE ratios, balance sheets, cash flows to get an intrinsic value. Same thing with real estate, same thing with bonds. That doesn’t exist. With cryptocurrencies, it’s literally supply and demand. It’s whatever people think that it’s worth and how many people are buying it and selling it, there’s no value backing it at all. And most cryptocurrencies, there’s no cash flow, there’s no earnings, there’s no dividends. So their values largely determined by market demand and sentiment rather than, like I said, any intrinsic fundamentals.
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Speaker 2
11:09
It’s really hard to evaluate a price based on normal fundamental analysis.
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Speaker 3
11:16
Yeah, it’s kind of your classic castle in the sky. Similar to gold in a way, but gold has some technically intrinsic value. But again, how do you determine the value of something that does not have cash flows? We’ll speak more to that in a minute.
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Speaker 2
11:30
Yeah, and then second thing, there’s huge price swings. So the volatility is like crazier than any traditional asset you invest in. So I’m gonna butcher this for sure. But I believe it hit an all time high around the pandemic. Bitcoin we’re talking. And then in 2020 I think it dropped down to under 20,000, I think it may was down to like 6,000 and then it’s like now back up to like 90. So like that’s just showing the, I think, I don’t know the exact time for it was like 60, 50 or 60 and then it dipped down under 20 and now it’s like back up over 90.
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Speaker 3
12:05
Sounds about right.
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Speaker 2
12:06
So like it can swing drastically. And so the other big thing like we talked about is regular regulatory uncertainty. At any point they could step in, there could be legal concern regulation that could, you know, really Hurt this. The counter argument though, to this being an investment is scarcity. So any like, huge bitcoin believer will tell you that, like, it’s a scarce asset. There’s only so many bitcoins you can mine and that gives it a value. Whether it does or doesn’t, I don’t really know. There are. It is a technological disruptor. So like, it is a new technology, it is a new form of money. There’s an argument that could be made that they created this technology and money is something you can invest in that’s going to disrupt an industry.
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Speaker 2
12:54
And then people argue that it’s a form of portfolio diversification, that it’s not correlated to any type of traditional assets. It could be a diversification tool to diversify outside stocks, bonds. I don’t necessarily totally agree with that. We’ll talk about our outlook, but anything to add on that so far? Devin?
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Speaker 3
13:12
Yeah, look, we can poke holes in the crypto argument all day, every day, but sometimes, like you mentioned, sometimes it just comes down to being a believer. I wanted to comment maybe quickly on the supply and demand piece and the fact that, yes, the supply of bitcoin is fixed, but that doesn’t necessarily mean that the value should always go up.
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Speaker 2
13:33
Supply is fixed. So it basically just depends on the demand.
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Speaker 3
13:36
Exactly. Yeah, exactly. So those two things work hand in hand. Obviously. Dumb example off the top of my head. You know, the supply of, you know, 1970s telephones, it’s fixed, but that doesn’t mean that the price.
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Speaker 2
13:49
There’s a demand.
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Speaker 3
13:50
Yeah, there’s zero demand for it.
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Speaker 2
13:51
Yeah.
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Speaker 3
13:52
So bad analogy. But I think that.
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Speaker 2
13:54
Get the point.
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Speaker 3
13:55
Yeah, you get the point.
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Speaker 2
13:56
The other thing I want to talk about before we dive into, like, what’s the outlook now in our recommendation, there are, I have seen from multiple clients, there are huge risks with this in the form of the platform that you’re transacting this on. It’s gotten a lot better the last couple years. You can trade on things like Robinhood, there’s ETFs you can buy on like Fidelity, any platform, but prior to that. And the. What’s the guy? Sam Brinkman. Freud.
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Speaker 3
14:23
Sam Bankman. Fried.
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Speaker 2
14:24
Yeah. The ftx is. That is. So what? I don’t know the whole story, but they went bankrupt essentially as fraudulent accounting or something.
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Speaker 3
14:31
Okay, so long story short, they were a crypto exchange, a place where you can buy and sell crypto. They also had a sister, a hedge fund. It was a crypto hedge fund that there were too many they were too close. Effectively FTX was funding the hedge fund blanking on the name of the fund right now. But FTX went bankrupt because it was backing the bets that the hedge fund was making. Ultimately the hedge fund was making these bets on crypto. When crypto prices dropped, they went bankrupt. And then the $8 billion that FTX gave Alameda Research was the hedge funds name was gone. And so ftx and the funny thing is now just starting, Rupert, FTX went into bankruptcy.
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Speaker 3
15:20
Bankruptcy court has been trying to get back the value that FTX had and it’s actually worth more now I believe than it was in 2022. Yeah.
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Speaker 2
15:28
Wow.
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Speaker 3
15:28
That’s. That’s a separate story.
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Speaker 2
15:30
But yeah. So basically these exchanges are like not regulated. There’s a lot of smaller exchanges, stuff like that happens. But I have a story of a friend of mine that he had money, a significant amount of money in crypto one of these, I would call them questionable exchanges. Like you’re not trading on Fidelity or Vanguard or Schwab or one of these like low, like small exchanges to trade crypto of a small company that started and he had a lot of money in there and hit an all time high. I’d advise that you should sell this because when this asset hits a high you should take some off the table. Didn’t do it. And what happened was a similar thing that the exchange, something happened where they were getting investigated, went bankrupt.
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Speaker 2
16:14
He luckily pulled his money out the day before, pulled all of his money out the next day, the exchange went bankrupt. And had he not do that, everyone just lost all their money, just gone. So that’s one of the risks is if you are going to trade it, make sure you’re on a reputable. I think Coinbase now is like, is pretty reputable. Like I said, you can do it on Robinhood, which Robinhood has their questions as well. But do it on exchange that’s not going to blow up and you lose all your money.
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Speaker 3
16:42
Yep, yep.
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Speaker 2
16:44
Okay, so let’s look at now what’s the outlook? What our recommendations. So Devin, why don’t you fill us in on like we’ve said that Trump campaign is pro crypto. We’ve seen this price new all time high. What’s the outlook? Why is that? Like what’s the substance behind it?
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Speaker 3
17:00
Yeah, again to kind of recap. So the new administration that’s going to come into power in January is apparently pro crypto due to that price is up high. But I think all of this hinges on two things. It’s the SEC and the SEC chair, Gary Gensler. Gensler has notoriously been as about as anti crypto as you can possibly get. And he is the primary reason, I believe, why the crypto lobby has been funding Trump, because Trump has. I think he’s already said, he’s already stated publicly that he will be getting rid of Gary Gensler. I think he said, quote, on day one.
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Speaker 2
17:37
Yeah.
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Speaker 3
17:38
Why is that important? Because again, Gensler has been, not only has he been creating anti crypto legislation, also suing crypto and crypto adjacent companies and individuals, but he is not providing. He has not been participating in what a lot of crypto firms want is a clear. They want, they want to build a framework of rules and they want that to be applied fairly. And he’s just not playing that game. And whether that’s good or bad, I’m not here to say. But he pretty clearly has not been allowing crypto firms to operate in the US I’m being overly simplistic there. So again, if Gensler is in fact taken out of power as SEC chair and either a pro or an agnostic crypto person is ending up running the sec, what does that mean? I don’t think anybody knows.
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Speaker 3
18:30
Is it going to be great for crypto prices, is going to be great for crypto innovation? You know, it remains to be seen.
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Speaker 2
18:37
So the bottom line is there could be more favorable, you know, SEC Cherokee more favorable and could be, it could be administration that is more favorable, that allows it to operate freely, more freely in the US So to be seen what happens. But let’s give our opinion. I still view this as speculation rather than an investment. I personally do not own any crypto and I’m okay with that. People have asked me, do you care if you miss out? No, I really don’t. I think that people get tied up in the, like get rich quick. You read about it. I’m gonna make a lot of money on crypto quickly. My opinion is that doesn’t exist anywhere. There is no get rich quick. Even something that looks like a get rich quick people. It’s like the tip of the iceberg.
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Speaker 2
19:28
Like there’s something underneath the iceberg that had happened to do all that. There’s a lot of hard work and stuff people don’t see. So I don’t view it as an investment. However, we have some clients that want to invest in it, participate it. We’re okay with that. We would say, number one, make sure that all of your other financial goals are on track. We don’t want kids college to depend on the price of crypto because we just talked about how volatile that could be. It’s not a good thing. Keep it under generally 1% of your portfolio. And I would say be okay with, I don’t want to say lose all of it because it’s not going to blow up. Be okay with losing 80% of what you put in. Like if that, like you have to put an amount of money in that.
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Speaker 2
20:08
If you lost 80%, your financial plan is not in jeopardy. Like we said, the exchanges are questionable. So do it on a reputable exchange. The risk of regulation could come at any point. Again, looks like the next four years, potentially not, but. And I would say there’s a use case for all of this. There’s a use case for cryptocurrency, there’s a use case for blockchain. Use it for the desired use case rather than investing in it as an investment. If you want to transact money through cryptocurrency for some reason that’s useful to you, do it not necessarily for a way to get a high investment return.
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Speaker 2
20:42
And the one thing I do want to spend a little bit of time on is I think this was earlier this year, end of 2023, these crypto ETFs popped up so Fidelity BlackRock and essentially what they are is we’re going to use BlackRock for example. Just because I’ve actually studied this one long and short of it is BlackRock essentially bought a bunch of Bitcoin and like I mentioned, that passcode that you have to have, they stored those passcodes in vaults around the country, secure vaults. So it’s a way to invest in this ETF where you’re buying a piece of Bitcoin. But it is much more secure and safe because BlackRock has over $10 trillion of assets. They’re obviously safe, secure. They’re much less of a risk of losing that passcode.
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Speaker 2
21:31
Plus, BlackRock also has cybersecurity regulations, you know, things in place that you and I as the average person can’t put in play because we don’t have $10 trillion of assets under management. But that would be our general recommendation is the ETF could be a safer way to participate. Keep it under something you’re okay with losing under 1% generally. Devin, anything to add here?
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Speaker 3
21:55
No, I completely agree. I could argue that it doesn’t have really many, if any practical applications right now in the U.S. In the U.S. Right. And in other countries it certainly does. But no completely agree with the thought process. If you have all your financial goals in place and you have maybe a little side pocket of money that you want to speculate on effectively look at it like a gamble. Yeah, that’s fine too. Let me end with a quote from Ray Dalio. He said bitcoin looks like a long duration option on a highly unknown future. And I think that kind of sums it up. So yeah, act accordingly.
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Speaker 2
22:33
Yeah, and I should have said at the beginning of preface, we are not there’s people that spend all day, every day analyzing crypto markets. We are by no means crypto expert. I know enough to be dangerous and enough to help people make smart financial decisions, I hope. But yeah, if you have any specific crypto questions, feel free to reach out. Our advice just be don’t throw your money into the optimism and really rely on it. Any questions? Feel free to reach out.
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Speaker 1
22:59
Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.
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