Why you can’t invest in crypto
Many people think that they are investing in cryptocurrencies, but they are wrong, because the very nature of crypto makes this impossible.
When it comes to crypto, most people fall into a few categories:
- “I keep hearing about it, but I still don’t know what it is.”
- “It’s all a scam; forget about it.”
- “Wen Lambo??? Laser eyes! Diamond hands! HODL! Mooooooooon!! 🦄🦄🦄”
Depending on which category you’re in, you may have had mixed reactions to the recent shellacking of the crypto markets this past week, where Bitcoin had a massive dive in response to some industry collapses, going almost as low as $25,000. (This is after a high of $69,000 just six months prior.)
You were probably in one of these three camps:
- You didn’t hear about it.
- You read about it the next day and rolled your eyes at the obvious stupidity of it all.
- You’re this guy.
Do a search for “invest in crypto” (actually don’t), and you’ll find scores of sites that either tell you how, tell you why, or tell you not to.
But I’m going to take a different approach, and tell you that you can’t.
I’m not saying you’re not allowed to invest in crypto. I’m just saying it’s not possible. You can’t do it.
Here’s why.
I’m not crazy
First of all, I bet more than a few of you are looking at your Ledger or your Coinbase balance, and thinking that I’m insane. “You’re an idiot, Mike. I’m invested to the gills in crypto.”
To which I say, “no, you’re not.”
Others might be looking at their mining rig running in the basement, or the NiceHash miner that running in the background of your gaming rig, and think I’m out of my mind. “What the hell are you talking about, Mike? Of course I’m invested in crypto.”
I’m not crazy. But you’re still wrong.
What is investing?
When looking around for a definition of “investing”, perhaps you can find no more appropriate source than Investopedia:
Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.
Truly, they should know, right?
The page goes on to greater detail as to the specifics of what it means to invest. But then, as if turning on a dime, it changes tack:
Whether buying a security qualifies as investing or speculation depends on three factors — the amount of risk taken, the holding period, and the source of returns.
The lede that’s buried here is that there is something called “speculation”, and that is different from investing.
What is speculation?
So let’s see what Investopedia has to say about speculation?
[S]peculation, or speculative trading, refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.
Hmm. So what does that sound like to you? Does that remind you of anything we’ve been talking about here? “Substantial risk of losing value, but also chance of significant gain”?
Sounds like crypto to me.
The reason you can’t invest in crypto
The reason you can’t invest in crypto is that there is, for all practical reasons, no way to adhere to the definition of investing, that is, allocation of resource for returning a profit, but not with a substantial risk losing value.
In short, the reason you can’t invest in crypto is that crypto only allows you to do speculation. It’s much too risky to be considered an investment.
A billionaire gave me this lesson
I once had a conversation with a billionaire. He may have been a billionaire on crypto paper only, but he was documented to be a many-millionaire for sure.
And he told me, on the subject of cryptocurrencies, something which I’ll never forget. He said (paraphrasing):
“Only spend money [on cryptocurrency] that you’re prepared to lose.”
I never forgot that, and I never want you to forget it.
I’m not going to tell you to avoid cryptocurrency. I’m not saying it’s a scam. Much of it is, and it all may turn out to be, but I won’t commit to that level of certainty.
And while it is certainly hastening climate change and possibly contributing to the destruction of the earth, I’m not saying it will always be so. And you could argue that by eating meat, or driving a car, or even by having children, you’re also contributing to the destruction of the earth in similar ways, at least in terms of carbon footprint.
But all hedging aside, what I will say is this: do not put a single dollar into cryptocurrency that you wouldn’t be okay losing. Gone forever. Poof.
Because there is a good chance, certainly a odds-on chance, that that will happen.
If you have play money, money that you’d spend for fun, money that you wouldn’t mind going away, then by all means, put some money down. Think of it like the Las Vegas craps tables.
Just don’t think for a minute that you’re investing. You’re not. There are lots of ways to invest, and crypto isn’t one of them.
Originally published at https://empathicfinance.com on May 16, 2022. Subscribe to my newsletter.
