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Bitcoin or cryptocurrency (aka “crypto”) is a decentralized digital currency that’s unregulated and not reliant on any government’s central authority or oversight. The word “crypto” means secret or concealed. That alone should make the hair stand up on your neck. I’ve had many crypto-bros gush on and on regarding how great crypto is, until I start asking questions, such as, “What does decentralized mean?”
“Dude, it’s unregulated and has no government oversight in their operations.”
“Is this a good thing? What if the crypto company is fraudulent?”
Besides zero government regulations or oversight, many of these crypto firms are constantly moving country to country looking for safe haven of no regulations and no taxes. Sounds good to me!
“Next question, if it’s a digital currency, can I use my crypto to purchase groceries?”
“No, dude, ya can’t do that.”
“So crypto is not a currency. It’s a speculative investment. Much like wheat futures.”
Note: Wheat futures are standardized, exchange-traded commodities futures contracts. The contract buyer agrees to take delivery of a specific quantity of wheat (i.e. 5,000 bushels) from the seller at a predetermined price on a future delivery date. Commodity exchanges have been around since 1877.
With the crypto market, you exchange your cash and they give you bitcoin or tokens that go into your digital wallet. There are thousands of types of tokens out there on numerous crypto exchanges until they go bankrupt and you lose everything. A crypto exchange is nothing more than a clearinghouse where you buy and sell your product, like the New York Stock Exchange or the NASDAQ. These tokens are nothing more than magic beans, aka nothing. It’s a speculative investment that you hope and pray others come along and pay a higher price for the magic beans, so the value of your magic beans goes up.
To give an analogy, say you walk into Caesars casino in Las Vegas. You give them your $1,000 in cash and they give you $1,000 in Caesars chips to gamble with. You sit down and play Blackjack for a few hours and at the end of your gambling, you walk to the cashier’s cage to turn your Caesars chips back into cash. Pretty simple, huh? Now, what if the Caesars executives took your cash and went across the street to MGM casino and lost it all playing craps. So now when you want to cash out your Caesars chip, suddenly they stop redemptions and you’re stuck with useless Caesars chips that you bought in for $1,000 and now they’re worth $0. Same goes for the crypto market.
Sam Bankman-Fried (“SBF”) was supposed to be the new “it,” the boy-wonder of crypto. Granted, he was a smart guy who graduated MIT and worked as a trader at Janes Street Capital. He founded Alameda Research, which traded in crypto and discovered an arbitrage play (difference in prices for the same asset class) where he could buy a certain type of crypto in the Bahamas for $1,000 and sell it in Japan for $1,050. Doesn’t sound like much, however, a 5% rate of return in a single day that could be scaled (increasing your investment capital), so now you’re buying crypto for $10,000,000 and selling for $10,500,000 daily. That’s a risk-free $500,000 profit daily. Not bad. He then founded FTX, a crypto exchange based in the Bahamas.
SBF told Sequoia Capital (Silicon Valley venture capital firm) about his so-called FTX super-app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.” They bought the pitch and invested $210 million in FTX, even though SBF was playing the video game, League of Legends during his Zoom call. FTX raised over $400 million from 69 institutional investors, including Blackstone, SoftBank and the Ontario Teachers’ Pension Fund. Those investments are now worth $0.
At the end of the day, any investor must ask themselves a few simple questions:
Can you understand the product and explain it to me in layman’s terms?
Is it transparent?
Does it have a long-term track record?
Can it be shorted (bet on the downside)?
If you answered “no” to any of these questions, run, do not walk away from this investment.
Matthew Owen resides in Eureka and believes the First Amendment allows for free speech.
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