First of all, the two charts below should be studied by everyone who has invested in Bitcoin blindly and is now panicking because of the recent sell off. Get the charts and study them at least twice a month. There is nothing like free money! Sustainable investing requires time and knowledge!
Back to the matter.
Everywhere I turn, people are shouting about cryptocurrencies.
I shared my thoughts about Bitcoin in Q3 of 2016, on Facebook when it was at 750 levels and I hinted to a trader friend that that if it broke that level, it would rally to its previous all time high recorded in 2013.
I also wrote a commentary in The Profitable Investor Network, my free membership based Facebook Community. You can click on the link below to join The Profitable Investor Network, where I help you how grow your wealth by showing you how to earn more, save smarter and invest better. It’s free, for now!
I said there that as a currency trader, I have learnt that value merely flows from one asset class to another.
Before investing or trading any asset class, I:
1. Understand dealer counterparty risk and trade it.
2. Identify/create correlated/synthetic asset classes and arbitrage their divergence.
What is driving Bitcoin’s rally?
What are the correlated assets that can influence Bitcoin’s rise or fall?
What are the dealer counterparty risks associated with Bitcoin?
Do your research.
I’ll give you a hint.
Concepts like Retail sales.
Assets like Ripple.
Monetary policies like the current paper currency restrictions in India and the capital exportation restrictions in China.
Oh and I still haven’t invested in cryptocurrencies.
Before investing in any asset class, I invest knowledge in myself first. Because in investing, why is more important than what!
Knowledge about things like capital outflow and currency control policy of central banks like People’s Bank of China. Reserve Bank of India. Ethereum. Monero. ZCash. BTC Gold ratio. Mount Gox.
I mention these terms to people who are holding Bitcoin as a long term investment (and not just for daily transactions and settlements) and if they sound blank, I ask them to please invest in knowledge first.
Saying you want to invest in bitcoins is like saying you want to invest in naira, cedis or rand or even dollars. That statement doesn’t make any sense right? You can’t invest in a currency, in that sense.
Currencies are primarily a PAYMENT & SETTLEMENT SOLUTION, not a investment asset. You can only exchange one currency for another currency that is appreciating faster in value due to higher demand.
Well, same thing with cryptoCURRENCIES, in this case bitcoin. Bitcoin’s value is primarily tied to the fact that merchants, importers & exporters accept it as a form of payment.
Infact, the value of ANY cryptocurrency is tied to its ability to be accepted as a payment solution. The more the merchants that accept bitcoin, the more the demand for bitcoin.
The more the demand for bitcoin, the higher the value and price of bitcoin.
So, if you are “investing” in bitcoin, you have to ask yourself, which country/region uses bitcoin the most as a payment solution?
Why are they dumping their own fiat currrency for cryptos?
What is the response of their central bank to this trend? Is their central bank also adopting cryptos in its reserves?
Which particular crypto are they going to adopt? Bitcoin, Monero, Litecoin, Ripple, Dash? And yes, it will most likely be bitcoin.
If yes, then that means the demand for that bitcoin will increase. If no, that means one day the central bank can ban legitimate merchants from ACCEPTING bitcoins. Can central banks stop its use? No! Can they limit its use? Yes.
Same way cocaine is still very valuable but you can’t be advertising publicly that you are a cocaine seller, right?
So, your bitcoin will still be valuable but it won’t be as liquid and easy to sell.
PS: Don’t even ask me about all these “community” pyramid scheme “investment” coins that are not accepted as payment solutions by merchants. Read the post above and conclude for yourself how valuable they are.