Get Off The Crypto Hamster Wheel!

Date: 11/30/2021
Author: Mr. X


A few days ago, “Mr. Goxx,” one of the Internet’s more noteworthy cryptocurrency gurus, died unexpectedly. He was mourned on social medial. One said that his memory would live forever on the blockchain. Between June 12, 2021 and the end of his financial career on November 22, 2021, he gained 19.7% on his portfolio. It was a respectable showing… especially considering that Mr. Goxx was a hamster.

 

Nonsensical running around on a wheel and entering tunnels led to the hamster making his investment “choices.” The hamster “trader” was a clever way of satirizing the speculation and pump-and-dump schemes that have come to define the cryptocurrency market.

One of the most blatant came when some developers made a coin called “Squid Game.” Despite using the name, it had no official connection with the smash Netflix [NFLX] series “Squid Game” (“Squid Game” is a South Korean satire of capitalism, but that didn’t stop the Communist North from sentencing someone who smuggled a copy into the Democratic People’s Republic to death by firing squad.) The coin was supposedly based on a “play-to-earn” model. You play the game, you earn tokens.

However, there was no actual game yet. Traders poured in and bought the coin as rumors spread online. At first, it spiked in value and traders were becoming wealthy – on a blue screen at least. Yet many traders didn’t have a way to turn the coins into real value. Why would you even do such a thing when the coin is surging in price?

Like most things that were too good to be true, the “Squid Game” coin was a scam. In a classic “rug pull” move, Squid tokens were transferred into Binance tokens (BNB) and then pulled from the project. SQUID plunged to near zero. Some investors lost everything.

Consider what would happen with a more restrained investment strategy. Indeed, let’s make this as unfair as possible. Let’s take Bitcoin’s highest price on June 12, 2021 and compare it to Bitcoin’s lowest price on November 22, 2021. In other words, if all you did was buy and hold Bitcoin, it would be literally impossible to do worse.

The high on June 12, 2021 was 37,340.14. The low on November 22, 2021 was 55,679.84. So even with the worst possible luck, you would have made a profit of about 49.12%. (You would have beaten the late and lamented Mr. Goxx).

Consider Ether, the second most important cryptocurrency by market cap. It’s the token for the underlying blockchain Ethereum, though the two are sometimes used interchangeably by retail traders. The high was $2,372.48 on June 12, 2021. The low was $4,033.57 on November 22. Again, with the worst possible luck, you would have made more than 70.01%.


 

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Of course, while I’m taking these dates to show the hamster’s trading “career,” it’s still somewhat arbitrary. We’re in the midst of a crypto boom. It remains to be seen whether new reporting requirements will lead to a permanent correction for the industry. Nontheless, this example reveals a simple truth too many investors ignored. Calm investment in the most reliable cryptocurrencies can produce solid returns, while jumping wildly from one altcoin to the next could lead to catastrophe.

This is why I say investors might want to consider a “spare change” trading strategy, in which a set amount of money is deposited into Bitcoin and Ethereum each week. Barring Armageddon (like a flat American ban on crypto), there’s no reason to even pay attention to the headlines.

Still, which should you prefer, Bitcoin or Ethereum? To some extent, this is a trick question, as one might ask which Ethereum? “Ethereum Classic” is the uninterrupted blockchain that was first created by Vitalik Buterin and Gavin Wood. In 2016, a hack led to the controversial decision to implement a “hard fork” – essentially creating a new blockchain to prevent users from having their money stolen. However, some said creating a hard fork violated the very principles of cryptocurrency – that “code is law” and that people must simply live with the dangers that come with an unregulated blockchain.

Almost everyone will know that you mean the post “hard fork” blockchain and the token ETH, not Ethereum Classic (ETC). Yet even this doesn’t tell you everything. Ethereum is currently being fundamentally changed as it moves from a “Proof of Work” basis to a “Proof of Stake” basis. In short, the miners or validators can approve a blockchain by staking their existing tokens. “Proof of Work” requires massive computing power, which is why cheap electricity and high-powered “rigs” are needed in order to mine Bitcoin today. (El Salvador wasn’t kidding about needing a volcano-powered city to mine Bitcoin.)

Bitcoin relies on Proof of Work and is limited to a set number of coins. It tends to increase in value because inflation is not an issue for the cryptocurrency. However, the Proof of Work standard imposes a sizable cost when it comes to consuming resources. Aside from peer-to-peer payments, you also can’t do much with the bitcoin blockchain.

 


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In contrast, the Ethereum blockchain was created to allow for decentralized applications. It’s also the underlying blockchain that allows many other projects to be built on top of it. Ethereum has major drawbacks – notably that it is still relying on Proof of Work and that it consumes large “gas fees” when it comes to carrying basic operations. When one app or new coin offering is widely used on the Ethereum blockchain, the number of transactions that the blockchain can carry out crawls to standstill.

Ethereum is reportedly working to fix this in what will be called “Ethereum 2.0.” This includes a full move to a Proof of Stake model and several changes that will (supposedly) let transactions be carried out more quickly. Though some upgrades have already taken place, we probably won’t see Ethereum 2.0 until mid-2022, at the earliest.

Until then, there is a race for “Ethereum Killers” to become the blockchain of choice for decentralized app development. Yet there may not be a true opening for one of the tokens used by these blockchains unless Ethereum 2.0 fails altogether. It’s too early to say whether this will happen or not – but thus far, every challenge that Ethereum has faced, it has overcome. I wouldn’t bet against that team.

There are plenty of tokens and blockchains that need to be broken down and explored – but before you do anything else, do no harm.

Don’t outthink yourself. If you believe in cryptocurrency’s potential as “digital gold” and a standard of value, put some fiat currency away in Bitcoin. If you believe in the vision of a decentralized Internet that can operate as a kind of “world computer” based on a modified blockchain that is already being used, then bet on Ethereum.

If we face a true bear market, we may see the value of many of these altcoins collapse together. The big two offer a relative margin of safety. Over the last few months, they would have provided a solid return.

And it’s a lot less work than trying to follow each new rumor like a hamster on a wheel.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.

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