The investment world has undergone a revolution in recent years, with the proliferation of online trading platforms coupled with the inexorable rise of crypto democratising a space that was once characterised by gatekeepers.
While these changes have presented millions with new opportunities, the perception that they represent potential for easy money can be a dangerous one, with stories of people getting burned being as common as those of people becoming millionaires.
BusinessNow.mt caught up with Luca Peric, a software engineer who follows crypto, and Investment Hub co-founder Steven Coleiro to talk about the crypto market, the democratisation of investing, and why education is vital for success in the field.
Our discussion starts off by considering the reasons for the recent crash in the crypto market, which Mr Peric is loath to describe as a bear market.
“Sure, a 40 per cent pullback is a crash, but we’re talking about an extremely volatile market here. When you have assets that are difficult to provide valuations for, the market becomes much more vulnerable to sentiment, with the fundamentals often falling by the wayside.”
He describes the crypto market as an “inelegant” one, in reference to the fact that cryptocurrencies often rise and fall in sync.
“Logically, a drop in Bitcoin should not be the same thing as a drop in Ethereum. They’re two different technologies with two different use cases, but the market sees it all as one.”
Besides valuations built on sentiment and an inelegant market, one other factor behind the crypto market’s volatility is the vast amounts of leverage being used, often by retail investors with little financial education who stake it all on an opportunity to get rich quick.
Driven by the market’s volatility, such widespread use of leverage holds a lot of promise for those who get lucky. This in turn further drives volatility, serving as a sort of feedback loop on the market.
One person whose presence looms large over the crypto space is Elon Musk, CEO of electric car maker Tesla Motors, and who is involved in a number of other companies. In February, he announced that Tesla had bought $1.5bn of Bitcoin and would accept payments in the currency, only to later suspend the option over concerns about its energy usage.
His influence in the sector is perhaps best exemplified by the close relationship between his public statements, often on Twitter, and the fortunes of Dogecoin, a so-called ‘memecoin’ that had for years held little value other than as a way to make a joke.
Doge is a popular online meme featuring a Shiba Inu, a dog breed originating in Japan, paired with exclamations in broken English, such as “much wow”.
Mr Musk’s support for Dogecoin sent its price soaring by 800 per cent within 24 hours in January, reaching $0.07. Continuing support for the crypto eventually led to it reaching over $0.66.
Mr Peric believes that these ‘plays’ are probably intentional, and points out that he is a CEO of a publicly traded company and has a duty to his shareholders, noting, in reference to Tesla’s Bitcoin announcements: “How does someone buy $1.5bn of something only to find out afterwards that it’s not so environmentally friendly?”
On the other hand, Mr Peric also describes Mr Musk as an individual with a remarkable intuition for marketing, and who enjoys both irony and playing around with hype, and believes that the situation with Dogecoin is an extension to that.
Another factor with a deep influence on the crypto sector is take up of the technology by traditional financial institutions.
Entering the conversation, Mr Coleiro recalls that institutional acceptance has long been a “big deal”, with one prevalent opinion holding that serious price action would happen once institutions come in.
In fact, Coinbase, one of the world’s largest and most well-established cryptocurrency exchange platforms, has seen a remarkable amount of activity from such investors.
“Their trading volume from institutional investors only, not retail investors, actually increased by over 1000 per cent over the last year, rising from $18bn in Q1 2020 to $215bn in Q1 2021,” explains Mr Coleiro.
He noted that these include Tesla, that bought all of its Bitcoin through Coinbase, which went public earlier this year in a somewhat controversial listing.
Mr Coleiro continues, “These are large companies, who of course do their due diligence and have entire research departments. So it could be one of two things: they’re either riding the momentum and doing what every retail investor is doing, or they actually see a need for a store of value for cryptocurrencies.”
Mr Peric similarly believes that it is unlikely that institutional investors are making purely speculative moves, but does not discount the possibility that they are in fact simply following the money.
Whatever the case, if you were to take the ‘shoeshine boy moment’ criteria for predicting a market downturn, it becomes clear with hindsight that a crash was bound to happen.
The term refers to a true story that happened to Joe Kennedy, an American businessman and investor, and father of future US president John F. Kennedy, who realised that it was time to exit the market when a shoe-shine boy was giving him stock trading tips.
He was right – it was 1929, on the eve of the Wall Street Crash that precipitated the Great Depression – and the ‘shoeshine boy moment’ remains a key market signal to look out for.
Mr Peric, relating his own observations, says, “I was on a train a few weeks ago, and a young teenager was explaining to his mother about altcoins.”
“My own rule is that once the media gets a hold of it, it’s time to consider an exit strategy,” chimes in Mr Coleiro, although Mr Peric believes that may be overly cautious, pointing out that Bitcoin has been a mainstream topic for years now, during which it made remarkable gains.
The hype cycle is nothing new, and booms and busts in investments have been occurring since the 18th century.
New technologies have in fact developed an investment landscape that is more akin in some ways to those early years of financial markets than to the tightly regulated and mediated space of more recent times, with barriers to entry falling dramatically.
“I always tell people to avoid investing in things they don’t understand,” says Mr Coleiro, “and of course crypto is extremely complex.”
“Investing in most coins is a purely speculative play because we don’t know how these technologies are going to develop in the future. We’re basically making a play that they will serve a purpose for our society. But we simply don’t really know.”
He therefore advises people to try and understand the fundamentals of a coin, and points out that some do indeed have a very compelling technology that serves a purpose, although he describes other altcoins as “rubbish, simply vehicles for people to pump and dump by employing people in developing countries to write ‘to the moon’ on Reddit.”
The only way for investors to defend themselves, he believes, is to educate themselves while broadening the time horizons of their investments.
Mr Peric picks up the thread, observing that, unfortunately, new retail investors are “extremely susceptible” to short term plays.
“They come in with the attitude that they want to make a particular amount of money in a short amount of time,” which he credits in part to the prevalence of media articles about crypto millionaires.
“There’s so much expectation built up in people’s heads,” he says, “that they just follow.”
“I think it’s about people not wanting to do the hard work. You have to educate yourself, and that’s hard.”
He continues, “As investment gets democratised and individuals are presented with more freedom, the burden on the individual gets a lot heavier, as they have to do their own due diligence. You’re no longer outsourcing the hard part to your stockbroker – you take on that responsibility in return for agency.”
Turning to Mr Coleiro, he praises his work at The Investment Hub, saying they provide a “fantastic” platform for people to educate themselves.
“Technology has empowered us to do things we couldn’t dream of just 20 years ago,” he says, “but that’s a pro for some and a con for others.”
With the landscape shifting fast, most recently with the rise of DeFi (decentralised finance), both Mr Coleiro and Mr Peric believe that the next few years will prove a challenge for regulators.
As Mr Peric points out, we’re just at the beginning of the digital finance revolution.
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