10 Compelling Reasons to Invest in Crypto
- Nov 2, 2022
- 14 min read
Now is the time to make a long-term investment in crypto, and by long-term, I am talking about a time horizon of at least one decade (aka 10 years). Before jumping into the 10 reasons why now is the best time to be in getting into crypto, let me explain the importance of the phrase “at least 10 years”.
Bill Gates of Microsoft, Jeff Bezos of Amazon, and Elon Musk of Tesla are three of the wealthiest men in the world. Their combined wealth could almost buy my entire country of South Africa, which is a little ironic seeing as Elon Musk was born in South Africa. Microsoft is the oldest of the three and was founded in 1972. It was then listed in 1986. If you had bought Microsoft stock at the beginning of 2000 and if you held it for 16 years until November 2016, how much would you have made excluding dividends? A big fat zero percent. The stock was basically a flatline for almost 2 decades. But if you had the patience to hold the stock for another 5 years until 2021, what would have happened? Your return would have gone from zero percent to almost 500 percent. Amazon paints a similar picture. Between 2000 and 2010, Amazon moved up and down a lot (ie it was volatile) but the price in 2010 was more or less the same as in 2000. Then from 2010 to 2020, the stock went from $5 to $100 which means it went up twenty times. Tesla shows a similar pattern. The price in 2019 was almost the same as in 2014. In 2020 the price exploded.
If you had taken a short-term view on any of these three companies, you would never have profited from their exponential gains. You need two things to make crazy money from investing - balls and patience. Microsoft, Amazon, and Tesla are all highly volatile, which means that they are highly unpredictable in the short term. In short periods of time like days, weeks and months these stocks experienced dramatic gains and losses and for a large part of their initial history, the losses canceled out the gains. This forced many impatient investors to sell out of these stocks before they could come into their own and blossomed into fantastic investments.
The same is true of crypto. It is easy to be scared off by the violent short-term volatility. Crypto is like riding a bull at a rodeo. American bull riding has been called the most dangerous 8 seconds in sports. If you are able to position yourself towards the front of the saddle so that your body is a counterweight to the bull, and if you can hold on long enough, you will break that bull. Before you get into crypto, you need to understand the long-term structural thesis (which I will attempt to explain in this blog). When you take a multi-decade approach to crypto, you will be handsomely rewarded for your patience in the same way that Bill Gates, Jeff Bezos, and Elon Musk were rewarded for their belief and patience in their own companies.
So here are the 10 reasons why now is the best time to invest in crypto
1) The Market is Giving You a Second Chance
How often have you heard the words, if only I had bought bitcoin 5 years ago? Guess what? Bitcoin in November 2022 is trading in exactly the same place as it was in December 2017. Sure, Bitcoin has been on a wild ride for the past 5 years. It touched $3,000 in 2018 and $64,000 in 2021. There is enough volatility on Bitcoin to rip the skin off your face but you need to believe that this short-term volatility is noise. Financial markets are like humans. They tend to overreact in the short term. They get spooked. A tornado hits their town and they think it is the end of the world. After a few weeks, life settles down and the memory of that extreme weather subsides and is eventually forgotten and the town gets on with its business. Bitcoin is still a new and immature asset. It has only been around for 14 years. It is an impetuous teenager that is susceptible to fits of irrational rage but as it matures its price performance will become more predictable.
2) Crypto is on Sale
Most major cryptocurrencies are down between 50 and 70 percent over the past 12 months. This means that these assets are on sale! Bitcoin is down 67 percent this year and down 71 percent off its highest price. So what is driving this downward pressure on crypto prices? The simple answer is that crypto is being driven lower by the same factors that are driving down the prices of other financial assets such as stocks and bonds, namely the war in Ukraine, inflationary fears, and higher interest rates. But there are also some crypto-specific events that have lubricated the downward trend such as the continued crackdown on crypto in China and speculation that Russian officials were considering similar actions.
3) Our Personal Freedoms Have Never been so Restricted
Could you have ever imagined being forced by the government to stay in your house for weeks? The scale of the lockdown implemented in 2020 as a response to the COVID-19 pandemic was unprecedented. The longer the lockdown lasted the more accustomed we became to these violations of our basic human rights. The world's longest continuous lockdown lasted 234 days and took place in Buenos Aires in Argentina. On March 24, 2020, the entire 1.3 billion population of India was ordered to stay at home making it the largest of the pandemic. This level of encroachment is significant and it is in the face of this intervention that we need to find ways to regain some of the freedom we have lost. You could argue that few countries are in lockdown at present and our basic freedoms have been restored. That is true in part, but the problem is the precedent that has been set. Governments now know how easy it was to suspend our rights and this makes us vulnerable in the future. So the way we need to "rebel" against this centralized undemocratic top-down control is to invest in systems that are decentralized and democratic and there are few things more decentralized and democratic in finance than crypto.
4) Fiat Currencies are Broken
The definition of a fiat currency is a currency that is not backed by any commodity such as gold or silver. All currencies in the world are fiat currencies. Before 1971, most currencies were linked to gold. They were backed by an asset with intrinsic value. Today, currencies are pieces of paper with no intrinsic value other than the hope that they will return the majority of their value and not be eaten up by inflation. Now, for the first time in decades, inflation is rearing its ugly head on account of the war in Ukraine and the impact that has had on the supply of oil and other commodities. Fiat currencies are not only broken because of Russia and Ukraine. They were broken the second they went off the gold standard. In order to understand the damage, let's look at the United States and the dollar. Over the past 50 years, the economy of the United States has grown at an average of between 2.5 and 3 percent per year. Money supply on the other hand has grown by approximately 7 percent. Incidentally, the supply of gold grows at between 2.5 and 3 percent per year which makes it a perfect link to currency because it mirrors the growth in the economy. So what happens when the supply of money increases 2.5 times faster than the economy? That excess money needs to go somewhere and it starts chasing assets like houses, condos, properties, and stocks. This creates asset bubbles because it overinflates the value of these assets. A beach condo in Miami which cost $100,000 in 1930 now is valued at $40 million. Who are the people who most benefit from the inflation of these high-end assets - the rich, and it is partly for this reason that we see a greater divide between rich and poor.
Crypto is the perfect antidote to this unhinged monetary system because it takes us back in part to the gold standard. Bitcoin has been referred to as digital gold because it is mined and has a finite supply. Its intrinsic value is its scarcity.
5) Saving Money Will Make You Poor
What do most people do when they have surplus money? They save it - they pop it into a savings account with their bank that will pay them a few percent in interest. Now you need to understand the concept of the “half-life” of money - it is how long it takes for a currency to lose half its value. The United States increases its money supply by 7 percent every year, and the half-life of the dollar is 10 years. By diluting the money supply in this way, in ten years the value of your dollar savings would have halved. If you live in an emerging market or developing market like South Africa, Mexico, India, Turkey, Russia, Brazil, Indonesia, etc, their money supply increases by 14 percent every year, which means the half-life is 5 years. If those numbers sound scary, hold onto your seat because all these calculations are pre-COVID. To boost economies post-COVID, countries have doubled their speed of money printing, which means those half-life periods now need to be cut in half - 5 years for developed economies and 2.5 years for emerging economies! What is the best way to avoid this erosion of value - instead of saving your money, learn how to invest your money, and if you read on until the end, you will see why crypto is the best investment you can make today.
6) Crypto is a Reall Financial Asset
When Bitcoin first made the headlines in 2017 when it went from $1,000 to $20,000 in less than 12 months, many0 haters said it was a scam, a fraud, and that it was going to zero. We are now five years down the line and guess what, Bitcoin and Ethereum are still around. Sure, many of the smaller less credible cryptocurrencies have fallen off the radar, but the two main ones (Bitcoin and Ethereum) are still around and account for 70 percent of this $1 trillion market. They have survived a global pandemic, Russia’s invasion of Ukraine, and Donald Trump’s presidency. Bitcoin is 14 years old. It is older than Uber and only four years younger than Tesla. If it was a scam, it would have been obliterated more than a decade ago.
7) Bitcoin Could be the Next Global Currency
What is the current global currency? It is the United States Dollar. Few people would disagree that in order for a country to boast the global currency, it would need to be financially strong. This begs the question: how strong is the United States economy? The U.S. has a fiscal gap – it is the difference between their income and their spending. For the U.S., spending is divided into five categories – healthcare, social security, other mandatory, discretionary, and interest. For the financial year ending 2021, the US Federal government spend $6.8 trillion. How much was their income? A total of $4 trillion which meant it spent $2.8 trillion more than it earned. How much is $2,8 trillion? It is a number so large that it stops making sense - $2,800,000,000,000. That is almost the size of the French economy which is the seventh largest in the world! If the U.S. was a company, it would have found itself in chapter 11 more than a decade ago. Fiat currencies are built on the U.S. dollar which is backed by a bankrupt government. The only thing that is keeping the U.S. afloat is their ability to print Benjamins – and they are paper gold for now. This party still has some way to go, but in the medium to long term, the world is going to realize that the emperor is wearing no clothes.
Which currencies could step into the shoes of the US dollar as a global currency? The euro is dogged with its own problems. It is a mismatch of economies that pares the powerful Germans with the less powerful Greeks in a union that is doomed for failure. The Chinese renminbi is another option. The Chinese would like nothing more than to have it as a global currency. They export huge quantities of commodities that are denominated in U.S. dollars. Using the renminbi as the base currency for these trades would remove the headache of currency volatility. In 2015, the IMF awarded the renminbi status as a reserve currency, but can it replace the dollar? China remains essentially a communist country and would need to work hard to win the world’s trust. That is unlikely to happen. In light of all this, Bitcoin looks like a strong contender.
8) Crypto Could be the Next Internet
The rise and adoption of crypto had been compared with the rise and adoption of the internet. The internet is the digital exchange of information and has been a phenomenal success. Crypto is the digital exchange of value and the question has to be asked whether the adoption of crypto will surpass that of the internet. Both are decentralized and it is this freedom that rattles the nerves of many investors. There is a big difference between sending an email and making a payment with Bitcoin.
So what percentage of the global population has adopted crypto? It is less than 2 percent which was the same rate of adoption of the internet in 1997. People quickly forget that adoption of the internet was slow. It was first introduced in 1983 and after 14 years only 2 percent of the people had adopted it. That closely mirrors the performance of crypto. Bitcoin first came to light at the end of 2008 which also makes it 14 years old and it too is sitting on an adoption of 2 percent.
Early adoption of the internet did lead to the dot.com crash in 2000. Hysterical investors massively inflated internet stocks believing that the new economy of the internet would displace the old traditional economy. Humans are known for irrational exuberance and the crash resulted in a dramatic loss in consumer confidence. In the crash, high-quality stocks like Amazon were punished as severely as bullshit companies like pets.com. You could argue that the recent correction in crypto is similar to the dot.com crash. The great thing about crashes is that they tend to purge the market of all the rubbish that has accumulated in it and what is left are the higher-quality assets that often emerge stronger.
Now we are ready to address the question - will crypto be as big as the internet? As of 2022, it is estimated there are 320 million crypto users. That growth was achieved in 14 years. The internet reached 320 million users in 2000 - 17 years after its inception showing that crypto adoption has been quicker than the internet. It is estimated that the total number of crypto users will conservatively reach 1 billion in 2030 - 22 years after its inception. The internet reached 1 billion in 2006 - 23 years after its inception. Shit. This means that crypto could be as big as the internet. That means that investing in Bitcoin now could be the same as investing in Amazon in 2001 at 50 cents (it is currently trading above $100!).
9) Crypto is Revolutionizing Finance
Crypto and blockchain present themselves as the most dramatic force of change since the internet. The fact that crypto is not regulated by a central bank is at the very heart of its beauty. It does not require central bank oversight because it is backed by its underlying technology. Crypto represents the democratization of finance. Crypto is the first tangible step towards narrowing the massive divide between rich and poor. To break the circle of poverty and increasing inequality, the world needs to find ways to achieve financial inclusion. More than 2 billion people do not have access to basic financial services. The existing banking model does not cater to those that are marginalized economically. The cost overheads of the bloated and inefficient system of banking branches, physical representatives, and the arcane methodology of processing and confirming transactions do not make financial sense to cater to this clientele. Here are four ways in which crypto and blockchain make the world a better place.
Firstly, crypto and the blockchain solve one of the biggest risks of money - namely fraud. When you use your credit card on an insecure site, there is a risk of fraud. Crypto is not transferred through you manually entering your credit card details - it is done securely with the blockchain and the transaction is verified through independent nodes and not by way of a centralized database. Secondly, it changes how we invest. An age-old problem that most businesses face is their access to funding. In the past middle-aged conservative bankers dominated this space and typically would only give money to companies that did not need it. Crypto has now introduced us to crowdfunding where entrepreneurs can get lots of small investments directly from the public without having to go through uncreative and expensive intermediaries like banks. This allows investors to build wealth through attractive investments and entrepreneurs to access cheap funding. It cuts out the middleman who charged high fees and added little value. Thirdly, crypto changes the money transfer process. The interbank system is slow and expensive. In South Africa, transferring money from one account to another account at the same bank is not instant - it can take up to 30 minutes. If you transfer from one bank to another, and you want the money to reflect in the other account on the same day, you pay extra. If you want to transfer to another country, it takes 2 to 3 days. Crypto does not get slowed down by all the checks of traditional banks and transfers are instant. This is important - when you sell your car to someone and the buyer does the transfer on his phone in front of you, you don't want to have to wait 30 minutes for the money to clear. Fourthly, crypto gives people greater control of their own money. Many people do not trust banks and financial institutions and opt to keep their cash at home. Crypto cuts out the banks and puts the money back into the hands of the people. Any time that more people can get control of their own money, this is a good thing.
10) Crytpo is Better than the Rest
Investing is a relative game. The words "good" and "bad" have no place in financial markets. Let me explain. When Teela first started operating it made eyewatering losses. It was burning through large piles of cash and making large losses. Public companies in the US report their results every quarter. Since listing, Tesla's worst quarter from a net income perspective was the second quarter of 2018 when it lost $718 million. That is a lot of money. The question is when Tesla announced this number, do you think the stock went up or down? A gut reaction is that the stock went down because that is a "bad" number but that is not how stock markets work. They work on a relative basis. Numbers are also compared to something. Before quarterly results are announced, the market arrives at a consensus number. This is a rough sum of the expected result. Analysts will do their calculations and publish what they expect Tesla to report. Let's say the general consensus in the market was that Tesla would lose $1 billion for that quarter. You have to agree that $718 million is a lot better than $1 billion. It is therefore highly likely in this case Tesla stock would have gone up on this announcement. Although the number was bad if seen in isolation, it was considerably better than what was expected.
So what does this all have to do with crypto? In my opinion, crypto is a compelling long-term investment seen in isolation, but let's assume you are not yet convinced by my nine arguments. My tenth argument is to try and convince you that not only is it a good investment, but it is better than any other investment out there. My final card is the relative card.
We know that inflation is heading higher, so we need to ask the question: which assets do well in inflationary periods? That depends on economic growth. There are three different high-inflation scenarios: high inflation with low economic growth, medium economic growth, and low economic growth. The years that lie ahead of us look to be similar to the 70s. In other words, we are facing high inflation with low growth because most of the global economies appear to be heading into a recession. Very few financial assets do well in this stagflationary environment. According to information from Reuters Datastream and the St Louis Fed Database, the worst performing asset are emerging market equities that tend to lose 2 percent per month - 24 percent per year. Global commodities lose 1.8 percent per month or 22 percent per year. Gold loses 0.8 percent per month. US equities lose about 4 percent per year, and US REITs (real estate) are flat. The best performing assets are US mortgage backed securities that gain 1.3 percent per month or 16 percent per year. To put it bluntly, in such an environment there are very few places for investors to hide. The combination of low growth and high inflation is akin to a perfect storm - except there is no escape route. Let me rephrase that - there used to be no escape route, but there is now. Cryptocurrencies.
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