Is it time to abandon crypto?
Here's a better way to ask that question...
D.R. Barton
December 1st, 2022
Blog | Is it time to abandon crypto?
tl;dr
The crypto collapse isn't anything new—it's just history repeating itself.
"Should I quit crypto?" might not be the right question.
Instead, try: "Crypto's going to be volatile for a long while. Does that work in my portfolio?"
This is a perfectly reasonable question to ask yourself. Quick recap:
FTX’s collapse makes clear the massive negative impact of human shortcomings (logical, ethical, statistical, etc.)
Bitcoin, still the biggest player on the field, is down 74% from its peak.
You can’t even mention crypto online without opening yourself up to trolls.
Despite all of it—and I promise this will make sense—I'm still not ready to walk away from crypto.
I’m not here to tell you it’s right for you. It might not be.
But I’ve been in the markets for 30+ years, so a flame-out like SBF’s isn’t anything new for me. Long before his empire collapsed, we all knew that crypto was a huge risk.
The only trick is: how to incorporate that risk into your overall investment strategy.
Market bubbles that collapse are nothing new
Thankfully, you don’t need decades of market experience to see that crypto in 2020-21 exhibited all the signs of an overheated market. It’s all there in the historical data.
Here’s how a bubble plays out, time and again, through the centuries:
A NEW THING! happens (product, service, or technology)
Word spreads of early successes in investing or trading the derivatives of that NEW THING!
Pundits and media declare, “This time it’s different!”
The market finds a way to make investing in the NEW THING! easier + faster + cheaper
Greed cycle peaks
No one credit-worthy is left to buy
Bubble bursts
Lather. Rinse. Repeat. It’s the same story, from Tulip Mania to the South Sea Bubble to the current Crypto Collapse. It’s the inevitable result of investing psychology and behavioral finance.
A better way to ask the question
In 2001, as the dot-com bubble burst, the big question was: “Should I abandon tech stocks?”
In 2008, as the housing market collapsed, it was, “Should I abandon banking and home builder stocks like JP Morgan ($JPM) and D.R. Horton ($DHI)?”
And now, in late 2022, it’s: “Should I abandon crypto?”
Which, again, is a worthy question to ask.
But there’s a better way to ask it. Try: “Do I understand the risk that crypto adds (or would add) to my portfolio?”
Because as an investor, that’s all that matters.
It’s not about whether crypto will survive as an asset class - it almost certainly will.
It’s not about pride or emotions or even being the bag holder in a Ponzi scheme.
It's not about being the smartest person in the room.
It’s not about being able to talk at a party about how you caught a falling knife when you bought.
Whether to continue (or start) investing in crypto is like investing in any other asset: it’s about understanding and managing the risk and nothing else. That’s because, for right now (and probably for the forseeable future) crypto will be the most volatile asset most of us will even consider buying.
Find out how crypto works in your portfolio
You can’t avoid risk completely. It doesn’t matter whether your portfolio is packed with every newly-minted token, or you’re in bonds and precious metals.
Even when you seem to be taking no risk (like holding cash), your real wealth (buying power) slowly drops, thanks to the effects of inflation.
The real question is not whether to abandon an asset class, but whether we can understand and manage the risks of that asset class.
If you look at the performance of some of the most well-established cryptocurrencies, you can start to see the hypothetical impacts adding a new asset would have on your existing portfolio.
Better yet—open a free Finiac account, and get a preview of what they might look like in your own portfolio. Just a test-drive, of course. Play around with position sizing—start with a small stake in a crypto you’re interested in, and see how it affects the risk efficiency of your portfolio overall.
It might not be for you. But don’t let the frauds and trolls scare you away. Crypto’s not going anywhere. Taking it seriously as an asset class means that we’ll have to weather a storm like this every once in a while.
God bless you and great investing,
D. R. Barton, Jr.
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bag holder - In current stock slang, a “bag holder” is one who hangs onto a stock as it drops, even all the way to zero. This investor may have bought a hot stock near the top and failed to acknowledge its demise. In a more traditional sense: Realizing that the thing you have (what’s in the “bag”) is not the valuable thing you that you thought you had.
falling knife - A "falling knife" is the term used to describe a rapid drop in the value of a security such as a stock or bond. Investing in a security while its value is still sharply dropping is referred to as "catching a falling knife.”
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