323 | Pump and Dump

Curious about cryptocurrencies? Is it investing or is it gambling? It’s a topic the community has a lot of questions on, so in this episode we create. framework for the conversation and explore the nuances. In the US, we generally want for nothing and true scarcity is something we haven’t recently experienced until this year and suddenly being presented with it creates some interesting psychological reactions. It’s good to position yourself to be ahead of the game and be prepared when you hear reports of activities that might affect the supply chain. You don’t want to be doing something at the exact same time as everybody else. See trends, think outside the box, and make your moves ahead of time. Colonial Pipeline paid to resolve their ransomware attack with a cryptocurrency, specifically, Bitcoin. Gas pumps on the east coast may be getting back to normal soon, but there’s an ongoing pump and dump issue with crypto. The stories of insanely high levels of return from crypto are all over the news and social media, creating a sense of missing out for those who aren’t in the game. So should crypto have a role in your plan for financial independence? For Brad, cryptocurrencies have always felt like pure speculation, which is the hope that you can buy it and then sell it later to someone else for more money. Although he is leery of all cryptocurrencies in general, he is interested in learning about the entire sphere of crypto because of all the innovation with decentralized finance and potential for smart contracts and NFTs. Although Brad believes there could be work-changing potential, he knows he’s not knowledgeable enough to know what it will look like or pick a particular company or cryptocurrency. Bitcoin was the first cryptocurrency to experience mass adoption and the most valuable on a per coin basis. Its value has increased ten times in the last year alone and yet it isn’t the crypto with the highest rate of return. At its core, Bitcoin is code. While only 21 million of the coins will ever exist, because it is code, it can be cloned or forked to add new features. There’s nothing magical about it that makes it worth $40,000 or $60,000 per coin. There are close to 10,000 different cryptocurrencies all with unique features and various values. Some have done well and some have done insane, but without the benefit of hindsight, you don’t know which are yours. It’s important to understand the different parameters that drive the value of a coin, what a pump is, and how they can run in parallel to affect the price. In contrast, investing is when you buy an asset of known value and it produces a return of some regular amount over a period of time. There are some who state Bitcoin is digital gold. When asked his thoughts on gold, Warren Buffet said that he had no idea where it would be in five years but he knows it won’t do anything between now and then except look at you while Coca-Cola and Wells Fargo will be making money. He would rather invest in something that can produce. Jonathan notes that while we are all on the same path directionally, we aren’t always going to agree. Though it’s true gold doesn’t produce anything, he sees it as an excellent store of value and has been more open to gambling on the Doge cryptocurrency. Gold has increased in value over the years, not because it produced anything but because the dollar has lost value to inflation while gold has held its value. The same argument could be made for crypto due to the limits on the number of coins. Unlike physical gold, crypto is a lot easier to store, liquidate, transfer, and transport. Cryptocurrencies have value because we say it has value. Although Brad believes the use cases are still small, he’s open to learning new information. In Episode 099 of the podcast, Michael Peterson discussed his non-profit in El Salvador. The use of Bitcoin there has cut down on friction and the fees for sending money from the US to El Salvador. Crypto is different from gold though because it is code and we don’t know what it will look like a few years from now. For instance, there are six different versions of Bitcoin. Bitcoin takes a lot of energy because of its mining concept for its transactions. All of the Bitcoin mining around the world takes up more energy than the country of Argentina. Other coins use no energy, so Elon Musk has said Tesla will look for cryptos that use less than 1% of the energy of Bitcoin. Crypto as a store of value use case has not been proven out yet. Gold, unlike cryptos, has a long history as a store of value and is less like to disappear from our memories like Blockbuster. DogeCoin started out as a joke and has grown to a total value of $54 million whose value can move up or down dramatically just based on a Tweet from Elon Musk. Last November, Jonathan put $150 into DogeCoin when it was $0.009 a coin. When he looked at it again recently, the price was in the neighborhood of $0.40 a coin. There are 130 billion DogeCoin and unlike Bitcoin, they can make more. since it uses less than the 1% of the energy Bitcoin does, Elon Mush began Tweeting about it and pumping the price of DogeCoin. Because he didn’t see a use case for it or think the value of DogeCoin would increase dramatically again, Jonathan sold it before it lost value to an Elon Musk Tweet. Brad thinks that Jonathan looked at it the right way because he viewed his DogeCoin purchase as gambling. Unlike owning shares of an actual company that can be used to calculate a company’s market cap, crypto is just code. DogeCoin can and does just make more. After selling his DogeCoin, Jonathan took $1,500 of the money to invest in another energy-efficient coin with similar features, running on a secure network, with a 10 billion coin lifetime limit. That coin skyrocketed and he sold it before it later came back down. Cryptocurrencies are susceptible to pump and dump. Jonathan felt a need to do this show not because he’s a genius with crypto, but because others are potentially losing massively, like whoever bought his coin. Anyone can create a cryptocurrency and begin selling a smaller portion of it on social media, building the hype around the coin and pumping up the price. The value increases dramatically, the creators and the early adopters begin to sell and deleveraging their position and let the coin die. As they dump their coin, those who bought to the top lose their shirts. Some of these pump and dump scenarios are scams from the creation, but sometimes good coins get pulled in and pumped by a group trying to control the market. Jonathan sold his coin when he found out 80% of the coin was held by just two addresses and the rug could be pulled out from under him at any time. Although he made money, his success is not replicable. There is a case to be made for gambling as entertainment. You just need to go in knowing that there is a high likelihood that you are walking out with nothing left. Brad believes in the decades to follow a couple of winners will emerge and their technology will change the world dramatically. You can prepare for it by educating yourself. Speculation can be a continuum. It can be high-risk with varying levels of confidence and potentially high levels of return. For cryptocurrencies, Jonathan likes those with a pre-mined amount, are energy-efficient, have liquidity and a lot of partnerships, have utility, play nice with banks and adhere to anti-laundering and anti-terrorism laws. He also believes that while these were created to exist outside of regulation, regulations are coming. When taking everything he’s learned about cryptocurrencies into consideration, Jonathan can decide on what cryptocurrencies to purchase that is more calculated than pure speculation. Resources Mentioned In Today’s Conversation ChooseFI Episode 099 Generous Giving on the Path to FI | Michael Peterson If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy.  Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.