The Old Man’s Views
Fruit machines ain’t finance
I came into the cryptocurrencies looking for additional products to hedge against inflation and economic decline.
What I found ...was a minefield.
I appreciated the ideology behind Bitcoin, and I realised volatility was a significant issue. I also understood how the blockchain worked with miners, proof of stake, and proof of work. I remain excited about the potential of this technology and appreciate how smart contracts are a vastly superior way to carry out all different types of transactions.
I expected to find a few experts I could learn from, which I did. But I was not expecting to see so many young people, with almost no knowledge of financial markets, throwing their savings into these products in the same way as they pump coins into a fruit machine.
Until the advent of trading platforms, I'd always argued that financial markets were not casinos, citing the amount of research people would do before they risked their capital. However, when trading platforms came in, things changed. The industry moved away from providing professional services to the investors and instead focused on turnover. Sadly, this meant that most good old-fashioned brokers disappeared.
I lamented the decline in professional brokerage but enjoyed using the real-time charts and news feeds now available. With turnover the main focus, CFDs took off, mini contracts expanded, and we saw initial margins and commissions drop across the board as companies competed for clients. Specialists issued trading recommendations, but that slowly declined, and now most trading ideas are given as opinions on market direction.
The popularity of trading platforms and reduced costs brought a lot of new players into the financial markets arena, including many who treated the markets as a game with prizes. As such, I can no longer argue that financial markets are anything other than a casino for many new participants.
My observations of how most participants approach investing or buying cryptocurrencies do nothing to change this view.
Social media, including LinkedIn, is full of optimistic comments on a host of cryptocurrencies, as well as a lot of positive news stories attracting more people into these markets. We are all encouraged to have a positive outlook on every aspect of our lives. But I question the value of us all copy and pasting the views of a handful of large currency holders. When it comes to financial markets and speculation - especially in such a volatile environment - it would be vastly beneficial for everyone involved if we had more variety in opinion and analysis.
Crypto is a very young industry with great aspirations, and I am convinced that we can realise many of these aspirations. That said, the market is still growing and whilst it grows, we need to be aware that there are people who will use social media to manipulate new players and market values.
Some people use the term The Wild West when describing cryptocurrency trading, and sometimes it feels like it. Many people, including me, like to use cliches, but I would suggest people think about the warnings we have to give on our recommendations. Past performance is no guarantee of future gains!
We now have over 6,000 different cryptocurrencies, and God only knows how many NFTs we have or will be launched this year. In my opinion, this is verging on the ridiculous.
I understand that 1,000s more NFTs will come to the market this year, especially with the interest and investment in the Metaverse, and I hope I can pick a few decent NFTs for myself.
But I find it difficult to accept that we need 6,000+ cryptocurrencies, and I expect this number to reduce significantly. That is not to say we do not need new currencies coming onto the market or that some of these new currencies will not flourish. Moreover, actively trading in and out of multiple currencies can mean participants find themselves paying vastly too much in commission or gas over a year.
It is challenging to simplify a constantly evolving, dynamic, highly technical sector, which is pushing the envelope in multiple directions, but this will need doing sooner or later. In the meantime, I cannot stress enough how important it is that novice investors carry out a lot of research on products long before they commit their hard-earned cash.
And please do not rely on the stories or recommendations you find on social media. Everyone in this eco-sphere is biased, and many big players have agendas.
On a positive note, I recommend everyone improve their technical analysis skills. Although there is little price history, these markets are moving very well technically, so if you see an excellent pattern forming, especially on daily charts, don't ignore it.
And finally, use stops to limit your losses. I know many people will think they are clever by telling you to HODL (hang on for dear life), but I repeat what I said earlier, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PROFITS. Hodl'ing has served many early investors very well, especially early buyers of Bitcoin. Still, there has been a lot of water passing under the bridge since 2008, and now the market is becoming flooded, and floods can be dangerous.
You can use many different trading strategies to help you navigate these volatile markets successfully, so do try to find one that works for you. A good strategy has an entry point, an exit point, and a level where you will close your exposure, at a loss if necessary. Hodl'ing is not a strategy, it is trading on a wing and a prayer, and it is not surprising that you hear people repeating it when the markets look weak and want to deter other people from selling.
Yes, it's a casino. But with a bit of work, you can increase your odds.
That's it for this week.
Until next time,
Good luck and good trading.