With the largest U.S crypto exchange site IPO-ing, it feels like another watershed moment for cryptos. Coinbase rose as high as $409 from its reference price of $250, before settling at about $342 last night. Not going to spend time speculating about its movements, as I’m passing on the opportunity to invest.

I am uncomfortable. There have been a lot of signs, and having a huge IPO is the latest that crypto might be getting overheated.

There has been a huge rally in cryptos recently, and that has been making people excited. Stimulus checks haven’t been going into the stock market, but more into cryptos. But it’s making me nervous. My view is that higher prices mean higher risk. Most people look at the price trend and assume it’s going to keep following that pattern. And cryptos have been nothing but up recently. The party just seems to keep going on and on.

The Wrath of the Regulator?

Cryptos have been going up so much that I worry that it will crash other parts of the market and cause systemic risk. I’m pretty sure that the regulators are keeping a close watch, and Tharman had warned Singaporean retail investors to stay away.

The more successful cryptos become, the more likely that regulators will take action. As mentioned, there is a systemic risk if thousands or millions of people suddenly lose their life savings. Heads-up, most of it is going to end up in the pockets of the Bitcoin promoters like the Winklevoss Twins and Chamath Palihapitiya. People who I’m sure have your best interests at heart. The U.S. government is staring at the possibility of losing control over their own currency. It’s a big reason why China banned cryptos, and arguably it’s been a pretty wise move for them. Will the Fed be the suckers who stand meekly by while Bitcoin takes the dollar’s place as the world’s reserve currency? They do realise it would be a catastrophe for their country right? Right?


Well, at current levels, I won’t participate. These things move in cycles, and I’ll be happy to throw some money in at the next crypto winter. But its the opposite now, crypto paradise.

How are the people getting paid?

Doing my research on crypto, I found something else that bothers me. The interest rates being paid on crypto accounts are incredible, going as high as 30%. Average seems to be about 5%-8%.

But how are these being paid? Cryptos are non-income producing assets. It’s not like a business that sells products or services. Like gold, it just sits there or gets traded around. In fact, it costs money to let them sit there. You have to pay for hosting, security, electricity, manpower, insurance, etc.

So to pay high-interest rates to consumers for depositing their crypto, there must be someone else on the other side of that trade, lending out at even higher rates. There is scant information on what and who these exchanges are lending out to. But judging by the interest rates they must be charging, it seems likely it’s going to people who don’t have very high credit ratings. I also wonder if some are borrowing from cryptos to buy cryptos. That’s sustainable as long as the asset price keeps rising forever.

This rise in cryptos has been challenging for my core beliefs about finance and investment. One of the first things you learn as an investor is that it is difficult to beat the market, which generally means about 10% a year. If you can produce that for a few years, you will be an award-winning fund manager. Everyone will eagerly push money into your hands if you can generate that consistently.

But every kid who has yolo-ed into doge coin and pretty much any other coin has smashed the professionals by a long shot. It’s not even close. Warren Buffett looks like a complete noob in comparison.

Yes, this makes complete sense

Another fundamental belief I have is that intrinsic value should count for something. There must some kind of fundamental value generated. As far as I can tell, cryptos have no intrinsic value. It’s all based on what the next person will pay for it. I do wonder how many institutions will pay hand over fist for an asset that was a fraction of its price a few months ago. Frankly speaking, I will pull money out of any bank that is paying these kind of prices.

Let’s look at it from a different angle. Pfizer announced their vaccine had 97% efficacy rates in Nov 2020. A true life-changing miracle that will save millions of lives, and will produce a huge recurring revenue stream. What happened to their stock price? It dropped over 9% from a Dec 2020 high. What was dogecoin (something its developers created as a joke) doing over the same period of time? It went up by 10,640%! Someone, please explain that to me.

Again, I can be wrong and crypto could be the magical asset/currency that can only continue to exponentially grow. I’ve been wrong before and I certainly can’t argue with its results so far. Every single person who had spoken out on Bitcoin so far has been spectacularly wrong. Kudos to those who ignored the advice and have bought in.

But I don’t understand the crypto space, and it’s probably too late to participate for me. I am content with growing my portfolio at 10%-20% a year, and that will be more than enough. In this age of 10,000% returns, that seems really lame. I realise I may stand to look stupid or outdated, to be earning single or double digit returns while everyone else is doing multiples of that. But I have to listen to my core beliefs. I can’t go chasing every fad and abandon what I believe in. It’s more important that I preserve my wealth and invest in time-tested assets.

If I surrender my basic common sense as well as my understanding of finance, I might as well invest by throwing dice.

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