The Truth About Crypto, A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets by Ric Edelman
In this guide to cryptocurrencies and blockchain, prominent financial adviser Ric Edelman pulls off an impressive balancing act. On the one hand, he comes across as an enthusiastic cheerleader for digital assets. On the other, he clearly and repeatedly tells readers not to put more than 1% of their portfolios into this new market. His cautious approach is a good thing, because the timing of this book was less than perfect: Its 2022 publication date coincided with a crypto crash. getAbstract never gives investment advice, but Edelman makes a strong case that cryptocurrencies aren’t going away and that investors would be wise to take them seriously.
- Blockchain technology has the potential to transform economies.
- Bitcoin has gone mainstream.
- Yet bitcoin suffers from some fundamental flaws.
- Despite the doubters, cryptocurrency is real money.
- Some see bitcoin as a digital alternative to gold.
- An investor can take a position in digital assets in a number of ways.
- Bitcoin has generated truly eye-popping gains.
- Trepidation is typical – here’s how to overcome common objections to investing in bitcoin.
The Truth About Crypto Book Summary
Blockchain technology has the potential to transform economies.
The traditional economy is based on trust – a company or an individual can keep a record of deposits and withdrawals, for instance, but there’s no assurance that the ledger is accurate and complete. Blockchain, on the other hand, creates an “authentication economy.” Blockchain relies on distributed ledger technology, in which every transaction is recorded publicly, for all to see. This trait promises to transform previously complicated transactions. For example, with blockchain, there’s no need for a real estate transaction to be bogged down in weeks of mortgage approvals and title searches. The transaction can happen immediately. As a result, blockchain threatens to make title insurers and settlement attorneys obsolete.
“Blockchain technology will be so impactful because it revolutionizes business.”
It’s not just the real estate industry that will find itself disrupted by blockchain technology – blockchain can make stockbrokers, insurance agents and ticket resellers redundant. That’s because the blockchain is designed to be a foolproof way to authenticate large transactions. The blockchain is decentralized, which means no one person can commit fraud. It’s transparent – everyone can see every transaction. And this technology is permanent. Once a record has been entered on the blockchain, it can’t be removed, duplicated or changed.
Bitcoin has gone mainstream.
The bitcoin blockchain debuted in 2009, a moment when the global economy was in free fall. At the time, bitcoin was such a novel concept that few people attempted to solve the difficult math equations required to earn the new cryptocurrency. In 2009, the block reward for solving a problem was 50 bitcoins. As of 2020, after a series of halvings of block rewards, the compensation had fallen to 6.25 bitcoins. The competition has grown so fierce that bitcoin miners no longer use standard desktop computers. Instead, they buy $12,000 rigs, even stringing them together to boost their chances.
“All this publicity, supported by huge increases in the price of bitcoin and other digital assets, has created a seemingly unstoppable force.”
Bitcoin was always envisioned as an alternative to fiat currency. While the US government can create an endless supply of dollars, the supply of bitcoin will be limited to 21 million coins. As of 2022, about 18.5 million coins had been mined, and some 4 million had been lost. Some early miners didn’t bother to keep track of their bitcoins; others lost their passwords. Bitcoin billionaire Mircea Popescu drowned in Costa Rica in 2021, and no one knew his bitcoin password.
“We must always be careful when investing. It’s no different with digital assets.”
In recent years, bitcoin has gone mainstream. Some 200 million people own at least some bitcoins. Credit card issuers, retailers and even a mortgage company have acknowledged the trend by accepting bitcoins as payment. Transaction volume exceeds $1.5 trillion a year, more than twice PayPal’s annual activity.
Yet bitcoin suffers from some fundamental flaws.
The idea behind bitcoin was that it would replace government-backed currencies. However, that goal has been complicated by a few realities. One is that bitcoin is quite volatile, a characteristic that undermines its use as a currency. Another issue is that settling a transaction in bitcoin is slow – the bitcoin ledger takes seven seconds to approve a transaction. By contrast, Visa handles 1,700 purchases per second. Bitcoin’s shortcomings led to the creation of other cryptocurrencies, including Tether, Litecoin and Ether, many of which sought to address problems with the original virtual currency.
“The digital asset ecosystem is complex and ever-growing.”
Despite the growing popularity of bitcoin, skepticism remains. One line of criticism says that bitcoin can’t be money because it’s not underpinned by gold, silver or anything else of value. However, a similar argument could be made about US dollars – they’re not backed by anything tangible either. They have value because consumers place their trust in the government that issues the money.
Despite the doubters, cryptocurrency is real money.
Take a step back and analyze what makes a currency a currency. Those factors include scarcity, acceptability, uniformity and portability. Of course, bitcoin’s volatility undermines its status as currency. That’s why new flavors of cryptocurrency are positioned as stablecoins, or a cryptocurrency whose value is pegged to a fiat currency. A US stablecoin, for instance, is worth the same as a US dollar.
“This is why digital assets are here to stay: governments love ‘em.”
Across the world, governments are moving away from physical money. Hard currency presents problems. It’s untraceable, so criminals, cartels, terrorists and tax evaders favor cash. A number of nations are testing central bank digital currencies (CBDCs). The Bahamas has already introduced a CBDC, known as the sand dollar, and China, Russia and Japan are among the major countries testing virtual money.
Some see bitcoin as a digital alternative to gold.
Bitcoin enthusiasts aren’t the first group to question the primacy of fiat currency. Gold bugs have long pitched their favorite metal as a superior alternative to paper money. They point to a variety of reasons to prefer gold: The metal has served as a store of value for thousands of years, and it’s a hard asset. What’s more, they argue, gold provides its holders with hedges against political upheaval and inflation. In addition, the supply of gold is finite, and its value isn’t correlated with equities.
“The two asset classes have nothing in common, and the words bitcoin and gold should never appear in the same sentence.”
But the gold bugs overlook some obvious downsides of gold. Its bulk is an issue – $1 million of gold weighs 35 pounds, so it’s not the most portable of assets. What’s more, gold’s permanence means that its supply grows every year as more gold is mined. And gold isn’t guaranteed to provide a hedge against inflation – sometimes it works as a hedge, other times it doesn’t. But the salient point is that gold and bitcoin really have nothing to do with one another. Comparing them is pointless.
An investor can take a position in digital assets in a number of ways.
How can you make money from the revolution in digital assets? Here are a few strategies investors are using:
- Mine coins – If you have the technical expertise to mine coins and the cash to invest in mining rigs, solving math problems is one way to play the cryptocurrency market. If the coins you earn from mining are worth more than your expenses, this strategy will pay off.
- Invest in miners – As mining grows more difficult, the most successful miners are sophisticated companies. Riot Blockchain is one example: The publicly traded company said it spends about $15,000 to mine a single bitcoin – so as long as the price is above that mark, mining is profitable. A handful of other publicly traded miners let investors enter the market this way.
- Buy coins or tokens – You can directly buy bitcoin, Ether and other cryptocurrencies. Dozens of digital asset exchanges smooth this process, letting you set up accounts where you can buy and sell cryptocurrencies. Prominent exchanges include Binance, Coinbase, Gemini, Kraken and Robinhood.
- Farm for yield – You can lend or stake your coins to others and earn interest, a process known as “yield farming.” A word of caution: Yield farming is a risky endeavor.
- Invest in blockchain infrastructure – During the 19th-century California Gold Rush, Levi Strauss became a household name not by mining for gold but by selling supplies to miners. The picks-and-shovels strategy applies to digital assets, too.
- Buy derivatives – You could buy options, futures, forwards or swaps based on the future movements of digital assets. However, this is a risky approach. The leverage involved in these contracts magnifies gains and losses.
- Buy bitcoin futures ETFs – This type of ETF, or exchange-traded fund, doesn’t directly own bitcoins. Instead, the fund holds futures contracts on digital assets. For most investors, the consumer protections governing ETFs make this vehicle preferable to playing the futures market directly. Examples include the Global X Blockchain & Bitcoin Strategy ETF and the ProShares Bitcoin Strategy ETF.
- Invest in a venture capital fund or hedge fund – Once a growth company hits the stock market, all the big gains have already happened. But venture capitalists can score truly huge returns by taking stakes in early-stage companies. If this appeals to you, consider investing directly in a venture capital fund. But beware – the risks are no joke. Among the downsides: Your capital will be locked down for five to 10 years, you’ll get no dividends or interest, investment minimums can range as high as $10 million, and you’ll pay steep fees.
Bitcoin has generated truly eye-popping gains.
The first bitcoins traded in July 2010 for 7 cents apiece. As of October 2021, that price was $61,319. An investor who held bitcoins for the duration was sitting on a return of 87,598,471%. An investor who waited until October 2011 to buy bitcoin at $3.11 would have reaped a return of 1,971,572%. Even buying in October 2016 at $727 would have yielded a gain of 8,335%. Those sorts of outsized gains have encouraged many to try to market-time digital assets. This is a mistake, because it’s all too easy to miss the single-day gains. The recent history of bitcoin shows that most of the profits in any given year come in just 10 days of the year.
“Investing a lot is a mistake. But investing nothing is also a mistake.”
The smarter move is to use dollar-cost averaging, a strategy that lets you buy digital assets incrementally. You can set a schedule of weekly, monthly or quarterly investments. Dollar-cost averaging is less risky than investing a lump sum in digital assets. Say you bought bitcoin in December 2017, when the price was $13,379. By January 2019, the price had plunged 74%. But by October 2021, bitcoin had returned to late 2017 levels. Waiting nearly four years just to break even isn’t an exciting investment strategy. But if you had dollar-cost-averaged your purchases, your losses in the 2018 crash would have been smaller, and your break-even point would have come sooner.
Trepidation is typical – here’s how to overcome common objections to investing in bitcoin.
Cryptocurrency, blockchain and digital assets are strange new concepts, so reluctance is understandable. Those fears are logical, but they need not prevent you from investing in blockchain. Here are some common objections:
- “I’m nervous about investing in digital assets” – There’s no shame in feeling this way; you should be anxious about investing in an asset class you don’t understand. But the more you learn about blockchain, the more the case makes sense. What’s more, investing in digital assets can provide a variety of benefits, including diversification, higher returns and protection against inflation.
- “It’s a fad” – For investors, it’s crucial to distinguish between fads and trends. Bell-bottom jeans were a flash in the pan, but casual clothing is an enduring trend. Investors of a certain age remember the Beanie Babies fad. Digital assets are not another version of the Beanie Babies toys; this is a legitimate trend.
- “It’s a fraud” – Investors always need to be mindful of chicanery, but bitcoin itself isn’t a scam. Instead, you should recognize that every credible asset class – stocks, bonds, real estate, commodities – has been used as a tool by hucksters and fraudsters.
- “There’s no way to ascertain value” – In the blockchain space, prices are decentralized. No individual or authority sets the price. That’s actually an advantage of digital assets.
- “It’s too volatile” – Bitcoin crashes regularly. But so do other asset classes, including stocks and real estate. Savvy investors view volatility as an opportunity. Upside volatility is a reward for investors; downside volatility is an opportunity to buy at a discount.
- “It’s too risky” – Risk is involved in any new type of investment. You can mitigate the risk of digital assets by devoting no more than 1% of your portfolio to this class of assets.
- “I don’t need it in my portfolio” – Just as stocks, bonds and real estate provide you with diversification, digital assets can zig when the rest of the market zags.
- “It’s too late to buy” – It’s true that the price of bitcoin has soared, from $479 in 2012 to $50,000 or more in 2021. Some skeptics say this means the opportunity to buy has come and gone. In fact, the soaring price of bitcoin makes it a safer investment. Its price in 2012 reflected its novelty and its limited acceptance. Now, though, the use case for bitcoin has been well established.
- “I’ll wait for the next decline” – If you wait too long, the prices of digital assets will run away from you. So employ the magic of dollar-cost averaging. By buying in increments, you’ll benefit from the eventual rise of digital assets.
- “I don’t know how to begin” – Talk to a financial adviser. You can find good advisers at DACFP.com, the website of the Digital Assets Council of Financial Professionals.
About the Author
Ric Edelman was ranked the top independent financial adviser three times by Barron’s. He hosts a national radio show and podcast, and he is the author of 10 books about personal finance.