Why Cryptocurrency is NOT the Answer for Building Wealth

Here at Tangibles Finance, we believe in deploying strategies to build personal wealth and to optimize for net worth. Soon after I published “Tangibles: The Six-Figure Millennial’s Guide to Personal Finance and Building Wealth,” many asked me if I had a chapter dedicated to cryptocurrency. I did not. This was not because I didn’t have any knowledge about cryptocurrency, but because cryptocurrency doesn’t have any meaningful position in my personal strategy. Unlike low-cost, market-cap weighted index funds and tax-advantaged accounts, cryptocurrency also does not have a place in most pharmacist’s portfolio. I will explain exactly why below. Before you start scrolling down, I suggest grabbing a bag of chips (the inner pharmacist in me wants to say grab something that is aligned with the DASH diet) because this is a long post.

1. There are two reasons anyone does anything: a good reason and the real reason.

JP Morgan is quoted saying, “A man always has two reasons for doing anything: a good reason and the real reason” in the book “The Elephant in the Brain: Hidden Motives in Everyday Life.” Why do you and others (namely, those on YouTube, TikTok, and Twitter) want to “invest” in cryptocurrency? I use the word invest loosely here; I think this activity is more akin to gambling. Many state the technology behind cryptocurrency as the reason, which I’ll explain in a momentary tangent.

Cryptocurrency uses a technology called a blockchain. What is a blockchain? Think of a block as a cube, and a chain as a literal chain linking those cubes. Each of those cubes is a container that gets “filled” with data. Once the container gets filled up, the next cube gets “filled” and once that cube is “full,” it links back to the previous block (data-cube). So, what is the data stored in each of these blocks, or data-cubes? The data stored here is a digital form of a ledger. For those unfamiliar with the term ledger, this is a book that records transactions. For example, if you bought a notebook from the Dollar Tree and you wrote down, on the first line, John paid Mary $5 in cash, you now have a ledger. You have recorded a transaction that can be read and serves as a “source of truth.” A digital ledger is simply a digital version of this. The blockchain is a way to record transactions and has no central authority. For example, Bank of America doesn’t store all of the transactions on the blockchain; computers (nodes) operating on the network store the transactions, so the system is decentralized. Since each member in the network has a copy of the digital ledger, if anyone (like Mary) tries to manipulate the network to say John paid Mary $5,000,000, everyone else in the network knows that this is incorrect because all of their records say John paid Mary $5, and Mary’s manipulated record is rejected from the network.

What about the “crypto” part of cryptocurrency? Good question. Cryptocurrency uses public and private keys, which are paired to each other. When you transfer cryptocurrencies, you have both of these keys; one is public, and one is private. You can share your public key with anyone, which allows other people to send you cryptocurrency. When you receive the cryptocurrency, you use your private key to unlock the vault (wallet) that contains the transferred assets. For example, think of a hotel. You can tell the hotel staff to slide mail underneath your door, which they can identify by room number (public key). However, in order to get into the room and read the mail, you need your room keycard (private key).

Why did I go down this momentary tangent to explain all of this to you? I did this because most in the crypto space use this technology as the reason why cryptocurrency is revolutionary. And yes, the technology does seem revolutionary. However, this is irrelevant because the real reason people like cryptocurrency is because it can make a select few into millionaires overnight. This won’t happen for everyone just like everyone won’t win the lottery. Like people buying lottery tickets, most will lose their money. People buy cryptocurrency because they hope it will go up to the “moon,” and they’ll cash out once its value rises. “Moon” or “mooning” here refers to a cryptocurrency suddenly spiking in value and going up to the proverbial moon. It’s a lot like buying a stock; although, this is an imprecise analogy because the cryptocurrency market is more comparable to Forex than to the stock market. Forex, for the uninitiated, refers to the foreign exchange; this is the market where people trade one currency for another (USD for GBP, for example).

If you buy 10 shares of a stock at $1, and that stock suddenly goes up to $100,000/share, you are now a millionaire. Input: $10. Output: $1,000,000. This is the real reason people “invest” in cryptocurrency in my opinion. They want to hit it big on Bitcoin (BTC), DOGE, or other cryptocurrencies; they really don’t care about the underlying technology but use it as a convenient and good reason to allocate money to cryptocurrencies. Is it a bad thing to purchase something hoping it goes up in value? No. However, it’s nearly as delusional as the gambler trying to outsmart slot machines in Vegas casinos. If Bitcoin didn’t go from being worth $400 per coin in 2015 to $60,000 per coin in 2021, I don’t think anyone would be talking about it today, and it definitely would not be a household name.

2. Speed and cost of transactions

Earlier, we spoke about how computers in the network have to verify transactions on the blockchain before the exchange actually occurs. According to the article here, “Sometimes, in 2017, it took an average time of 78 minutes to confirm a Bitcoin transaction. On the Bitcoin network today, the average confirmation time for a BTC payment is about 10 minutes. Nonetheless, transaction times can vary so much due to factors, such as the total network activity, hash rate, block time and size, and transaction fees.”

Now you might say, “Mandeep, 10 minutes isn’t that bad.” There are two problems with this line of reasoning: network congestion and fees. When you swipe your credit card at Taco Bell, your card is processed immediately. Imagine if the cashier told you to wait 10 minutes before they started working on your order. Would you use that method of payment? Secondly, we are talking about 10 minutes when there are very few transactions actually occurring on the blockchain. The transaction time depends on a variety of factors, one of which is network activity. If everyone in the US started using cryptocurrency instead of credit cards, that 10 minutes would be more like 10 days to verify a transaction. Considering that active labor falls between 4 and 8 hours, human life is brought into the world faster than this hypothetical transaction would be verified.

Secondly, there are transaction fees involved in sending money. According to the article here, “On the Bitcoin network, the average daily transaction fee this year has been as low as $1.78 and as high as $62, according to bitinfocharts. On Ethereum, the average fee has been as low as $1.59 and as high as $70.” Now the fees (or gas, as it’s called on the Ethereum network) also depend on network traffic. Recall our previous scenario where we are waiting 10 days for our Taco Bell Chalupa to get made. Let’s say your order total comes to “$5.23.” But due to the network congestion, the network fee was $35, and your total comes out to $40.23 for the privilege of waiting 10 days for your Chalupa to be made. Sounds pretty ridiculous, no? Sure, it might make sense if your Egyptian cousin is wiring you $10,000,000. 10 days and $35 is actually remarkable. How many of us fall into this category? I would reasonably guess zero. If we were to actually use cryptocurrency as a currency, it’s not even a laughable alternative to credit cards/cash in its current state.

3. Dogecoin (DOGE)

The interest in DOGE circa 2021 is mind boggling to say the least; I have never seen greater crypto delusion since I’ve become aware of cryptocurrency in 2015. DOGE is a cryptocurrency project that is short for Dogecoin. It was created by Billy Markus and Jackson Palmer as a joke cryptocurrency in 2013 because of the wildly fluctuating value of cryptocurrencies at the time. I guess not much has changed. Unlike other cryptocurrencies, like Bitcoin, which is deflationary (Bitcoin has a fixed supply of 21,000,000 coins which are “mined” – a topic that is broad enough that it is deserving of its own article), Dogecoin has no fixed supply. It’s inflationary in nature, and 5 billion new Dogecoins enter the circulation every year. In 2020, Dogecoin was worth $0.0025/coin. Due to wild speculation back in 2021, it reached an all-time high of $0.60/coin. This means if you gambled $10,000 on Dogecoin in 2020, you would have made $2.4 million if you sold at the peak. Don’t get too excited; this is the same as hoping you were the one in line at the 7-Eleven in Sacramento, CA where the last $632,000,000 Powerball was won. At its peak, the market capitalization of Dogecoin was greater than Southwest Airlines, Hilton Worldwide, eBay, Ferrari, Twitter and other companies that are household names. Would you put your money into a joke, inflationary cryptocurrency, which provides nothing of tangible value but is somehow worth more than those companies named above? I would not take that bet.

4. Fake transactions/trading volume

Low-cost, market-cap weighted index funds (specifically referring to stocks) are the cornerstone of any modern portfolio. Many of these index funds have analogous ETFs that trade on the stock market exchange. For example, the analogous ETF to Vanguard’s VTSAX is VTI. The cryptocurrency industry, namely Grayscale, ProShares, and Bitwise, has made an effort to create their own ETFs so crypto “investors” can diversify their risk by buying a single ETF. Bitwise, in one study that can be found to be referenced here, claims that 95% of trading volume on unregulated exchanges appears to be fake. It’s not real volume; it’s just a bot going in and selling and buying the same coin, which makes it appear like people are trading that cryptocurrency. Alexey Andryunin, a 20-year college student and cofounder of Gotbit, runs a business where he fakes trading volume by trading between two bots for clients. Once the coins have enough volume, they get listed on coinmarketcap.com. The token project appears to be more successful than it actually is; in exchange for this service, Gotbit collects a fee from its clients. As shady as this market manipulation is, it pales in comparison to whale activity.

5. Whale movements & SEC

What exactly is a whale? Am I referring to the large mammal that occupies our planet’s oceans? Not quite; a cryptocurrency whale simply refers to a person or institution that holds lots of cryptocurrency – in the terms of tens of millions to billions of dollars worth of cryptocurrency.

Why do we care about whales? Whales can cause a selling panic where they sell a sizeable portion of their portfolio, which causes the smaller traders to sell off their crypto. When the price drops substantially, they buy back the cryptocurrency at a lower price increasing the size of their position and influence over the token. They can also do the opposite and place enormous purchase orders causing the price of cryptocurrencies to spike up. Pump and dump schemes, this type of market manipulation, are illegal as the US stock market is regulated by the Securities and Exchange Commission (SEC).

However, this kind of activity is regularly seen on the cryptocurrency exchanges and tracked by #WhaleAlert twitter accounts. The Bitcoin surge to $20,000 per coin that was seen in 2017, according to finance professors at the University of Texas and Ohio (article can be found here), was done by a single Bitcoin whale manipulating the cryptocurrency market.

6. Cryptocurrency and NFT scams

Logan Paul, the YouTube celebrity, and Soulja Boy, a rapper who struggles to remain relevant in today’s music industry, are two of the major social media promoters behind a cryptocurrency called SafeMoon. SafeMoon LLC is being accused of collaborating with several celebrities, including the aforementioned, to scam investors by pumping and dumping the token. SafeMoon’s value has since dropped 99% from its peak. Let’s just take a second to examine the name of this project, SafeMoon. “Mooning” refers to a cryptocurrency skyrocketing in value, and putting “Safe” before “Moon” would imply that investing in this token is a “safe” bet. The name alone is a red flag.

The Non-Fungible Token (NFT) craze, which was popularized by the Bored Ape Yacht Club series, is also full of crypto scams; one of the most notable is by adult video actor Lana Rhoades who made off with $1,500,000 in Ethereum (ETH) from investors who bought her Cryptosis NFTs, which I won’t get into detail here for a variety of reasons.

Cryptocurrency has become so rife with scams that certain cryptocurrencies, or token projects, are called rug pulls. Rug pull refers to the developer/company/entities involved pulling the rug out from underneath investors and disappearing with millions of dollars, leaving people like you and me “holding the bag.” Holding the bag, for the uninitiated, is a term that refers to someone that is in possession of something of no value. The etiology of the phrase “holding the bag” refers to crime – specifically, a bank robbery, where the robber holding the bag of stolen goods gets arrested by the police, while the other robbers escape the consequences of justice system.

7. Arrest of Celsius CFO and resignation of SushiSwap CTO

Celsius is a platform where you can deposit your money, much like a traditional bank. Then, Celsius lends out your cryptocurrency to borrowers, who pay interest on the loan. Celsius takes a cut and delivers the rest to the lender (you) in the form of weekly Annual Percentage Yield (APY) payments. Unlike traditional banks where you get paid 0.01% or 0.50% APY, Celsius pays ~4.00-9.00% APY on stablecoins and up to 17% on more volatile coins as of the time of writing of this article. Stablecoins are tokens that are pegged to the USD, which means that they maintain a “stable” value in relation to USD. One of the most popular tokens is MCDAI (Multi-collateral DAI), which has a value that floats around $1 USD/token.

The CEO of Celsius is Alex Mashinsky, a serial entrepreneur, who is responsible for many successful projects, including VoIP. Overall, this company seems like a pretty safe bet, no? Yaron Shalem, the CFO of Celsius, was arrested in Tel Aviv on money laundering charges in November of 2021 related to some work he did at a previous company. While he was removed from his CFO position at Celsius, this does cast a nasty spotlight on Celsius and cryptocurrency in general.

Etherum, one of the most popular cryptocurrencies, allows for some interesting projects based on its blockchain called DApps (decentralized applications). One of the more popular types of DApps are DEXs (decentralized exchanges), where users can trade cryptocurrencies without the need of a central authority like Coinbase or Binance. SushiSwap is the second largest DEX behind UniSwap. SushiSwap’s CTO Joseph Delong resigned from SushiSwap in December 2021 due to internal team chaos and infighting. SushiSwap also has a corresponding token called SUSHI, which has since dropped enormously in value.

These are just events that happened towards the end of 2021; they are not, by any means, exhaustive. There are likely several other “shady” actors if we were to truly do a deep dive down the cryptocurrency rabbit hole.

Conclusion

You may be thinking, “Surely, Mandeep, you don’t gamble your own money on crypto?” And that is where you would be wrong. I actually do gamble on cryptocurrencies because I may have some degenerate tendencies (Polly wants crypto tendies), but I keep it to less than 1% of my portfolio. I won’t lose big, but I won’t win big either. It’s fun having a horse in the race even when the race is rigged. However, I have no expectations (delusions) that it’s going to make me rich, and if it all went up in flames, I wouldn’t lose a minute of sleep. That’s why 99% of my portfolio is invested in low-cost, market-cap weighted index funds.

If you are a new pharmacy graduate or would like to become more knowledgeable with regards to personal finance and do not understand the intricacies of investing, such as Roth and traditional IRAs, sequence of returns risk, and using market-cap weighted index funds to grow your net worth, I explain all of this and more in a concise booklet, which can be found here: https://amzn.to/32PLB3x or on the homepage.

If you have any questions/comments, please find a comment box below.

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Disclaimer: The article above is an opinion and is for informational/educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The author has taken care in writing this post but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of this information.