By Trent Dudenhoeffer - @_tdudenhoeffer
Just when you thought it couldn’t get any gloomier in cryptoland, with most assets down 70% or more from their peaks, Sam Bankman-Fried (thought by many to be the one guy to save an entire industry from bankruptcies and further carnage) said “hold my beer.” Here’s the brass tacks: you’re living through the unfolding of one of the largest pyramid schemes in human history that has even Bernie Madoff blushing. Not only that, but the entire process was documented on Twitter in real-time (this is one of my all-time favorite pieces of content on Twitter EVER. I highly suggest following Dylan for more). It’s surreal when you think about it.
By now, you’ve probably heard the story of what happened. If you haven’t, check out this Nobody Special Finance video and CoinDesk article. The story itself isn’t what I want to write about, but for more info, these links above do it much more of a justice than I ever could.
Today, I want to speak to the person that is newer to crypto. Maybe, they just opened a Coinbase account at the start of 2022 and have seen nothing but a decreasing balance, day-after-day. I want to write for the person looking at that depleted account balance and saying to themselves “what the hell did I get myself into?” If you’re in this boat, this post is for you. Here are three actions that I would take before I eat my next meal.
Action #1: If You Don’t Have a Plan, Make One
It was very easy to get swept up in the euphoria of Bitcoin and crypto “going to the moon” in 2020. Thousands rushed to open a Coinbase account and buy whatever doggy coin they saw, only for it all to come crashing down. 70%+ decreases in values are always hard to stomach and they’re even harder when you are caught off guard, left unsure of what to do next. Your first priority should be securing enough cash on hand to weather future storms. And I don’t mean crypto volatility here; I mean losing your job, having a medical emergency, or other catastrophe. Priority #1 is a fully stocked emergency fund.
Did you allocate too much of your portfolio to an asset this volatile? Did you invest your emergency fund to buy the dip? Are you panicking? Take a few minutes or even a few hours to be honest with yourself. No one knows how long this crypto winter will last – it could be years. You should have a “plan for the worst, hope for the best” type of attitude. Use this framework to determine the percentage of assets to allocate into crypto.
Use this as a learning opportunity if you allocated too much. There’s a good chance you won’t overextend yourself in the future, and there is value in that lesson. If you’re losing sleep at night due to your position size, then sell it. No one likes to sell low (and I hate advocating for it), but it’s not worth it if you’re losing sleep and relationships are deteriorating over it. Get to your comfort level and cut ties.
If you’re comfortable with your allocation size, that’s great. Does it make sense to add money to it? There typically are no better times to buy than when blood is in the water. When investing in hyper-volatile assets such as crypto, it’s best to have the longest possible timeframe. You don’t want to be buying Bitcoin if you plan on using that same money a month from now. I advise having a timeframe of no less than five years. Ideally, you consider your crypto investments as retirement money: zero plans to touch it until you need to rely on your investments as primary income. Once you’ve determined your plan to move forward, you’re ready to take the second action.
Action #2: Withdrawing all Your Crypto to a Self-Custody Wallet
“Not your keys, not your coins.”
When you go to an exchange to buy/sell anything, you expect the exchange to be able to provide the money or the good you are looking to acquire. In cryptoland, we’ve seen that isn’t always the case. For example, FTX’s customers had a rumored $9 billion worth of crypto assets on the platform. However, FTX only had (again, rumored) $900 million worth of assets on hand, which is only 10% worth of claims kept on hand. As I said earlier: this Ponzi would have Madoff blushing.
You’re probably asking yourself how in the world that’s even possible. And it’s a totally reasonable question to ask. Unfortunately, or fortunately – depending on how you look at it – this is largely due to the lax regulations around crypto and the industry as a whole today. Most Congressmembers can’t even explain what a blockchain is. It’s not as if we should want them to regulate the industry, but there should probably be something, right?
That’s neither here nor there, though. The point of the matter is this: don’t trust an exchange. Verify for yourself that you own the coins you just bought. You do so by moving these coins to an address that you control. Self-custody is one of the main tenets of Bitcoin. It is truly peer-to-peer finances with no trusted-third parties (ie. exchanges) required. Self-custody requires self-discipline and personal responsibility. If you lose your keys, you lose your funds. There are no bail outs; there is no hot line to call to reset your password; none of that. Holding your own keys is taking sovereignty over your finances.
Many believe the hurdle to self-custodying is a tall one and I’m here to tell you, it isn’t at all. You need to write down your seed phrase and keep it in a safe, secure location. Start by practicing this with a small amount of funds until you feel comfortable. Additionally, holding your own keys helps number-go-up. Exchanges must have the crypto you just purchased from them if you want to withdraw it from their platform. They also can’t lend the crypto that you keep on their platform to short sellers. Even more than that, self-custody is holding/using/transacting with crypto in the way it was intended all along.
I suggest beginning with a software wallet on your phone, also known as a hot wallet. When you accumulate a large amount of wealth in crypto, you should graduate to a hardware wallet. And for maximum security, consider multi-signature storage, which requires more than one device to move funds.
Be patient. This is a new process and likely foreign. But if you know how to operate a smart phone and can recite the English alphabet, I promise you can hold your own keys as well.
Action #3: Focus all Your Attention on Bitcoin
Go ahead and substitute ‘Bitcoin’ for every time I have used ‘crypto’ so far in this post.
Crypto is the entire reason we are in this mess. Crypto exchanges are making Lehman Brothers and Bear Stearns (the banks that were over-leveraged and participating in fraudulent activity) look like the good guys. Crypto companies are doing the same thing today but far more recklessly and disrespectfully to their users. Satoshi Nakamoto invented Bitcoin to ensure the financial crisis of 2008 never happened again while crypto and all these altcoins are ensuring further demise will continue.
Here’s why: anyone can create a cryptocurrency. I have zero experience with computer science, but all I need to do is watch a YouTube video and I can learn how to create a new crypto coin. That’s why there are over 21,000 different cryptos according to CoinMarketCap. FTT – FTX’s native token – has lost 95% of its value since its implosion. Its market cap (total value) still ranks #209 at the time of this writing! If a bankrupt company’s token with zero utility ranks 209/21,000, the rest of them are probably total crap.
So, what did FTT actually do? Bruce Fenton likes to describe many altcoins as “gift certificates at stores no one wants to shop at.” His description is best encapsulated by FTT. The only utility that FTT provided was discounted commissions on trades at FTX for the holders. The tokens do not have value outside the store that is FTX. Not only are these tokens seemingly worthless, but they were used to leverage FTX’s balance sheet. The team used these tokens as collateral for loans, and they took out billions of dollars’ worth of them.
You can equate this process to creating your own money from nothing, lending that money to a friend for real money, then doing whatever you want with the money your friend gave you. And the music doesn’t end until someone calls your money worthless, which took an embarrassingly long time in FTX’s case. Money should be difficult to create. It should be scarce. It should be portable, verifiable, censorship-resistant, and decentralized, among other things. Bitcoin ticks all these boxes.
The cat is out of the bag – everyone knows about the idea of a decentralized, internet-native currency and Bitcoin is our only shot at it. I don’t want to say something is impossible, but I think it’s pretty dang close to impossible to create another currency that is as robust, secure, and decentralized. This is it. There is no second best. There is no better Bitcoin.
And there is still plenty of hope for Bitcoin. It operated exactly as advertised; through the FTX implosion, through Celsius’ bankruptcy, through the Luna Ponzi, and through each bull market. The exchange rate and all these distractions created by CrYpTo companies doesn’t matter. The Bitcoin protocol is the most stable thing on Earth – its humans that are the volatility. Bitcoin works.
I have never been more optimistic.
Here are a few of my favorite resources for learning more about Bitcoin:
· Bullish Case for Bitcoin by Vijay Boyapati
· Fix the Money, Fix the World podcast playlist (created by me – 24 hours of content – best to listen in order)
· Five Examples of Bitcoin’s Real-World Utility by Trent Dudenhoeffer
The countless stories of fraud and manipulation will be brought to light, making the last few months great for a Netflix documentary or Hulu show. I hope this saga ends with the main offenders in prison and that from the ashes an emphasis on Bitcoin emerges. When you watch these movies a few years from now, how do you want to react?
Will you be upset that you never listened to Bitcoiners telling you to hold your own keys? Will you kick yourself after investing your emergency fund into it before another leg down? Or will you smile knowing your Bitcoin stack, larger than it’s ever been, is locked away in cold storage with no plans to touch it?
I sincerely hope the latter rather than the former.
Thanks for reading.
Originally published on The Weekly Dose at orangepilladdicts.com on December 8, 2022.
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