A close relative once told me that investing in something you don’t understand is as irrational as hating something you don’t understand. To date, those words still ring true and time has only further vindicated them.
When it comes to a subject like cryptocurrency, which involves both money and mechanisms that are difficult to grasp, even a basic understanding is hard to come by. And when people don’t understand something, they’re inclined to make flawed judgements.
It’s why you have famous investors like Warren Buffet saying Bitcoin is completely worthless or notable publications like Forbes claiming all cryptocurrencies are Ponzi schemes.
This is hyperbole. It’s also a clear indication that these individuals don’t fully understand Bitcoin or what cryptocurrencies are. And getting that information isn’t the same as getting the secret investment strategies of famous investors. It’s an open-source program and you can read the white paper that helps explain it at any time for free, courtesy of this link.
It’s hard to understand because it involves math and encryption, two topics most people don’t know much about. But whether they understand it or not, they still use it. If they use a smartphone, a computer, or anything that connects to the internet, they are utilizing some of the same type of technology that goes into cryptocurrencies.
Now, I say all that because things in the cryptocurrency world have been pretty rocky this year. If you just look at the prices of most major cryptocurrencies, this has been a historically bad year. If you bought any crypto in January, there’s a good chance that investment has lost money by now. I know because I’m one of them.
I’ve noted before that I do own some cryptocurrency. I’ve also talked about it before as both an investment and a useful tool for the internet age. I won’t deny that while my investment in Bitcoin was very small, never exceeding more than a few hundred dollars, the returns this year have not been great. And I would never recommend anyone put all their savings or investments into Bitcoin, or any asset for that matter.
In addition, I would never advise anyone to invest their money in a way that would limit their control of said money. When you put your money in a bank, whether it’s in person or online, you’re trusting a system and the people within it to handle your money. By law and by the fine print of the contracts you sign, you have control over that money and they can’t take that control from you absent some very limited circumstances.
With that in mind, I think there’s an important lesson to learn from the recent collapse of FTX. If you’re at all involved with crypto, chances are you’re aware of this and have felt the impact. I certainly have. It helped make an already terrible year for cryptocurrency that much worse. Last I checked, my Bitcoin value went down a good 20 percent and will likely go lower.
It was a bad turn among many for cryptocurrency and it wasn’t even the first. Before FTX, other famous cryptocurrency exchanges like Mt. Gox also suffered a similar fate. It’s collapse is actually very similar to FTX. The issue was this.
A new institution or organization is set up to buy, sell, and store cryptocurrency.
It becomes successful by making cryptocurrency accessible to more people.
Due to greed and a lack of supervision or understanding of cryptocurrency, the organization begins skimming money while lying about how much actual cryptocurrency it has.
Ultimately, the scheme is either uncovered or it collapses like a Ponzi scheme when too many people try to withdraw their assets.
In both cases, the problem was the same. People were buying cryptocurrency on an exchange and keeping it on that exchange. They weren’t exactly owning any currency. They were essentially paying the exchange to stake a claim on a certain pool of currency that didn’t exist.
In that context, nobody should be that surprised that FTX and Mt. Gox crumbled. I get the appeal of investing in cryptocurrency without having to go through the trouble of storing or securing the coins on your own computers or devices. However, it’s worth remembering that these are not banks. These are not institutions that are subject to the same laws and regulations as banks.
That’s not to say all crypto exchanges are frauds, but fraud is just a lot easier for them than most.
So, if there’s one lesson to take away from FTX and the collapse of any exchange, it’s this. If you’re going to invest in cryptocurrency, make damn sure you actually own or possess the coins in some tangible medium. That’s what I’ve done with all my Bitcoins. I keep them all in a digital wallet that is not at all connected to any exchange. I also keep a backup to ensure that even if I lose one of my devices, I can still access my coins on another.
It’s not that hard to do. In fact, it’s easier now than it was back when Mt. Gox was still active. It’s even become a common refrain from those who still defend the value of cryptocurrency. The mantra is if the Bitcoins aren’t in your own wallet, then they’re not yours.
Exchanges still have their place in the world of cryptocurrencies and probably will for the foreseeable future. I also don’t expect cryptocurrencies to recover from these latest downturns anytime soon. But if you’re going to invest in cryptocurrency in any capacity, there’s a right and wrong way to do it. Even if you don’t understand the math and the science behind cryptocurrency, you’ll do better in the long run if you just do things the right way.
Don’t use exchanges.
Use digital wallets.
Here’s a list of some that I encourage others to look into before buying any crypto.