Why You Won’t Profit From Crypto. (The Anatomy of a Crypto Cycle)

Quick question, which centre circle is bigger?

The one on the right… right? Wrong, they are the same size. You’ll see how this relates to Bitcoin in a moment, bear with me…

Okay, I understand, the title is confusing, everybody wants to profit from Bitcoin, and that is exactly why they wont.

I have been invested in Bitcoin for over half a decade (sounds cooler than 5 years, apologies), and like many others, my path through investing in the beginning went as follows;

  1. Learn about Bitcoin
  2. Watch the price go up.
  3. Fall in love with Bitcoin.
  4. Buy altcoins.
  5. Come running back to Bitcoin.

Seems illogical, because it is. But like many others, even back when I could buy a whole Bitcoin for the ripe old price of £290, I considered Bitcoin to be too expensive to put all my eggs in one basket. The big question is why?

Well the human brain isn’t very good at taking an individual point of data and interpreting its meaning, that’s just not how it evolved, the brain works in relatives, it’s no good interpreting the optical data of seeing a lion in the wild if you aren’t able to distinguish it from the rest of the optical data points your brain is receiving, in other words; to understand a threat, you have to understand ‘not a threat’.

In the same way that this is true, understanding Bitcoin as £290 is useless without having other information on prices to compare it to, and since Bitcoin was a cryptocurrency, I compared its price to other cryptocurrencies, this is where I went wrong. Further, Bitcoin also happened to be the most expensive cryptocurrency, so comparatively it seemed very expensive, when in reality, I may have been comparing its price to the wrong data set.

This little quirk that our human brains have is the reason that, to this day, newcomers in the cryptocurrency industry consider Bitcoin to be ‘just too expensive’.

However, it’s entirely understandable, if you have no financial understanding or background in economics, to look at the Bitcoin price standing tall at $50,000 (give or take), and to compare that to some random altcoins price of $5 and think to yourself; ‘What good is my £200 going to do in buying Bitcoin?’ before coming to the conclusion, based on your extensive 2 hours of research, that MemeCoin is clearly the better investment decision, because you ‘missed the boat’ on Bitcoin. (If MemeCoin is an actual cryptocurrency I wouldn’t be surprised, but I’m not talking about it.)

But what if altcoins didn’t exist? What would we compare the price of Bitcoin to then? Gold? If we were to divide the market cap of gold into 21,000,000 parts (the amount of Bitcoin that will ever exist) we should get a rough, market-cap based, comparison of the two prices. Here’s the math;

  • One 21 millionth of all the gold: $545,333 (as of writing)
  • One 21 millionth of all the Bitcoin: $46,052 (as of writing)

Okay, so… now rather than comparing the price of digital gold (BTC) with the price of an experimental cryptocurrency, with an entirely different value proposition, that has never had to handle even 1% of the use of the Bitcoin network and is only 2 month’s into their development roadmap, we are comparing the price of BTC with the current real world market cap of an asset that has the same use case (store of value).

Now, when you read these two pairs of prices, in which did Bitcoin seem expensive, and in which did Bitcoin seem cheap?

  1. GOLD: $545,333 / BTC: $46,052
  2. ETH: $3,391 / BTC: $46,052

My guess is that the first time around, Bitcoin seemed cheap, and the second time around it seemed expensive, right?

This is because of the Cognitive Framing Bias, definition;

“Framing is when someone makes a decision because of the way information is presented to them, rather than based just on the facts. In other words, if someone sees the same facts presented in a different way, they are likely to come to a different conclusion about the information. Investors may pick investments differently, depending on how the opportunity is presented to them.”

Remember the image at the top of the article with the circles? That is an example of how deep cognitive framing bias is rooted in our psyche, it even changes the way our eyes see the world.

This is why the majority of new Cryptocurrency investors will not make profit, they are likely to see everything as expensive, until the price has gone up enough to break that bias and FOMO will take its place, but coming off the back of considering every coin to be too expensive, they will go for the cheapest coins (likely even ignoring market cap) and at this point we will be nearing the end of the bull run, the seasoned investors will be rebalancing their portfolios back from altcoins into Bitcoin, selling them all to the newcomers who are caving in to FOMO (Fear Of Missing Out).

Once all is said and done, the whales will have stacked sats, and the newcomers will be left with quickly depreciating meme-coins that they have no real understanding of.

In my opinion, this is the anatomy of a Bitcoin market cycle.

Ask any crypto investor of less than 3 months what coin’s they’re in, I bet the word Bitcoin will not be mentioned.

PSA: I’m not a Bitcoin maximalist, nor have I ever been, the aim of this article was to highlight the word industry, in the phrase “Blockchain is an emerging industry”, an industry consists of many different goods and services, and blockchain is no different, it’s not that I believe all altcoins are bad investments, its just that they are so entirely different from Bitcoin on every level, that to put them in the same basket when evaluating your investment decisions is, in my opinion, a strategic error.

I will be writing a follow up article to this, using Ethereum as an example of how different the structure of the investment opportunities presented in altcoins are, when compared to the investment opportunity of Bitcoin, and why we should really stop comparing them. Im not saying one is better than the other, only you can make that decision for yourself, but I am saying that they are entirely different investments. So be sure to follow me here on medium or subscribe to my blog over at permissionlessltd.com/blog/ to be notified when part 2 goes up.

I hope you found this article useful, thank you for reading.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store