CASE STUDIES

CRYPTOCURRENCIES AS AN INVESTMENT

Prepared By:
Vansh Khanuja
[email protected]
August 1, 2021
PREFACE
This report covers cryptocurrency, my views on crypto as an
investment and/or currency and psychological factors that
influence people for/against crypto.

Hedge fund manager Ray Dalio (Bridgewater associates) is

bullish on bitcoin, whereas investors like Warren Buffett and
Charlie Munger calls it ‘Worthless artificial Gold’. These
contradictory statements from big investors are not surprising
considering the fact that Buffet and Munger adhere to value-
investing and Mr. Dalio is a hedge-fund manager.
My goal is to explain how and why crypto can affect the world
economy and why Dalio is bullish. I am somewhat bullish about
long-term uses of crypto but I’m extremely bearish about the
current market situation. I will explain everything in this article.
I might be wrong and there can be something I don’t know
about (blind spots), I would welcome hearing from you if you
feel I’ve missed something.
Visit my website http://thesecurityanalyst.weebly.com for more
finance related content. I focus mainly on equity analysis and
explaining investing psychology.
TABLE OF CONTENTS
1. CRYPTOCURRENCY
• INTRODUCTION
• CRYPTO AS AN INVESTMENT
• VALUATION OF CRYPTOCURRENCIES
• FUTURE OF CRYPTO
2. PYSCHOLOGICAL FACTORS
• CONSISTENCY BIAS
• FEAR OF MISSING OUT
• THE GREATER FOOL THEORY
3. BITCOIN MARKET CAP
4. REFERENCES
 1. CRYPTOCURRENCY
INTRODUCTION
As the name suggests, cryptocurrency is a form of digital
currency. They are not regulated by any government and
the value of any cryptocurrency is derived by ‘Demand’
and ‘Supply’. For this reason, these currencies can trade
at very high valuations. The most popular cryptocurrency
viz. ‘Bitcoin’ is currently trading at 41,808$ (Aug 01,
10:05 AM BST [*Source: Yahoo Finance]).
The ownership of crypto-coins is stored in computerized
databases that are secured by using strong cryptography.
These databases can- 1) secure the ownership of the
coin, 2) control creation of additional coins and 3) verify
transfer of ownership of the coin. The fact that it is not
issued in the form of paper money and is free from
government regulations make people think that it is ‘The
Future’. Fiat money is a centralized currency (issued and
regulated by a single authority) whereas
cryptocurrencies are de-regulated and decentralized.
These currencies work through blockchain technology
which is a form of ledger that serves as a public financial
transaction database.
CRYPTO AS AN INVESTMENT
Bitcoin and all the other cryptocurrencies are now
viewed as investments.
The reason behind the popularity of Bitcoin is not related
to its technology or anything of that sort. The main
reason behind the popularity of Bitcoin (and all other
cryptocurrencies) is the investment return.
Now consider this scenario (and ask yourself if that
makes sense): You purchase x units of USD because you
believe the currency will give you much higher return
than the stock/bond market. When I studied about
currency in high-school, I was told that currency is a
medium of exchange that you can grow by investing in
stocks/bonds. Here, people are selling stocks/bonds to
invest in a ‘currency’.
The US stocks are not expected to return as much as they
did in the past primarily because of low interest rates.
The expected return being optimistic about the economy
is around 2-3%.
[DJIA was at 68$ during Jan 1900 and reached 10,729.38$
in the year 2000. This return is just 5.1% for the 100-year
period. To give the same returns for 21st Century as well,
DJIA will have to close at 1,690,566$ on 1st January, 2100.
Clearly, the returns are not going to be as huge as they
have been in the previous century]

This is a reason why investors are putting everything into

crypto. Nothing else can beat the market [in the short-
run]. Here, we are observing theory of reflexivity (by
Geroge Soros), the prices are high because people are
making their decisions based on their perception of
reality (instead of reality itself).
I have seen a lot of people who have earned millions by
investing into crypto. People are taking leverage more
than 100 times their money because they are sure that it
will go up.
If you ask someone about their investment strategy, and
the answer you get is: ‘It is going to go up’, then you
know the kind of investor the person is. If millions of
people start doing the same thing, then you know the
kind of investment the security is.
There are a lot of different things about cryptocurrency
like mining, NFTs, nodes, timestamping, etc., that I’m not
explaining here because this article is about Crypto as an
investment. I will make a separate article on
Cryptocurrency’s technology.
VALUATION OF CRYPTOCURRENCIES
The basic goal of investment is to profit either by income
received (dividends, interests) or capital appreciation or
both. To determine your income through dividends or
interest payments, you need to assess the business
model of any security and understand how much risk is
involved. Cryptocurrency does not have any kind of
periodic payments because it does not generate cash.
The next way to profit is through capital appreciation.
You should know the current value vs current price to
expect capital appreciation. Suppose you buy a security
at 10$ knowing that it is worth 20$, then the 10$ profit
which you expected is a calculated bet (given you have
analyzed with proper techniques). In case of crypto,
there is no way to get the intrinsic value. This is a classic
example of 'The greater fool theory', one person is
paying only because he expects the other person to
know more. The economics of chain letters combined
with inadequate financial knowledge and a great
emotional catalyst (in the form of Fear of Missing Out
[FOMO]). If you are a true value investor, I expect you to
stay away from such things.
FUTURE OF CRYPTO
Note that I said crypto is bad for investment purposes
(especially in the bubble-like situation we are
experiencing now). The future of crypto can still be of
major importance. Consider the airlines industry: As an
investment, it is really bad but still one of the most
important industry we have.
I believe crypto will have utility in the future as a stable
currency, it will not replace fiat currency in the way
people believe. There is a great possibility of a regulated
cryptocurrency made by governments. I don’t think
bitcoin can ever replace the dollar. Instead, Yuan will be
the best alternative as a reserve currency.
Unregulated currency is a double-edged sword. Bitcoin is
favored by many because it is not regulated but that will
be the major reason for the problems it can cause.
Human behavior is not going to change, people will
speculate and do all sorts of illegal stuff when given the
chance. We are still at the beginning of a major economic
revolution.
To summarize crypto’s future as a currency, I believe that
ultimately, regulations will be made. I am not saying
when and how.
As for investments, my best advice would be to stay
away. I am not sure about the utility-side of crypto
because there are many variables that can affect any
prediction, but I’m sure that we are in a cryptocurrency
bubble.
“Say that to my 100x gains, your value-investing
approach will take years to deliver the same”
“Bro you do not understand cryptocurrency, it is the
future”
“So, you are smarter than Elon Musk now?”
These are the replies I got when I said the same thing in
Yahoo-finance comments sections. They actually prove
how biased people are regarding crypto.
 2. PYSCHOLOGICAL FACTORS
CONSISTENCY BIAS
This bias can be really harmful especially in the long-run.
Consistency or commitment bias is our tendency to act
according to our previous commitments. We are
creatures of habit and we prefer being consistent. This
can affect investing/speculation/gambling, people are a
bit afraid before placing a bet but after they’ve made a
decision, they will trick themselves into thinking that
they are correct no matter the odds.
This same bias can cause bubbles. If you have made
some money in bitcoin and/or other cryptocurrencies,
you will always believe that they are good investments.
This bias is so strong that a person will stop listening to
anyone opposing their investments.
“Most people would rather die than think; in fact, they
do so.”
- Bertrand Russell
FEAR OF MISSING OUT
The most common psychological factor during a bubble.
The fear of missing out. This fear is also due to another
common human emotion – envy. Suppose your neighbor
doubled his money through bitcoin and you are stuck at
12-15% a year returns through investing. In this case, you
will ultimately end up selling your undervalued stocks to
buy some digital coins. In fact, this example was
originally given by Warren Buffett (Probably during the
real estate bubble of 2007-8). He said:
“You can’t stand to see your neighbor getting rich. You
know you're smarter than he is and he’s doing these
things and he’s getting rich.”
This is how Fear of missing out works, people want to
follow the crowd because they cannot stand missing out
on such opportunities. They don’t understand the
investment, they don’t understand the
risk/price/security/anything but they know one thing -
‘It’s going to go up’.
THE GREATER FOOL THEORY
This theory is exactly how I will describe a bubble. There
is no better way to explain it. According to the greater
fool theory, the price of an asset is determined by
whether or not you can sell it at a higher price. A lot of
people might know that bitcoin is not worth 40,000$ but
that does not matter because they know that they can
sell it for a higher price.
This is a classic Ponzi scheme. The economics of chain
letters combined with inadequate financial knowledge
and a great emotional catalyst (Fear of Missing Out).
If you feel attacked because I am criticizing your
investment (if you are invested in crypto) then you
should understand that your views are biased. You
should feel excited when someone criticizes your
decisions because you’re getting a different perspective.
You can compare the reasonings and take a top-down
view. This can surely prevent you from making terrible
decisions.
If you disagree with me, that’s great. You have an
opinion; you know about something more than I do. I
would be really happy to know what makes you think we
are not in a bubble. But the reasoning should be based
on something we can discuss. If you will write - ‘I think
you’re wrong on bitcoin because I made 4 times my
money’ then there can be no discussion. I cannot argue
about your entry/exit points.
 3. BITCOIN MARKET CAP
The current market cap of bitcoin is around USD 770
billion. This means, bitcoin is worth USD 150 billion more
than Berkshire Hathaway. If you will buy Berkshire
Hathaway, you will get a lot of businesses and stocks and
cash which all put together will produce more and more
each year. If you buy bitcoin, you can see it go up and
down, you can look at the numbers and feel good about
yourself but nothing changes. Fast forward 100 years and
Berkshire has probably produced goods worth billions
more than you paid for whereas bitcoin is still there;
Nothing has changed for the coins you have.
“Bitcoin is worthless artificial gold” -Charlie Munger

With this, I end my report on cryptocurrencies as an

investment. I am probably biased against cryptocurrency
and I might be exaggerating the negatives (negativity
bias?). This report was my views on cryptocurrency;
views can be subject to bias and blind spots, If I’m
missing something, do let me know.
Email: [email protected]
 4. REFERENCES

• Wikipedia: Cryptocurrency. [Online] 2021. Available

from https://en.wikipedia.org/wiki/Cryptocurrency
• Wikipedia: Bitcoin. [Online] 2021. Available from
https://en.wikipedia.org/wiki/Bitcoin
• Investopedia: Bitcoin. [Online] 2021. Available from
https://www.investopedia.com/terms/c/cryptocurre
ncy.asp
• Macrotrends: Dow-Jones-100-Year-historical-chart.
[Online] 2021. Available from
https://www.macrotrends.net/1319/dow-jones-100-
year-historical-chart

(Accessed 1st August, 2021)