We are publishing the well written piece below by 20-year old University of Michigan student Bennett Stein today because we want our readers to understand just how passionate the millennial generation is about digital currencies. Bennett first contacted us through a friend to see if we would be interested in publishing his bitcoin trading videos. We said no, but we would be interested in hearing WHY he is so passionate about bitcoin, because we feel our audience – which is mainly comprised of wealth managers, hedge funds, VCs and the like – need to understand why they have to get with it on the whole digital currency craze for their next generation of clients. So read this well-written piece below – and if you do want us to feature his videos in the future – let us know.
By Bennett Stein
I wanted to offer my perspective on cryptocurrencies.
In full disclosure, as a 20-year old current University of Michigan student many might discount my perspective as naive or inexperienced. But as an economics major that has been trading since he was 15 years old, and a recent convert to the world of crypto, I would like to think I have something to offer on the topic. And readers should keep in mind that it will be my generation that will be the most involved in, if not affected by, the acceptance and use of these currencies.
My introduction to cryptocurrencies largely came by accident. I began trading stocks in the eighth grade after I had devoured several books on the psychological aspects of investing, and wanted to explore this for myself. I began as many do, by investing passively in stocks. But I hungered for an investment experience that involved more immediate feedback (please note I did not say “gratification”). So after trying my hand at short-term trading in equities, I gravitated to the currency markets. FX at the time was perfect testing ground as it was global, 24 hours a day (meaning very few gaps), no dividend dates to contend with, and deeply liquid.
However, upon learning about Bitcoin, and opening my first account, I sensed that I had an “edge” that I did not seem to enjoy in short-term FX trading. But more about that below.
Before sharing my experience as a new crypto trader, however, I think it is important to address a potential fundamental criticism of these markets. After immersing myself into the cryptocurrency world, I happened to be confronted by a family friend, a lifelong traditional investment advisor. With the best of intentions, he mounted his best arguments to persuade me that Bitcoin was essentially a lottery, and I was making sucker bets. I likened this to having my first glass of fine wine only to be told that it was just grape juice. Was crypto really a type of asset, or was I just taking part in some enormous lottery scheme?
I may be relatively new to markets, but I’m aware that there is “investing” and there is “trading”. Markets that offer short-term trading opportunities must also have longer term investors. So do the cryptocurrencies have these? Do they comprise an investment asset class? In my opinion, Wall Street and the asset management industry have kept investors living in the past. By purposely blurring the lines between different types of asset classes (e.g. stocks and bonds, real estate, gold, etc) investors have been kept in the dark about what type of asset truly addresses their needs (or fears).
What is an “asset class” and which ones serve as a “store of value” may be more important question now than ever. Many G10 countries are now anticipating both a stock market correction and – for the first time in decades – a potentially lengthy bear market in bonds. In considering all the candidate assets in the marketplace, it would be foolish to reject newer weapons that could be added to the arsenal. The investors that will be celebrated in the coming years may very well be those who were brave enough to adapt to new assets and new technology. The consensus among modern academicians is that there are basically three types of asset classes:
(a) Investment assets, where price is determined by future income stream;
(b) Consumable assets, like grains or food (or water and gasoline, if you’re a fan of “Mad Max”); and
(c) Assets that are a store of value, such as gold, fine art – or your favorite fiat currency.
This criteria also reveals that there are things that pretend to be “assets” when they are not – e.g. lotteries, slot machines, and sports wagering.
So while our family friend remains firmly convinced cryptocurrencies fall into the “pretend” category, I’m equally convinced that they satisfy the basics of a store of value.
But that’s not the end of the case for cryptocurrencies. Not all stores of value are created equal. A fiat currency is a store of value, but precious metals require no blind faith in a government to manage its treasury to retain its value over time. Its fundamental “scarcity” makes it a valuable. But gold has its own drawbacks – for one, you can’t pay for groceries or your rent with it. So in the realm of currencies it is essentially “pick your poison”: Have a store of value that’s actually backed up by something, or have something that’s less a store of value and more transactable. Fiat currencies are considered legal tender but in reality have no tangible value.
In the view of many economists – who have much more experience than I do – Bitcoin and other cryptocurrencies may very well resolve this by presenting the investor with the “best of both worlds”: A store of value that is soon to be more transactable than ever.
But this is an article about my experience trading cryptocurrencies – not an analysis of their merit as an asset class. Getting back to my migration into cryptocurrencies, I discovered that on most of the crypto exchanges I had the benefit of information that was missing from my currency trading. In the FX markets, I had very little data on the actions of other traders in a short time frame. On the crypto exchanges, I enjoyed the ability to view the order book. I have been using the Gemini exchange, which features order flow analysis. (Although in the course of writing this article, I must confess my love for this exchange has waned given their constant shut-downs)
The order book is nothing new to professional investors in the FX world. However, market makers in FX markets tend to hide their order books from retail investors (and for good reason) or charge excessive monthly fees for access to one. This lack of access has been essentially the house edge. This house edge is mitigated for smaller investors in the Cryptocurrency world – as shared access to the live order book is paramount to keeping the unregulated free market as a lucrative alternative investment.
Although a free and open market like that Cryptocurrency market offers immense benefits versus other tradable markets, there are certainly some aspects that could be improved.
One scourge that plagues many deregulated markets is “spoofing.” For the uninitiated, spoofing is the act of placing orders that are meant to influence the market but are never meant to be filled. Bots and Quant Traders alike can and will influence the order book with these fake orders which can lead to investors making important trading decisions based on false information. Exchanges like Coinbase and Gemini need to address this. Also, the seemingly frequent flash crashes (Coinbase) and shut-downs for days due to security or software upgrades (Gemini) can be enormously frustrating.
Furthermore, as cryptocurrencies are a new asset class, with fundamentals that are based on new technological concepts, these markets will be subject to occasional “growing pains.” The “hard fork” in Bitcoin on August 1 may have kept many prospective investors away due to the fear of a massive devaluation of the currency if it was to split into two different assets. However, these investors who were kept away due to their fear would have missed out on a 63% increase in the price of Bitcoin after the hard fork (as of August 28th).
The Cryptocurrency markets could very well become one of the largest global markets the world has ever seen. With the world in a time that is uncertain as ever, the investors who will succeed are the ones who take advantage of lucrative opportunities and diversify properly.
You can find my Youtube Channel (Bitcoin Trading Challenge) that gives Cryptocurrency strategies, predictions and trading practice down below: