Crypto could be one of the biggest and fastest-growing bubbles in world history, but it should not be confused with anything related to investing.

That’s because crypto in all its various brands has no fundamental value and certainly no investment characteristics that lend it to established, fundamental security analysis. Crypto has no earnings, dividends, PE ratios, management, or even company information.

Its value is more in its perception than function. Since there are over 250 issuers of crypto worldwide, many of them secretive, it’s almost impossible to discern which one is worth buying compared to another. Crypto’s most exciting feature now is in its branding efforts.  But branding is not investing, so what’s the big deal about crypto?

What’s the Big Deal About Crypto?

The newer online firms touting crypto are selling the sizzle, not the steak. They are vague about what crypto offers, if anything, but praise its hipness, generational exclusivity, anti-bank, anti-government and anti-establishment stance. Ads for crypto touted by Matt Damon and Tom Brady have no message other than saying that crypto is a cutting-edge new something for bold risk-takers, most of whom have limited assets and minimal investing experience.

The dangerous part is that 80% of crypto buyers are Gen Z and Millennials, most of whom have little or no knowledge of traditional investing, distrust traditional banks, or oddly claim they don’t have access to these firms.  Interviews with crypto buyers who claim they have some investment knowledge sound as if they never heard of portfolio diversification, the role of fixed income, or even high-beta stocks that have more benefits than crypto investing.

Crypto is also coming at a time when the US is suffering from the greatest wealth gap in history. There is a declining real economy that actually produces anything physical. The COVID epidemic has disrupted the workplace and called into question the nature and quality of the work and the role and purposes of traditional financial institutions.

This combination, along with low financial literacy and a desire to be part of the crowd has propelled crypto as being some magic path to wealth when it could easily be a financial dead end.

Beware of Crypto Scams

One young crypto investor said buying crypto was part of a “paradigm shift of democratized ownership paired with 24/7 trading.” It’s too bad this guy does not know that 24-hour retail trading started in futures markets in the 1980s and that “democratized ownership” (whatever that is) is what issuing the shares of publicly traded companies is all about, and that started in the early days of the 1800s at the NYSE.

Worse, some of these young crypto buyers (they should not even be confused with investors) told CNBC that he bought “a meme coin” called unisocks, or $SOCKS, which is “a digital token representing a claim on a physical pair of socks.”

While grossly uninformed and easily misled, too many of these young crypto traders entered the markets via no-commission firms, like Robin Hood, which stressed their hip technology (which is no better than the technology offered by Fidelity and Vanguard) over what is they were selling. Firms like Robin Hood, E-Trade, and some robo-advisors, preyed on unsophisticated investors by never disclosing the dangers of IPOs, SPACs, or related scams.

These online brokers tested the hyping environment by first touting SPACs (Special Purpose Acquisition Companies) as a way to get in on IPOs, just as the big institutional investors were buying into the same IPO.  But these firms never mentioned the fine print of SPACs that said the wealthy insiders were getting the insider price when a company went public. The novices led by the online firms were attracting small, unsophisticated investors to pump up the post IPO price in the days and weeks after the IPO’s public listing.

Small details like this were of no concern to Robin Hood since these firms were an integral part of the SPAC frenzy.  But this same model works well for crypto and investors who are just essentially day trading unknown names.  The only way these crypto buyers will make money is to sell their crypto to another buyer at a high price. That resembles a Ponzi scheme more than investing.

What Makes Crypto Attractive?

So, what makes crypto attractive to more sophisticated investors?

It is excellent for money laundering, evading taxes, transferring money in record time, and all types of pump-and-dump schemes. While foreign currency trading is fluid and readily convertible, crypto has regulations that vary from country to country.  And grey regulations often attract people who thrive when working in grey areas.

Not unexpectedly, US financial regulators at the SEC, US Treasury, and CFTC have caved in to industry pressure and approved some forms of listed crypto funds.  But that may happen because they wanted to control a portion of the unregulated trading into the formal investing system. Yet even with the regulation, there is no consensus about crypto. These three agencies consider it a commodity, security, and currency.

But since a prominent attraction of crypto is unregulated, the US regulators have probably lost the battle on taxing and monitoring crypto trading.

But since you cannot argue with success, it is best for crypto skeptics to watch the unfolding train wreck. China, a nation more protective of its citizens in many areas than the US, has banned crypto exchanges and crypto mining operations. That may be considered extreme, but how else do you prevent a bubble from developing that can undermine your own nation’s financial system?

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