Stock Trading – Entry 7

My previous article outlined the three big mistakes a simple investor can make in blockchains.

What other lessons did I learn from my initial round of blockchain investing?

First, the whole thing about use cases needing to align with the concept of currency makes things very interesting. I would only ever invest in a company that created/owns a great non-currency blockchain. But that is me investing in the company, via regular stocks, not the blockchain itself.

Second, when a company that owns a blockchain gets sued (like Ripple with its XRP blockchain), they are either not offering a blockchain at all (fraud) OR more likely bigger players in non-blockchain markets know they will be affected, don’t have a response, and have politicians and lawyers at their disposal to dramatically slow down such a company (classic delaying tactic in almost any industry, by the way). This means I would need to have a very good understanding of a particular use case of a blockchain as well as the large players involved (including those outside the blockchain market).

Third, making big bucks on blockchain markets at the time of writing this article seems to boil down to very unpredictable things, one being bizarre interpretations. For example, take Elon Musk's announcements regarding bitcoin. Why did he go public about using bitcoins as payment for Tesla cars? Why did he later go public to completely reject that idea? You can argue not using green energy for bitcoin mining all you want, but as an investor, the mechanics of those two moves require I expend effort to set aside the possibility of that being another pump and dump scheme.

What if the publicized opinion of a big name was way off the mark and wasn’t accurate about a given use case of the blockchain in question? (Again assuming no pump-and-dump.)

The answer: Completely unfair advantages stacked against a puny investor like me who needs a bit of fairness and reliability even in a market uber-sensitive to people jumping onboard. I mean it’s unregulated and a blockchain could become the next currency, so the objective should be to fight tooth and nail to make it big with a blockchain, right? Terrible idea.

Is there a very short bit of history that can teach us something about blockchains?

There is nothing similar between wanting to get in on something new before it takes off and the Rothschild lie following the Battle of Waterloo back in the day.

If you haven’t heard that story, Emperor Napoleon loses at the Battle of Waterloo. News traveled slow back then, but reached the Rothschild family first due to their existing network in the international gold market. They then sold their UK bonds like crazy with everyone paying close attention, sending the stock market into a free fall because everyone thought Napoleon had won and everything would end. Rothschild then bought back bonds, pennies to the dollar. A short time later, the news arrived that Napoleon had actually won and the market rebounded, making the Rothschilds uber-wealthy when those bonds matured (could be cashed out) two years later.

How is that story different from sensitivity to uptake? The collapse of a central system of markets of a country is not the same as anxiety towards the uptake of a potential new currency. Saying ‘the end is here’ as opposed to everybody suddenly wanting copper because ‘copper is the new gold’ are completely different sources of panic.

How is a blockchain with a currency use case different from an IPO?

An initial price offering is the debut of a new stock on the stock market.

Would you believe me if I said toothpicks were going to replace the currency of a prominent country? If I was the President of a central bank of a prominent country and had been for some time and was explicitly moving towards swapping out the current currency with toothpicks, would you want some toothpicks anyway, if only to at least hedge your bets?

If a central bank was not explicitly moving in that direction like we saw with various European countries prior to the adoption of the Euro, how would you know if a blockchain would replace a currency? Since we have existing currencies to fall back on, I would start with questioning whether that blockchain is actually a legit contender. Does it have a currency-like use case?

If you open those lengthy, technical documents that describe a particular blockchain/cryptocurrency, you will find somewhere in it a section that talks about use cases. Read it. Then compare against the definition of a security and the definition of legal tender. A security is a thing that simply says it is worth something AND people get it because they want the value of ‘worth something’ to go up, like a stock. Legal tender is dictated by a government as being the only thing you can use to pay off debts or to compensate someone (for selling you something).

Would I invest in blockchains again?

What would I do differently next time?

a. Penny trade (preferably with software so I don’t need to be glued to my screen)

b. buy-to-hold (either through to the blockchain being adopted or up to an early increase in price)

There are two notes of interest:

1. Item 3 in the above list are for simple investors, which are not the only non-spiteful legit ones out there. Others include those who are invested in the use case and buy to obtain usage rights. Others are collectors (own some for status). Others are technophiles (whose mantra is ‘must buy new tech’). Others are out for arbitrage profits (playing on exchange rate differences between three or more blockchains (I may be tempted to write a short article about how arbitrage works)). There are other types of investors, but you catch my drift.

2. I am not sure about automated trading software, but it is fairly tempting. It’s simply too expensive for me to try. That said, some have a sandbox feature where you practice using the software on live market sessions.

Will I invest in currency-like or non-currency-like blockchains?

I am neither your financial advisor nor am I dispensing financial advise. In my personal, non-expert opinion, the use case itself doesn’t matter a whole lot – and I say that because what I am about to say next will quickly weed out blockchains to be avoided by simple investors.

IMO, if you want to buy into a particular blockchain, it should be because (a) you value the use case AND (b) people want to actually use the blockchain in that way. Those people may include yourself, but that doesn’t necessarily need to be the case.

That’s how I distinguish between investing in:

• a company that has a blockchain;
• a blockchain itself;
• both a blockchain and the company behind it; or
• neither a blockchain nor the company behind it.

All of this said, as certain non-currency use cases for blockchains get implemented, perhaps regular currencies will adopt some blockchain features, enough that the market eventually demands a shift. That gradual adoption of non-currency and currency-like use cases in global markets is something I already see coming and cannot be ignored.

If you have done your research and are ready to take a bite out of the future, click here to signup with Netcoins with a welcome bonus.

For now though, my regular stock trading journey continues. So read on.