Earlier in the week I published an article detailing how I thought a cryptocurrency apocalypse would go down. Long story short, as I’ve discussed in previous articles (here and here) conditions persist that can and will make it easy for the entrenched banking interests to subvert and control the cryptocurrency markets where it matters most…
… conversion back to the real world.
Because, like it or not, our bills, taxes and groceries are still all denominated in local government-issued currencies. Well-designed cryptocurrencies are circumventing this need. They are bringing customers and consumers together, but nowhere near the rates needed to fund real economies, yet.
And with so many people having made so much money in the past year or so, it’s important to remember that every investment needs an exit strategy. Because this party is going to end at some point. Markets don’t go up in straight lines (or parabolas) forever. They correct. And sometimes they correct for a long time.
Are you prepared to ride out another one to two-year bear market in cryptos which will grind off 60-80% of your peak value? Or are you going to be smart, book profits, cash out some, give the tax man his due and pay off your house?
The God of Greed
The first question you have to ask yourself is, “How am I going to get my money?”
The first step whatever you aren’t cashing out need to get off the exchange to put in your wallet(s). That’s becoming increasingly difficult. Withdrawal and exchange services are either strapped for coins or the blockchains are too overloaded to process transactions in reasonable time frames, if at all.
Yes, you can say these are normal (or abnormal) growing pains. But they are reality. And people are really persnickety about their money, and well they should be. Illiquid markets are difficult to cash out of. If you’ve ever traded penny stocks, like gold or copper explorers, you know what I’m talking about.
Fast moving markets are not like going to the grocery store. So, you want to be thinking ahead, moving out of illiquid coins you have huge profits in before the mania hits. Even if this means not getting the top.
Don’t worry, you weren’t going to get the top anyway. So, don’t sweat it. I always remember what veteran gold trader Jim Sinclair used to say, “Grab the 60% in the middle of the move and leave 20% on the table for the God of Greed.” I can’t tell you how many times I’ve been caught not listening to that advice.
And it has cost me more money than I would have ever made trying to time the top and/or bottom.
The next problem is the bigger one, getting profits back into local currency. Because while you may not be able to get some thinly-traded, pumped and dumped ERC-20 token du jour off of an exchange, you could convert to something that is reliable like Litecoin or Bitcoin Cash to move out to your wallet.
This is the real problem because 1) this is very likely a taxable event and now requires you to figure out your cost basis which could be very tricky (there’s a new service for this) for tax purposes and 2) the exchange at this point very likely has suspended withdrawals.
The Ever-Shrinking Exit Door
Moreover, I’m seeing more and more examples of what I talked about last month where capital is being allowed to flow into the crypto-markets but now it isn’t being allowed back out. Just the other day Bitwala, a popular crypto-funded debit card, had its relationship with VISA terminated without warning or reasons.
Yesterday our Bitwala Card issuer WaveCrest Holdings Ltd received direction from Visa Europe to immediately suspend all Bitwala cards effective immediately. Unfortunately, neither Visa nor WaveCrest were able to provide us or you with more time to prepare for this announcement.
But you know the reason. Bitwala was being used to circumvent Anti-Money Laundering (AML) and Know Your Customer (KYS) laws and VISA was told to shut it down. Simple, direct, done.
Accounts are stranded and the money will be returned, eventually. Bitwala’s business was destroyed overnight and VISA feels no remorse about losing Bitwala’s business. This is just another way to cut off avenues of escape. One less avenue to be used as an exit strategy by crypto-investors.
Fiat gateways are down all over the industry. Billions are now trapped with little hope of getting out. And with Bitcoin pushing back towards its all-time high at $20,000 the probability rises of even more illiquidity in the market.
Projects designed to facilitate both crypto-crypto and crypto-fiat conversion are still in their infancy. The industry has attracted capital far in excess of its ability to actively manage. And I fear that this imbalance between funds entering and funds leaving will create an opportunity for the enemies of cryptocurrencies to create mass chaos in the near future.
As investors it’s imperative to have an exit strategy for any trade/investment you get yourself involved in. Nothing lasts forever. I spoke earlier about holding on too long. In 2011, at the height of the gold bull market having made very good returns on my investments gold closed on a Friday in early September at an all-time high. I was prepared to sell into the peak the next week.
Rather than sell in stages and take some profit off the table, I wanted to cash out and grab the peak.
Over the weekend the central banks coordinated their policy, the Swiss National Bank pegged the Franc to the Euro at a ratio of 1.20 and the gold bull market was over. That lack of decisiveness cost me thousands the next week.
And in my experience so far with cryptocurrencies is this looks like the same setup. The banks and the governments are coming to get their due. So, it’s better to sell a week early rather than a minute too late. Because when the panic starts everyone will be trying to fit through the same door at the same time.
Don’t be that person. Be the early bird. Get the worm.
The difference can be catastrophic.
Image by bigstockphoto.com
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