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Mufasa

Cryptocurrencies: THE FUTURE IS HERE

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22 hours ago, Mufasa said:

To Mo, because I feel like I'm being pulled into an argument I wasn't going for at this point:

 

-What I noted in the beginning (and which everyone knows) is that the future of cryptocurrency is uncertain. Even if cryptos take off--or if blockchain does--that means nothing of the future, for example, of Bitcoin, which is simply the first--not the most efficient. So yeah, it's based on a lot of excitement; the thing is, the value has flailed a lot in the last few months, but it will ultimately correct itself. I think that reflects that there is a lot of *real* money in there and people are going to let it sit. Right now a lot of it is driven by people fearing they will miss out--that's the nature of it being new, now mainstream, and quite easy to buy-in. But we don't know it's future. You might *think* it's a bubble. You don't know it's a bubble.

 

-Well, I definitely do not think that a firm like Bridgewater is going to be investing their clients or advising others to invest in Bitcoin. There's no doubt it's a risky investment, which I've noted from the very beginning. (though, their clients would not have been complaining had they had the foresight to invest a few years ago, would they?) However--and this is based on subjective experience--there are 'tons' of young people working at companies like Bridgewater who are personally investing in Bitcoin. This I know from friends who work at similar firms in New York. While I don't know much about finance, since I've become intrigued, I have you on your anti-crypto crusade, but I do also have them whispering in my ear too. They're obviously not putting all their money in cryptos; but they are diversifying within the crypto world and betting on it to work out.

 

-But none of this really addresses the issues I have. I have no delusions about whether cryptos are a *safe* investment. But where's the hadith that says it's only OK to invest if global investment corporations A-Okay it?

 

 

 

 

1. The thing is, it is behaving exactly as a bubble does. There is a broad consensus on this amongst financial professionals. It highly resembles Dotcom bubble of the 90s albeit at a far more limited scope (for now). 

 

2. Bridgewater is a hedge fund. They aim to invest in high risk strategies to get a return and they don't advise others. They use numerous strategies but their hallmark strategies are all quant strategies, which means they really don't care for the underlying asset type but are focused on maximising returns independent of market risk. Cryptocurrencies are very much the type of product they would use in building their portfolio (using both long and short positions). Most hedge funds using quant strategies like Bridgewater's typically invest in bubbles because they can use these products to adjust the risk of their portfolio with less capital than traditional investments require.

 

3. It isn't that it is only ok if global corporations say the product is fine, it is the fact that amongst finance experts the broad consensus is that Bitcoin is a bubble, and that bubbles are genuinely accepted as being markets of extreme gharar. 

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That's fair. But if you are comparing cryptos to the dotcom bubble (a comparison which I don't disagree with), would it have been haram to invest in Amazon or Google in '99?

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1 hour ago, Mufasa said:

That's fair. But if you are comparing cryptos to the dotcom bubble (a comparison which I don't disagree with), would it have been haram to invest in Amazon or Google in '99?

Isn't this like asking weather or not it's halal to buy a winning lottery ticket?

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5 minutes ago, superman said:

Isn't this like asking weather or not it's halal to buy a winning lottery ticket?

Not really. We've already established an investment, even a speculative one, is not gambling, right? With Amazon or Google, you'd have to actually look at the company, see what they have to offer, and decide whether it seems like it will be valuable. The same is true of cryptos -- a lot of them are totally worthless, but some of them actually seem to provide useful services and possibilities.

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10 minutes ago, Mufasa said:

That's fair. But if you are comparing cryptos to the dotcom bubble (a comparison which I don't disagree with), would it have been haram to invest in Amazon or Google in '99?

 

All companies that survived the bubble had immense financial discipline. Amazon is the greatest example of this, and there are in depth financial analyses into the operation which Jeff Bezos ran but the key takeaway is he was one of the few to go 'slow and steady'. Google didn't have its IPO (initial public offering, where shares become available to the public on exchanges) until 2004 which was well after the crash and all investors prior were the same institutional investors who are warning against Bitcoin today.

 

Some companies survived the bubble its true, but let us look at some of those survivors:

  • Yahoo had a price of $108.7 at the peak of the dotcom bubble, when the bubble burst and settled, it had a price of around $5, representing a loss of 95.5% on investment. It never recovered.
  • Amazon was valued at $106.7 at the bubbles peak, but when it settled was valued at around $15, an 86% loss on investment. Today it is valued at $1294.58, which would be an annual return of 15.87% compounded. Comparatively, DJIA has had a 5.24% annual return over the same period. 
  • Ebay doubled in share price over the year preceding the bubble, however, rather than losing more than 90% of its value, it simply returned to the price it held previously, with natural growth/loss occurring over time. However those who bought it at the peak lost 50% of their investment. Ebay has had a 8.73% compounded annual return since then until now. 

Analysing the information, sure what investors bought was not worthless, but it was excessively overvalued and they suffered massive losses. Of the few companies that survived, most declined further or flatlined. Of around 2800 companies that went public during the dot-com bubble and the events preceding it, Amazon and Ebay were the exceptions with the rest all being losing investments. Given then, the enormous amount of risk, it is difficult to say that Amazon or Ebay really paid off on a risk-adjusted basis. Yes, they offered higher returns on the market, but the failure rate of the industry they were in was incredibly high.

 

Now lets add another fact to the mix: listed companies are very transparent, with annual reporting every year revealing their cash flows and growth, from which analysts can deduce valuations. Cryptocurrencies on the other hand don't have cashflows (unless it is a proof of stake model like Ethereum where validators use their 'stake' to validate a transaction and charge a fee). This means their value is tied to being a modicum of exchange (in the case of proof of work like Bitcoin or Dogecoin) or network facilitator (like in the case of Ripple). The first can be estimated based on the volume of transactions on the ledger, but the second is quite opaque because the valuation of the network facilitation capacity of the Ripple network isn't in the public domain.

 

This means that from a financial standpoint at the very least, cryptocurrencies could be considered even more risky than tech companies in the dot-com era boom. Right now there are 1469 cryptocurrencies with a market cap of $630bn. How many do you think will survive, given the survival rate of the dot-com bubble, and on a risk adjusted basis, are any of them even worth it? That is ultimately for you to gauge. Of course I have the benefit of hindsight, but many notable investors (Warren Buffet of course comes to mind) refused to buy into the craze. 

 

From an Islamic perspective I would argue the situation of investing in the tech bubble would've garnered different answers from different scholars at the time, but if we are trying to objectively measure gharar then crypto definitely presents a larger risk than the dot-com bubble did and the fact it is even less transparent, and even more so that unlike the dot-com bubble, most market analysts actually view crypto as a bubble. I would probably say yeah, it would've been haram to invest in the dot-com bubble based on my perception of what constitutes extreme gharar.

 

Ultimately what it comes down to is what your expectations are of the situation because every single investor has their own preferences and perception of risk. The fatwa was a generalised one (given the consensus of most finance professionals on the matter), but if you don't view crypto as having extreme gharar based on your own conclusions, nobody can really force you to adopt another conclusion. The general person isn't a finance professional or tech expert and for them investing in crypto ultimately has to by definition pose extreme gharar.

 

tl;dr: 

  • The fatwa was a general one
  • Crypto bubble is more risky than the dot-com bubble for investors (thus more gharar)
  • It is difficult to answer things in hindsight
  • Gharar itself is a subjective matter (just like risk)

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Thanks- that's helpful info. I'll have to read more about the dot-com bubble. If nothing else, cryptocurrencies have piqued my interested in financed. Obviously you know a lot more about the subject than I do.

 

For the record, I do think a vast majority of cryptos will (and should) fail. 

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Since my last post, the Crypto market has wiped well over 50% of its value. 

With new regulations coming through and the frenzy dying off, I predict prices will continue to tumble (maybe a small resurgence beforehand). 

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But I'm not sure anyone who has faith in (and knowledge about) Bitcoin thought it was going to just keep surging. Most of the analyses I read predicted cryptos would drop hard, hence the HODL motto and cautioning against buying out of FOMO.

 

I'm not sure that the fact that it's wiped over 50% of its value is any more indicative of its long-term prospects than its peak was evidence in favor of its long-term prospects. Neither seem to mean much in terms of its long-term potential; I assume it will stabilize at some point- from what I've heard, maybe between 2k or 6k.

 

Do you think it's going lower?

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Unfortunately I bought Ripple at a very inopportune time (I should have heeded the FOMO-feeling cautioning). But Alhamdulilah, I didn't put in very much, and I'm in this for the long-sight, not for a quick gain. 

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1 hour ago, Mufasa said:

But I'm not sure anyone who has faith in (and knowledge about) Bitcoin thought it was going to just keep surging. Most of the analyses I read predicted cryptos would drop hard, hence the HODL motto and cautioning against buying out of FOMO.

 

I'm not sure that the fact that it's wiped over 50% of its value is any more indicative of its long-term prospects than its peak was evidence in favor of its long-term prospects. Neither seem to mean much in terms of its long-term potential; I assume it will stabilize at some point- from what I've heard, maybe between 2k or 6k.

 

Do you think it's going lower?

 

Thanks to transfer fees bitcoin no longer has any underlying value. As prices diminish miners will have lower incentive to keep mining new blocks due to difficulty involved, and when the cost of electricity + mining rig > profit from mining bitcoin then no transactions will get done because no new blocks will get mined. 

 

Transaction times already were a major issue prior to the frenzy and as the frenzy dies out they’ll only become an even bigger issue.

 

Bitcoin has a fundamental design flaw in that it is dependent on an ever expanding network of miners due to the increasing difficulty of each new block. There is the ultimate trade off of time vs computing power, both of which determine cost. 

 

Maybe other cryptos address this design flaw like ETH with its proof of stake model or XRP with the proof of consensus model. But anyone investing in the long term should do so after this bubble pops so they don’t get ripped off. 

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