The Investment Scientist

The Crypto Crash

Posted on: February 8, 2022

Yesterday in a client progress meeting, the client asked me a question: “What do you think of crypto?” I usually get this question either when cryptos are rallying or crashing. As you may know, over the last three months, most cryptos have lost 50% of their value. In fact, I more or less alluded to this in my earlier newsletter. I wrote that in a Fed tightening cycle, the vanguard market will fall first. Decades ago, the vanguard market used to be the emerging market, now it’s the crypto market.

So what do I think of crypto? I have asked myself the same question, read a lot of books and white papers about it, and even took a full-length MIT class on crypto taught by Gary Gansler, who is now the SEC chairman. I have a good understanding of the technical aspect of cryptos, but I still can’t figure out the economic rationale of their existence and their sky-high valuations.

On one side are people like Warren Buffet and my economics professor at Oxford, Dr. Sussman, who think cryptos will and should fall to zero. On the other side are extremely smart people like Elon Musk who think they will reach the moon. I was hoping that when I took his class, Gary Gansler would tell me what he thinks. But he more or less admitted he is not sure either. The only thing I know for sure is that as SEC chair, he will not ban cryptos. 

I must admit I am not smarter than Warren Buffet or Elon Musk, and I am in no position to judge who is right and who is wrong. What I want is not to have any regrets regardless of who turns out to be right. So starting about a year and half ago, I committed to investing about $200 per month in four cryptos: BTC, ETH, LTC and DOGE. $200 is what I used to spend on unhealthy drinks every month. I kicked my bad habits, saving the money to invest in cryptos. All together, it is still a very small amount of money, but I no longer pay too much attention, and I no longer feel bothered. If cryptos go to the moon, I have a few thousands riding on them. If cryptos go to zero, I still have kicked my bad habits. 

Throughout the year and half, my position was at one time up 60+%, one time down 60%, and now it’s about flat. When I did not have this tiny position I felt a pang of jealousy and regret whenever cryptos went up a lot. Whenever they crashed, I felt glee and vindication. Now that I have this tiny position, all these negative emotions are gone. So in fact I was not engaged in real investment, I was engaged in FOMO (fear of missing out) management. By mitigating my fear and regret, I am in a better mental state to manage my own money and my clients’. That’s really the only reason I am “invested” in cryptos at all.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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