Hi guys I'm Phil town from rule 1 investing and today I want to give you a little bit of an idea about what I think about cryptocurrency . The principles of rule 1 investing lay out very clear standards, very clear boundaries that can be used to analyze whether or not a business is worth purchasing. We call these boundaries or the kinds of things we're doing. We call that investing so. One common question, though, is whether or not a cryptocurrency like a Bitcoin or in aetherium sort of meets the standard of an investment and in this video, I'm gon na attempt to explain why. I don't think that cryptocurrencies are a safe or prudent investment, but why? It might be a lot of fun to put a little money into them from the risky business point of view. So first cryptocurrencies are you know, they're a little bit hard to understand.
One of the standards of rule 1 Investing is before you invest in something you should be sure. You understand it very very well, you should know it's management, its mission, the history, the fundamentals, it's got, ta have a track record and with most companies, this information is relatively easy to find and understand. If those companies are kind of in your wheelhouse with crypto currencies, though really not the case, cryptocurrency market is really complex and moving really fast, and it's really new. It'S only about 10 years old from the very beginning of cryptocurrency has a lot of moving parts, and even people who are deeply involved in it with some very good friends of mine are find that there are pieces of it that they don't fully understand.
There'S no single company there's no set management behind what would be known as the cryptocurrency market, but it's also a real technological market and trying to understand its ultimate mission of any one of these cryptocurrencies. That remains a little bit difficult. Sometimes so I don't think we should invest or call it investing in something that we don't fully understand and much of the time with crypto currencies you're buying into something where the the information available about the currency is basically that you are taking a total risk and That there's no technology behind the currency whatsoever, but there it's not the case all the time, but it is the case much of the time. So first off you've got to be sure you understand what you own. The second is that the cryptocurrency market is only ten years old. Bitcoin was invented and put into the world in 2009 a standard of rule, one investing is to look at whether the not the company has delivered really high-quality cash flow returns for the last 10 years or so. Cryptocurrencies aren't even a business in that regard.
So you can't even look at them as something which is going to produce cash flow. The way you would as an ordinary business so immediately, we've got to say: okay well, cryptocurrencies, don't qualify as any sort of real business that we would be able to look at and value the problem with that and the problem with not seeing them as a business Is that cryptocurrencies then sort of fall into the valuation standard of something like a Picasso or gold or whatever a diamond? Perhaps, in other words, the cryptocurrency value and price turned out to be the same thing, just whatever somebody's worth willing to pay, for it is what they're willing to pay for it, and that's it you. You have no other way of judging what the value of the cryptocurrency would be, so this is very similar to gold, for example, whereas with a business, what we do is we look and see alright. What is the cash flow? That'S gon na come out of this business in the future. Do we think it's gon na be higher than it is today, and am i buying that at a really good price that reflects a margin of safety with crypto currencies? That'S just not possible, so we don't have any ability to find a margin of safety price.
All we have is, it was higher at 20,000 last year, but we really have no certainty about that at all, and the lack of certainty is what differentiates it from an investment. Third, the cryptocurrency market is incredibly volatile. Now volatility is great for trading, but not so great for long term. Investing and now there's a clue about where I'm starting to be comfortable about cryptocurrency in the trading market, so the cryptocurrency market, certainly one of the most volatile markets in the world. I have friends of mine: who've made millions of dollars in it. So just look at the price of Bitcoin right and it's gone through this incredible range and probably will continue to do so where it has doubled in a matter of months, then been cut in half in a matter of weeks, then doubled in a matter of weeks.
Then got cut back in half, so it's fantastic for trading. This is the volatility that traders love, because imagine that you got on the right side of that. Every time you ride it up to 20,000. You short it down to ten. You write it maybe up to twelve, you short it down to six. You go up to eleven and you're making a fortune, but this is not investing. This is trading and that's extremely different than what we do with the vast majority of our money. So many people are so interested in trading Bitcoin and I can understand why. Why, wouldn't you be with that kind of volatility? So the question is: if you're, an investor or even if you're a trader, can you go through the emotions and you have the fortitude? Just sort of go through the emotional swings that it's going to go up or it's going to go down.
It'S a wild ride right if you're like most people, that level of volatility is really hard to stomach, and certainly you don't want to do it with money You can't afford to lose now. Let me just modify that last statement. A lot of people think money that you can't afford to lose would be especially the case for people that don't have very much money, someone with ten thousand dollars or two thousand dollars. It doesn't have very much money when it comes to what they're going to need to retire on, which would be calculated in the millions of dollars. But, ironically, those are the very people there should probably be taking the most chance. Those are the very people that should probably be figuring out how to trade, something that's really volatile because they are broke already, so losing ten thousand or losing two thousand, while certainly would be hard to handle.
It'S not a tragedy losing ten million. Now that's a tragedy, So I'm gon na encourage you guys, if you really don't, have a lot of money to be thinking in terms of looking for some kind of thing to trade, which is indeed volatile that you can get an edge on now. That'S the question. I have with cryptocurrency is: where do you get your edge when we're talking about options trading, which we do trade we get an edge by knowing the value of the business compared to the price when the option market only prices it as if the Value in the Price are the same thing. So when we can trade options with an edge, then we can make money pretty consistently. But the question is: how do you find your edge in a cryptocurrency? That'S really a really a great question. I don't know the answer to it, but I would say if you're gon na think about trading crypto, you really want to figure out where's
My edge is one of these crypto currencies have a technological basis which might make it really valuable. Look at Ripple. There might be a real technological advantage to that which could have value someday. So we've got to look at all of the sides of a trade and try to figure out if you can figure out what the best way to trade. This is, but certainly cryptocurrency is not something that would be considered an investment more and more
It'S starting to be considered a reasonable trade. It is in fact, now being traded on the CME, with options with orange juice and all the rest of the kinds of commodities, and that's a huge breakthrough for cryptocurrency fans. I would look at it for trading purposes. Don'T ever think about looking at it The purposes of real investing, that's gon na, maybe not happen for a long time. So, as Warren Buffett said before, when it comes to investing, you really can't be putting your money in American businesses and putting your money into digital currency doesn't stack up to a great investment. On the other hand, when you have to make money and you're not Warren Buffett trading, something like crypto might be right up your alley. Now, I'd love to hear from you guys. What do you think about cryptocurrency? Do you think it's a safe investment, or do you think it's an interesting trade leave a comment below with your answer and I'll be sure to follow up with you thanks for watching you guys now go play if you enjoyed this video and you feel it was Valuable and teaching you more about understanding trading versus investing with cryptocurrency hit the like button, and please share this video with your friends and if you want more investing content subscribe to my channel, don't forget to click the button on the screen for a free gift.