Why no one is making money with cryptocurrency

With the exception of exchanges, scammers, YouTube channels and news sites full of filler and ads, and whales like Michael Saylor, it would seem hardly anyone is making money with cryptocurrency. Despite Bitcoin going from $10k to $40k in less than two months, one is still hard-pressed to find many success stories or evidence of ordinary people getting rich buying and holding or trading crypto. A few days ago I scanned the popular Reddit subs r/bitcoin and /r/cryptocurrency for posts of people who had made sizable sums of money with crypto, and I only found two: someone who had bought a $10,000 Omega watch with their crypto gains, and someone else who made $63,000. Sure, this is better than nothing , but not exactly life-changing amounts of money, especially given how well Bitcoin has done over the past year. By contract, on /r/wallstreetbets there are pages up pages of people making hundreds of thousands or even millions of dollars seemingly effortlessly with stock options and with buy and hold. Sure, some on /r/wallstreetbets lose a fortune too, but even in spite of large losses, it would seem that there is far more wealth to be made with stock trading compared to cryptocurrency. It is not even close. I had to dig through dozens of pages to find even just a handful of people who had made a sizable amount of money with crypto, whereas on /r/wallstreetbets it’s the opposite.

Where are the millionaires? Surely there must be some. This is not to say that no one has gotten rich with crypto. There are people who bought Bitcoin from 2010-2013 and are sitting on large fortunes. But one would think that there would be dozens of posts every week from newly-minted crpyto millionaires bragging about their gains. One explanation is that bragging this incurs the risk of having your funds stolen, but it is not like you can break into someone’s cold storage wallet from a Reddit account. I imagine that anyone with a fortune would know how to share a screenshot or make a post without compromising their crypto.

So why has crypto been such a loser despite the bull market over the past 2 years, especially compared to stocks? Why aren’t people making money with crypto, but stock trading millionaires are a dime a dozen? There are several reasons:

1. Crypto has too much volatility and hence poor risk-adjusted returns compared to stocks. Whereas many stocks and indexes tend to exhibit a gentle rising slope over the duration of the post-2009 bull market, punctuated by a deep but brief dip due to Covid, crypto tends to zig and zag unpredictably. This is bad for many reasons: too much volatility makes it harder, psychologically, to stay in the market without panic selling at a loss or taking profits too soon. Although bitcoin may have higher absolute returns compared to the Nasdaq , the volatility is considerably higher. This also makes it harder to apply leverage strategies, further minimizing returns. If the Nasdaq has 25% annual returns but 10% draw-downs vs. 50% returns for Bitcoin but 30% drawdowns, you can use 4-1 leverage on the Nasdaq and make 100% in a year with a 40% maximum draw-down, but even applying 2-1 leverage on Bitcoin will give you 100% return but a 60% maximum draw-down. Clearly, stocks provide better risk-adjusted returns with leverage.

Leveraged stock strategies such as buying and holding 3x ETFs such as FNGU,TQQQ, and TECL, have outperformed Bitcoin since 2018. In early 2018, when Bitcoin was at $12k or so, I recommended FNGU as an alternative to Bitcoin (as a sort of high-risk but high return investment). Three years later, FNGU is up over 500% vs. 350% for Bitcoin.

2. No options market with crypto. Stock options allow small returns of the underlying index or stock to be magnified, but options trading is still very limited with crypto. It is possible, but it does not work nearly as well as stock option trading.

3. Too hard and cumbersome to deposit and withdrawal large sums of and crypto and or fiat. Even after 911, given all of the Patriot Act restrictions, I found it very easy to deposit money in a brokerage account and begin trading. All I had to do was wire money to the broker and within 3 days I was able to trade. With crypto, often you need ID cards and proof of funds due to various arbitrary compliance and anti-money laundering restrictions and regulations. Prior to 2017, it was easy to transfer funds and crypto in and out of exchanges, but criminals inevitably abused and exploited the good will of exchanges. That is usually what happens with these sort of things: all it takes is a few bad actors to permanently ruin it for everyone else. Two decades later, we still have to take off our shoes at the airport because someone had the brilliant idea of smuggling a bomb in their shoe.

4. Too small of position sizes. On /r/wallstreetbets it is not uncommon to see traders in their 20s or 30s make bets of ten thousand dollars or more on a single option trade. Yet for some reason with crypto everyone is skinflint and risk averse. It’s like “I deposited $50 into my Coinbase” is the norm. You’re not going to get rich with such as small investment even if Bitcoin goes up 100x. It is the same age group and demographic buying stock as buying crypto, so it’s not like the crypto traders should have less money.

5. Gains do not hold. GME stock started at $3 in 2020 and a year later is still above $100. Stocks tend to ‘trend’ which means that past price movement predicts future direction. If a stock has risen 70 out of the past 100 days, likely it will keep rising, at least for the foreseeable future. This is known as momentum, and there is evidence that in spite of the efficient market hypothesis, that it exists. With crypto, sometimes an altcoin will get pumped 100% in a day and then the next day give up most of its gains, and then a week later be back to where it started. It is hard to make money off that because there is no follow-through or trend to ride higher. It s not like Gsamestock, which kept going up for many months, or, like Tesla, which went from $70 to $900 over 2 years.

6. As discussed earlier, crypto is more like a commodity than a stock. Whereas stocks tend to generate shareholder value in the form of retained earnings, dividends, or buybacks, crypto does not generate earnings that can be passed on to investors. Also, crypto has more inflation than stocks, as some inflation (between 2-5%) is built into crypto protocols, whereas with stocks the supply tends to shrink over time due to buybacks. Historically, for these reasons, commodities tend to have far worse returns than stocks.